Will GSX Shares Rally With The Re-Emergence Of COVID-19?

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Although the firm stated in its financial report that it achieved a gross profit of CNY 1.46 billion this quarter, an increase of 265.6% from the same period last year, the company’s operating and net profit showed a sharp decline.

It is worth noting that the online educator’s operating loss increased from CNY 11 million to CNY 990 million within a year. According to the company, the reason behind the increase in operating loss was mainly due to its heavy investment in marketing activities to expand traffic and increase brand awareness.

Shorted 12 times and under internal investigations

On February 26, 2020, Grizzly Research, a research firm that produces research insights on publicly traded companies, released a 50-page report titled 'Why We Believe GSX Techedu is the Worst Publicly Traded Education Company.' The firm took a hard hit on April 14, after short-seller Citron called it 'the most blatant Chinese stock fraud since 2011.' in addition to the Grizzly report.

Following Citron's first report, 16 US law firms initiated class actions to investigate GSX  that was recently valued at USD 10 billion. These firms made a survey into the exaggerated profitability of education companies. The survey focused on whether the company overstated indicators such as profitability, income, student enrollment and teacher qualifications, or if it disclosed all information related to investors.

The situation escalated on May 7, 2020, when Citron Research issued the third part of the report in a series of GSX Investigations. Citron presented firm evidence of GSX Techedu committing securities fraud using multiple undisclosed related party transactions to hide expenses or liabilities to US regulators. The report also pointed out that it is highly unlikely that GSX had been able to acquire a customer at half the cost of its competitors. Moreover, over 80 highly suspicious WeChat official accounts engaging in customer acquisition solely for GSX were not registered to any disclosed GSX entity.

Muddy Waters, the firm which exposed the Luckin Coffee fraud, joined the party in late May, claiming at least 70% of the GSX’s users are robots and calling it a loss-making business. The ADRs tumbled 34% from their February 24 peak the following day. 

Some short-selling reports pointed out that GSX transferred costs through affiliated companies, but the transferred costs are only a small proportion of the total cost. Therefore, GSX’s ultra-low-cost ratio is mainly due to inflated revenue. 

Through monitoring robot trainees, Muddy Waters calculated that the amount of inflated revenue from GSX has increased from 70% to 90%. 

There are no other US-listed firms that have been attacked like GSX by short-sellers in 2020.  However, its stock price increased to USD 89.77 per share as of February 08, 2021, compared with USD 37 around a year ago.

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Disclaimer: Please consult your own advisor before making any investment decision. 

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