Hall of Shame

Consumer Discretionary

GSX Techedu (GSX US)

Year: 2020

GSX TECHEDU INC. is a China-based holding company principally involved in the provision of technology-driven education services. Through its subsidiaries, the Company is engaged in the provision of online K-12 after-school tutoring services. It also offers foreign language, professional and interest courses. It listed on the NYSE in June 2019, raising US$207.9M during its IPO. In an additional share offering in November 2019, US$289.8M was raised.

Grizzly Research
Feb 25, 2020 Grizzly Research issued a report titled "Brushed Student Counts and Cooked Books: Why We Believe GSX Techedu is the Worst Publicly Traded Education Company". In its report, Grizzly Research's allegations include that GSX:-
       -  has been vastly overstating its profitability,
       -  is offloading cost to multiple related parties to report better financials
       -  conducting CAPEX fraud
       -  faking student enrolments to boost count
It also notes that Insiders and old shareholders are selling aggressively, that GSX's former CFO left suddenly during the IPO and the current CFO was previously involved with a dubious on-line education company. 

In conclusion Grizzly Research believe that GSX is a fraud and say "GSX should not hold up to the due diligence of any credible institution. A simple online review would reveal that the company is not what it portrays itself to be. Red flags around the CFO departure were blatantly ignored. Financials that are simply too good to be true are taken at face value. GSX’s auditor Deloitte Touche Tohmatsu and underwriters including Deutsche Bank, Goldman Sachs, Bank of America, and Credit Suisse have apparently failed to perform basic due diligence on their client – otherwise they should have easily detected at least some of the major red flags we outline in this report."

June 2, 2020 Grizzly Research issued another report on GSX titled "GSX Techedu Inc. – Grizzly Research Presents Smoking Gun Evidence of Fraud". Grizzly said it has carried on its research since its first report in February and found evidence confirming its and other Short Sellers allegations. In summary, it focused on two key points:
       - GSX's true revenues and student count were only 11% of what GSX suggested to US Investors,
       - GSX’s core marketing activities were illegal and employed massive amounts of fake identities,

It concluded that GSX could simply not to be trusted; The company had been fuelling their growth miracle with nothing but lies and criminal activities.  Grizzly expected that US regulators would be forced to address the first point, while it expected Chinese regulators to have a close look into GSX’s illegal marketing activities.

June 3, 2020 GSX issued a response to Grizzley refuting the follow-up report and responding to the issue of inflating enrollment numbers.

Citron Research
April 14, 2020  Citron Research published the first of a series of reports on GSX Techedu; "GSX Techedu Inc – The Most Blatant Chinese Stock Fraud since 2011". In the report Citron: 

  • alleged that GSX Techedu Inc was overstating revenue by up to 70%. 
  • questioned GSX claims that in the year up to IPO GSX's growth was 432% along with gross margins of 75%
  • Asked if GSX had 432% revenue growth, it would be widely known and reported; why was it not regarded so by the Chinese Government, Media and Think tanks.
  • suggested that a huge discrepancy exists between reported figures (revenue and student enrolment) and reality. Citron believed GSX potentially fudged their numbers using duplicate classes.

April 30, 2020 Citron published a second report "Conclusive Evidence of Fabricated Financials at GSX Techedu".  In the report, Citron said there was clear evidence that GSX was manipulating its reported financials, including a recorded phone call with an employee at a brushing outfit (i.e., a firm that is paid to generate fake users and reviews) hired by GSX, who explains that 40% of GSX’s 2019 registered users were fake.  Also that the report included systematic documentation of multiple undisclosed related parties that have been closely working with GSX.  Citron did not believe GSX was receiving the proper oversight from its auditors, as its investigation had revealed that the engagement partner at GSX’s auditor, Deloitte Touche Tohmatsu, had a suspicious and limited engagement history that read like a who’s-who of disgraced Chinese education firms.

May 7, 2020 Citron research issued "Part 3 in Series of GSX Investigation" report. It said that it was presenting, to US regulators, definitive evidence of GSX Techedu committing securities fraud through the use of multiple undisclosed related party transactions, to hide expenses/liabilities.  It concluded that there was, then, far too many red flags at GSX to ignore. It strongly urged U.S. and Chinese regulators to end this charade and immediately initiate investigations into GSX.  Citron said that regulatory sentiment already acknowledged that the issues it had raised reflect systemic problems that needed to be addressed for the benefit of investors.

