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Short sellers have repeatedly targeted GSX Techedu since its listing on the New York Stock Exchange in June 2019. Photo: AP

Chinese tutoring provider GSX denies claims its online students are bots as Muddy Waters joins stock attack

  • Muddy Waters alleges 80 per cent of GSX users are bots, company ‘a massive loss-making business’
  • Allegations show lack of understanding on its business, CEO Chen says in statement on his Weibo account
GSX Techedu, one of China’s largest online tutoring providers, has denied allegations by Muddy Waters that it has fabricated most of its users and revenue, saying the US activist short seller misunderstood its business.
New York-listed GSX fell 7.4 per cent lower at US$32.84 in New York overnight, after earlier plunging by as much as 16 per cent following the release of the short report on Monday. The Monday report by Muddy Waters represents the sixth time GSX has come under attack by short sellers in the past four months.

“The company believes the report contains inaccurate and disorderly data courses, and shows a lack of understanding of GSX’s business,” it said in a statement published by chief executive Chen Xiangdong’s account on Weibo, a Twitter-like social media platform.

CEO Xiangdong Chen (right) has rejected the latest allegations by Muddy Waters, saying it lacked understanding on the company’s business. Photo: AP

GSX released technical details regarding its user IP addresses, and said it continues to make profits with a positive cash flow, Chen said in a separate statement.

The controversy came at a fragile time when investor confidence in US-listed Chinese companies has taken a beating after a series of scandals, including the Luckin Coffee fiasco. The coffee chain last week fired its chief executive and chief operating officer after an internal probe on fabricated sales.

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Muddy Waters, which exposed the fraud at Luckin Coffee in its latest bet against Chinese firms, in its report accused GSX of making up as much as 80 per cent of its users through building a network of internet robots or bots.

Headed by prominent short seller Carson Block, the activist firm said GSX “is a massive loss-making business” after analysing user and attendance data files of more than 54,000 users covering over 200 paid K12 classes. “Without users, there is no revenue,” it added.

This is not the first time the Chinese online tutoring sector is facing off with short sellers. TAL Education Group and New Oriental Education & Technology, two of China’s largest physical tutoring centre operators, have also come under attacks in 2018 and 2012, respectively.

Before Muddy Waters, peers like Citron Research, Scorpio VC and Grizzly Research had taken aim at GSX in five separate reports since February, alleging the online tutoring firm cooked its book.

GSX Techedu, which was listed in June last year, has denied all of them. Instead of tanking, its share price has surprisingly surged by a stunning 50 per cent since the beginning of this year.

The company offers online courses for primary pupils, high school students and adults on subjects ranging from English to accounting.

It reported a 337 per cent jump in first-quarter net profit to 148 million yuan (US$21 million) from the same period last year, according to its quarterly earnings report filed earlier this month.

Paid course enrolments soared 307 per cent to 774,000 over the same period, amid a surge in online teaching as schools were shut across China due to the Covid-19 pandemic, it added.

This article appeared in the South China Morning Post print edition as: Online tutoring firm denies claims by short seller
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