GSX Stock Inches Higher on Another Denial of Short Report

Over the past two weeks, the Chinese tutoring provider and the notorious short-seller exchanged a series of public statements. Will GSX manage to keep investors' trust?

Anna Vodopyanova
    May 29, 2020 10:00 AM  PT
GSX Stock Inches Higher on Another Denial of Short Report
author: Anna Vodopyanova   

GSX Techedu Inc. (NYSE: GSX) issued a statement on Friday refuting the allegations in a second Muddy Waters report in which the notorious short-seller alleges that the Chinese education platform "openly recruits engineers to help it run bot farms."

GSX responded to two counts in its rebuttal, supplied with log screenshots from its servers. Specifically, the company claimed it did not omit information in its earlier screenshots and said the job postings for engineers were for the daily maintenance of cellphones – not for bot farms. As to the third issue Muddy Waters noted, GSX directed to the "already provided detailed clarifications" in its previous press release.

The letter of denial, however terse, sent GSX stock to rebound 4% by midday Friday, to $30.98 per American depositary share. That was still down from over $35 per ADS at which GSX traded prior to Muddy Waters' first publication.

Muddy Waters' second report, published on Thursday, was a commentary on GSX's initial two responses to the "bot" allegations from last week. At the time, the Chinese company issued a press release in English and a public statement in Chinese on WeChat. Muddy Waters called the former "non-substantive" and the latter – "techno-drivel," where GSX allegedly included log screenshots with omitted information including timestamps.

Next, the short-seller claimed that out of 463,217 sign-in records for 54,065 users, it found that 28.2% of the purported users shared an IP address with GSX employees. According to Muddy Waters,  GSX responded at the time by querying its database and reporting 0.78% overlapping IPs in the press release – and 43,843 IPs in the WeChat statement.

"This purported query fails our laugh test," Muddy Waters said. "Our data set of 165,111 total distinct IP addresses was only 2.9% of GSX's claimed query data set, yet it yielded 34.8% of GSX purported overlap number."

Lastly, Muddy Waters said it found that "10.6% of users joined on the same second, the same day of the week, but on different weeks." GSX had explained that it happened when tutors switched a small class over to the large class. However, Muddy Waters said on Thursday, it had excluded burst joiners within five minutes on either side of the start of class.

Muddy Waters also showed a translation of a job posting from GSX, where the company appears to be seeking engineers experienced in secretive bot networks.

In its first short claim on GSX of May 18, Muddy Waters alleged that the Chinese afterschool tutoring provider overstated its users by "at least" 73.2%, and "quite likely" by 80.8%. Its allegations followed an April report by Citron Research, which called GSX "the most blatant Chinese stock fraud since 2011." 

While some investors choose to stay with GSX, the allegations proved sufficient grounds for a number of U.S. law firms to launch their own investigations into GSX on behalf of shareholders.

In a statement on Friday, The Klein Law Firm said that it has filed a complaint against GSX, alleging: "that GSX Techedu Inc. made materially false and/or misleading statements and/or failed to disclose that: (i) GSX overstated its profitability, revenue, student enrollment figures, teacher qualifications, and teacher selection process; (ii) the foregoing, once revealed, was foreseeably likely to have a material negative impact on the Company's financial results; and (iii) as a result, the Company's public statements were materially false and misleading at all relevant times."