GSX Shares Slump after Company Accused of Inflating 2018 Earnings by 74%
GSX Techedu became China’s third EdTech firm to reach a USD 1 billion valuation mark with shares surging to record highs. A scandal over reported revenue has caused traders to leave their GSX positions en masse.
In an article recently published by EqualOcean, we talked about the sudden surge in shares of the NYSE-listed GSX Techedu (GSX:NYSE). This didn’t last for long – after reaching its record high of USD 45.42 per share on February 22, it fell 3.96% to USD 43.3 the following day.
After a comparison of financial reports, we found out that the company's operating profit margins in the third and fourth quarters of 2019 were 8.8% and 1.3%, which were significantly lower than those of the first and second quarters, 17.3% and 24.4% respectively.
To further worsen the situation, on February 26, Grizzly Research, a research firm that produces differentiated research insights on publicly traded companies, released a 50-page report, ‘Why We Believe GSX Techedu is the Worst Publicly Traded Education Company.’ The report stated that China’s recent stock market figures, which have attracted much attention from the capital market, represent exaggerated financial data. Talking about GSX, it said that, although the company's stock price has tripled since its listing, it is actually the worst choice among listed education companies. GSX shares dived 7% during the session last night, but then rebounded significantly, eventually closing down only 3.15%, after the market fell within 1%. As of now, the stock's cumulative increase during the year has reached 101.24%.
The report pointed out that GSX exaggerated 74.6% of net profit in 2018 and used unconsolidated related parties to whitewash financial statements; the three buildings purchased in Zhengzhou in January this year for CNY 330 million actually cost only CNY 75 million, for instance. There were also other suspicions of exaggerating capital expenditures and transferring funds.
In addition, the former CFO suddenly left the job on the eve of the listing, and the current CFO had previously been a part of multiple fraud lawsuits.
Grizzly Research to date has published only five such short-selling reports, two of which are on Chinese companies. In addition to the latest one, the other one was released on February 13, 2020, on 58 Tongcheng (WUBA:NYSE), a classified advertisement website serving local merchants and consumers in China, entitled ‘We believe that 58.com (WUBA) is a House of Cards with Little Economic Substance,’ after which its stock price fell more than 18%.
GSX Techedu has been a rising star in US capital markets. Founded by New Oriental Education & Technology Group’s (EDU:NYSE) former executive president Larry Chen in 2014, GSX has made a name for itself as one of the fastest growing online education players in China, and the first to purportedly achieve profitability. Analysts and management have been attributing this growth to its great management skills, low sales and marketing or student acquisition cost, and the high profitability achieved by its groundbreaking ‘star-instructor, dual-teacher, large class’ model.
On June 6, 2019, GSX began trading on the NYSE under the symbol ‘GSX’ at USD 10.5 per share. During the past eight months, the stock rose to a high of USD 45.42, reaching an astonishing annualized return of roughly 450%.