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