GSX Techedu Inc. GSX
GSX Techedu's too-good-to-be-true 70%+ margins and triple-digit growth are propped up by inflated profits, brushed student enrollments, alter-ego related parties, and suspected CAPEX fraud — it is a fraud worth zero.
Thesis
GSX Techedu, a Chinese online K-12 tutor that IPO'd on the NYSE in June 2019 and tripled to a $10bn+ market cap, is portrayed by management as the only profitable player in the space, with gross margins climbing from 56% to 79% in eight quarters. Grizzly argues the financials are fabricated: SAIC credit reports for GSX's seven main operating entities show consolidated 2018 net profit overstated to the SEC by 74.6%. The firm allegedly uses unconsolidated alter-ego entities such as Beijing Youlian to absorb costs, has a long history of paying third parties to 'brush' fake student orders, and just paid RMB 333.8m for Zhengzhou buildings whose total project investment was only RMB 75m — likely CAPEX fraud to wash off phantom cash. With insiders, co-founders and the prior CFO all selling or leaving, Grizzly believes GSX is the worst publicly traded education company.
SCQA
GSX Techedu is a Chinese online K-12 tutoring company founded by ex-New Oriental executive Larry Chen, listed on NYSE in June 2019, and the only Chinese online education peer reporting consistent profitability with ~70-80% gross margins.
PRC credit-report filings for GSX's seven operating entities show 2018 net profit overstated to the SEC by 74.6%, and operations are propped up by alter-ego related parties, brushed student orders, fake teacher profiles and suspected CAPEX fraud on a Zhengzhou real-estate purchase.
Investors should sell or short GSX, and the auditor Deloitte and underwriters Deutsche Bank, Goldman Sachs, BofA and Credit Suisse should perform genuine due diligence on the alter-ego entities, real-estate purchase and student-enrollment figures.
Grizzly does not publish a price target but, having disclosed a short position, expects substantial downside as the fraud is exposed; the stock had risen ~300% from the $10.50 IPO price to ~$42 prior to publication.
The three reasons
- 1
PRC credit reports show 2018 net profit overstated by 74.6% versus SEC filings
- 2
Order brushing and web/app traffic data suggest student enrollments are largely fake
- 3
January 2020 RMB 333.8m real estate deal is 4x the project's RMB 75m total investment, hinting CAPEX fraud
Primary demands
- Investors should not trust GSX's reported financials and should treat the stock as a short candidate
- Auditor (Deloitte Touche Tohmatsu) and underwriters (Deutsche Bank, Goldman Sachs, Bank of America, Credit Suisse) should perform genuine due diligence on the company
- GSX management should explain the RMB 333.8m commercial real estate purchase and the role of suspected alter-ego related parties
KPIs cited
Pattern membership
Composition what's on the 56 slides
Slide gallery ·
Notes
Classic short-seller research note format: 59-page Word/PDF document, Grizzly Reports bear logo on every page, Calibri body text with embedded Yahoo Finance / Alexa / Baidu Index / SAIC screenshots and Excel-style tables — competent but not designed. Eight-pillar argument (margin disconnect, credit-report mismatch, alter-ego related parties, CAPEX fraud, fake enrollments, web-traffic gap, fake teachers, CFO/insider exits) with a strong opening cover slide. Disclosed short position but no explicit price target. No precedents to other short campaigns invoked despite the playbook resembling other China-fraud shorts (Muddy Waters, Citron). Subsequent campaigns by Citron and Muddy Waters on GSX followed in 2020.