JL Warren Capital
April 25, 2020 JL Warren published a note "Detailed Account of Brushing Behind GSX TechEDU".  The note was to share the details of an extremely enlightening call that JL Warren had with a professional brushing outfit in Guangdong, China.  Brushing – which is “faking” online orders and reviews - is a common practice in China by merchandisers to increase their visibility, attract traffic and improve conversion rates.  JL Warren's brusher contact was one of the outsourced brushing service vendors contracted directly by the management of GSX. The contract authorised the brushers to create “fake” class enrollments (students) for a selective group of teachers for as much as ~40% of the class total enrollment. Brushing volume differed depending on the teacher and the class. Brushers were also responsible for writing “fake” positive reviews where the number of reviews needed depended somewhat on what was needed to neutralize and offset the negative but genuine reviews.  JL Warrens' discoveries supported the fraud allegations made by short-sellers and widely reported in the media.  It appeared more than clear to JL Warren that GSX was scamming American investors. 

May 25, 2020 JL Warren released a second report "GSX: Minimal Market Share; ~90% Fake Enrollment and Unlawful Operations".  It had conducted market survey among approx 2,200 K12 parents, in eight cities, who registered their child(ren) for at least one class over the previous 6 months. When comparing its results  to GSXs stats it found that:
   - data suggested that GSX is outperformed by every one of its competitors.
   - More than 90% Accounts and Live Class Enrollments Were Fake
   - 80%+ of those logged in “students” were fakes operated by brushers
   - Fake WeChat Parents Groups
   - Numerous Violations of China’s Ministry of Education Regulations
It concluded saying that four independent researchers (Grizzly, Citron, Scorpio and Muddy Waters) independently conducted thorough primary research from various perspectives, all coming up with similar assessments that it agreed with mostly.  JL Warren believed GSX was a blatant fraud that could not be ignored by the US regulators. 

Seeking Alpha
May 4, 2020 A blogger, DX2 Capital, published an article on Seeking Alpha "GSX Techedu - An Unsustainable Story, The Stock Should Be Avoided".  DX2 conducted its own due diligence on GSX and came away with similar bearish views as Citron and Grizzly. It could see no competitive advantage in GSX, believed that its growth was unsustainable, and had doubts over its management.  DX2 said it simply did not see that GSX's growth would last and could not justify its current valuation. From Dx2s point of view, there was a disconnect between the company's fundamentals and its share price. It was not suggesting anything sinister about GSX, but believed it was definitely a stock to shy away from at the current price level.

Scorpio VC
May 6, 2020 Scorpio VC released a report on GSX, "GSX (whom to learn from), THE LAST TO LEARN FROM".  In the report Scorpio VC questioned GSX's multiple data, a property purchase in Zhengzhou, salaries of top teachers and employees buying courses. 

May 26, 2020 Scorpio VC issued "GSX (whom to learn from), THE LAST TO LEARN FROM - Part 2". In this report it focused on five issues:
   1. Teachers qualifications - Some have no certification and some have different names on the certs, 
   2, VAT Fraud - where subsidiaries are not registered for tax. Whilst VAT figures reported to SEC are overstated. 
   3. Fabricated Cash income which accounted for 50 to 80% of the FY 2019 revenue.
   4. Questions over the user numbers when compared to its peers.
   5. Purchase of a property in Zhengzhou, if related parties were involved.

GMT Research
May 7, 2020 GMT Research issued a report "GSX TECHEDU (GSX US) SELL/AVOID: Long list of concerns". In conclusion it noted that GSX has traits in line with past fraud, there was evidence of profit manipulation and GMT had concerns over some of the individuals involved; however, this was far from definitive, and plausible explanations may have existed.

Muddy Waters
May 18, 2020 Muddy Waters (MW) issued a report; "MW is Short GSX Techedu Inc." concluding that GSX was a near-total fraud. In the report MW said at least 70 percent of the Beijing-based GSX’s users are bots and that the real number is likely 80 percent or more. It also noted that the company did not generate revenue without users and its expenses were greatly understated.  MW concluded that the company was losing significant money – both because real revenue was a fraction of the claimed number, and GSX fraudulently understated expenses.  MW also noted that the company’s chairman, Larry Chen, had pledged $318 million worth of shares, making the stock “even more dangerous for long holders,”

May 19, 2020 GSX issued a response to Muddy Waters report addressing some of the points on the report.

May 28, 2020 Muddy Waters issued a 6 page report; "GSX: Small Classes, Big Lies", in response to GSX's reply. In it stated that GSX’s responses consisted largely of drivel, designed to obfuscate and lie. MW maintained its view that GSX was a massive fraud – i.e., it was a nearly empty box. MW said that making GSX’s denials even more farcical was that it openly recruited engineers to help it run bot farms. MW showed this in this report. 

May 29, 2020 GSX issued a response to Muddy Waters refuting Muddy Waters Research's follow up report again responding to specific points.

