This Chinese K-12 company is ‘a near-total fraud’

Hedge fund manager Carson Block is shorting a Chinese education company, alleging that its inflating revenue numbers. 

“Calling GSX a company is arguably a bit generous,” the Muddy Waters founder said on Yahoo Finance’s The Final Round (video above). “They claim to provide online education, mainly K-12, but the reality is that the vast majority of its users … north of 80% are not real.”

In a separate note on the company’s website, Block goes further in asserting that he’s shorting GSX because it’s “a near-total fraud.” 

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Essentially, Block believes that NYSE-listed GSX Techedu Inc. (GSX) is engaged in shady tactics after Muddy Waters went through the sign-up process.

Block’s team had registered for over 200 paid classes on GSX’s site and using Google Developer tools embedded in Google Chrome, looked at each class, and identified each unique user, log-in patterns, I.P. addresses.

A boy checks a dictionary as he watches a TV programme at his home in Beijing on in 2013. (PHOTO: STR/AFP/Getty Images)

The team believes it identified users that are bots, exhibiting non-human behavior. For instance, in one class, there would be no log-in activity for a while and them “boom,” he said, 20 or 30 users join. That led them to believe that at least 70% of GSX’s users are fake and that the reality was closer to 80%.

The findings were verified by a “former GSX manager,” the Muddy Waters note added, who “explained various details of GSX’s extensive bot operation.”

Therefore, “it probably would be fair to say at least 90% of [GSX’s] revenue is fake,” added Bock. “There’s no way this company is remotely close to break even.”

TAL short

This isn’t the first time Block and his company have gone after a Chinese online educator. In 2018, they called TAL Education (TAL) a “real business with fake financials.”

In April this year, TAL Education admitted to inflating sales figures.

‘The time may come’ for public service

Block also noted his interest in going into public service “in some way,” due to his “myriad frustrations with how poorly governed we are.”

“I have long felt that instead of complaining about the way something is done,” Block said, “you should try to do it yourself.”

He quickly added while he had “no plans in the near future… the time may come when I try to do something that’s more public-oriented or public service-oriented.”

Aarthi is a reporter for Yahoo Finance.

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