Chinese e-learning firm GSX probed by US after inflated sales complaints

Online education provider GSX Techedu, recently trading at 12 times its IPO price last June, tumbled Wednesday following the disclosure. (Photo by Alex Fang)

Chinese e-learning platform GSX Techedu said Wednesday that it is being investigated by American regulators after multiple short sellers accused it of inflating sales.

The U.S. Securities and Exchange Commission’s enforcement division contacted New York-listed GSX to request certain financial and operating records dating from Jan. 1, 2017, the Beijing-based company said in its earnings release, which reported a rosy second quarter.

The online tutoring platform’s disclosure follows that of Baidu-backed video-streaming service iQiyi, which last month said it was under investigation by the securities watchdog, also after reports by American short sellers. Both companies have previously denied wrongdoing but have hired outside advisers to conduct internal investigations.

The investigations come at a sensitive time when both the U.S. government and legislators are pushing for rule changes that could eventually delist Chinese companies from American bourses, following the Luckin Coffee accounting scandal. The short seller that spilled the beans about Luckin is among those raising a red flag about GSX.

GSX was one of the few Chinese startups that had turned a profit before its listing on the New York Stock Exchange in June 2019. Its share price had skyrocketed to over $131 last month, more than 12 times its initial public offering price.

The stock plunged by as much as 18.7% Wednesday despite recording a 366.6% revenue growth on the year during the April-June period, which it attributed in part to a shift to digital education due to the COVID-19 pandemic.

The company “is cooperating with the SEC,” GSX said in its Wednesday filing. “We cannot predict the timing, outcome, or consequence of the SEC investigation.”

From February to July, multiple short-selling firms published reports about GSX. Citron Research said it presented to U.S. regulators “definitive evidence” of fraud through the use of “multiple undisclosed related party transactions to hide expenses [and] liabilities.”

San Francisco-based Muddy Waters Research said it was “highly confident” that over 70% of the platform’s users are bots and concluded that GSX is “a massive loss-making business.” The famed short-selling company in January published a lengthy report that called Luckin a “fraud.”

Muddy Waters Research also blew the whistle on another Chinese e-learning company, TAL Education, which admitted in April to inflating sales figures.

Luckin, trading in the U.S. as an over-the-counter stock since its July delisting from Nasdaq, said in a Wednesday filing that it has reinstated independent board director Sean Shao, who steered the company’s internal investigation. The move, part of continued boardroom infighting at Luckin, was pushed for by investor Centurium Capital.

The article was first published on Nikkei Asian Review

Singapore Reporter/s

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Following vacancies can be applied for (only in Singapore).   

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.