August 9, 2020 A report, "Impossible Numbers in China EdTech" was released by SYLVAN. The author cast doubts on GSX's reported statistics based on comparing business network sites LinkIn and MaiMai figures for GSX, as compared to five of its competitors. The main facts it put forward were:

  • GSX had the lowest amount of employees out of all the major China EdTEch firms,
  • GSX had the lowest educational staff despite their claim to have 10,000 tutors
  • SYLVAN showed that GSX's claims to have hired 6,500 Online Tutors in an 8 month period were doubtful, SYLVAN found they hired ONE in 90 days,
  • It believed GSX was likely overstating the amount of teaching staff that it had by more than a 100 times,
  • It said that many of GSX ‘Tutors’ were either IT or sales staff or unqualified to teach; which was illegal in China.

SYLVAN finished saying it had asked that Deloitte and Li Li Shan (Deloittes Auditing Partner), to re examine the numbers and verify with the China Ministry of Education for licenses registered.

September 2, 2020 In an announcement of its 2nd Quarter results, GSX also disclosed that the SEC’s Division of Enforcement contacted the Company, requesting it to produce certain financial and operating records dating from January 1, 2017. GSX said it was cooperating with the SEC. It also disclosed that prior to the SEC contact, the Audit Committee had engaged third party professional advisers to conduct an internal independent review into the short sellers reports’ key allegations. 

Deloitte Watch
October 30, 2020 A web-site "Deloitte Watch" was published sometime in October 2020. Its headline was "GSX Techedu is an $18 Billion Fraud…enabled by their auditor"  and it said it was the creation of many concerned investors. It consolidated the issues raised by Short-sellers. The focus of the web-site was mainly on Deloittes performance in auditing of GSX and highlighted it's past history with its audits of Chinese fraudualant companies. It commented "By continuing to serve in the role as GSX’s auditor, Deloitte Touche Tohmatsu is purposefully turning a blind eye to fraud, and is lending their firm’s reputation out for fees. All the evidence on this site has been provided to Deloitte, but has not triggered the Professional Skepticism that is required of an auditor. We expect regulators, including the SEC, PCAOB, FINRA, and the NYSE, and investors to hold Deloitte financially liable for its unreasonable recklessness in enabling GSX."

GSX Techedu: GSX 2019 Q4 Earnings Release, 18 Feb 2020
Grizzly Research: Brushed Student Counts and Cooked Books, 25 Feb 2020
Citron Research: GSX Techedu Inc – The Most Blatant Chinese Stock Fraud since 2011, 14 Apr 2020
JL Warren Capital: Detailed Account of Brushing Behind GSX TechEDU, 25 Apr 2020
Citron Research: Conclusive Evidence of Fabricated Financials at GSX Techedu, 30 Apr 2020
Seeking Alpha: GSX Techedu - An Unsustainable Story, The Stock Should Be Avoided, 4 May 2020
Scorpio VC: GSX (whom to learn from), THE LAST TO LEARN FROM, 6 May 2020
Citron Research: Part 3 in Series of GSX Investigation, 7 May 2020
GMT Research: GSX TECHEDU (GSX US) SELL/AVOID: Long list of concerns, 7 May 2020
Muddy Waters: MW is Short GSX Techedu Inc., 18 May 2020
GSX Techedu: GSX Refutes Muddy Waters Research's Allegations, 19 May 2020
Yicai Global: GSX Techedu Slumps Despite CFO Rebuffing Fourth Recent Short Seller Report, 19 May 2020
JL Warren Capital: GSX: Minimal Market Share; ~90% Fake Enrollment and Unlawful Operations, 25 May 2020
Scorpio VC: GSX (whom to learn from), THE LAST TO LEARN FROM - Part 2, 26 May 2020
Muddy Waters: GSX: Small Classes, Big Lies, May 28, 2020
GSX Techedu: GSX Refutes Muddy Waters Research's Follow Up Report, 29 May 2020
Bloomberg: Muddy Waters Joins Short Sellers Pounding Away at GSX, 29 May 2020
Grizzly Research: Grizzly Research Presents Smoking Gun Evidence of Fraud, 2 Jun 2020
GSX Techedu: GSX Refutes Grizzly Research's Follow Up Report, 3 Jun 2020
SYLVAN: Impossible Numbers in China EdTech, 9 Aug 2020
Deloitte WatchGSX Techedu is an $18 Billion Fraud…enabled by their auditor, 30 Oct 2020 (snapshot)
GSX Techedu: Announces Q2 2020 Unaudited Financial Results, 2 Sep 2020
GSX Techedu: Annual Report YE Dec 2019
GSX Techedu: Prospectus - Nov. 2019