Photo/Shetuwang

May 19 (NBD) -- Chinese online K-12 education company GSX Techedu Inc. (GSX, NYSE: GSX) Tuesday issued a detailed refutation of the sixth short selling report targeting the company since 2020.

Muddy Waters Research (Muddy Waters), led by veteran short-seller of Chinese stocks Carson Block, published a report one hour before Monday trading started, calling GSX a "near-total fraud", as it concluded that it faked at least 70 percent of users, as well as revenues of at least the equivalent percentage.

Shares of GSX plunged by 16 percent pre-market after the report, and closed 7.31 percent lower at 32.84 U.S. dollars in Monday trading.

Muddy Waters reached the conclusion by analyzing GSX's own data of over 200 paid K-12 classes covering 54,065 unique users, and found three abnormal patterns that account for 73.2 percent of the sampled users.

The short seller labeled the first pattern as Precise Joiners, who join a class at exactly the same time on the same day of at least two different weeks. The second pattern is GSX IP Joiners, who shares IP addresses with a teacher or a student. The third is Burst Joiners, who are a large group of users joining a class at the same second.

Muddy Waters believes these highly unlikely patterns show that many GSX students are actually bots. Adding another pattern called Early Joiners, which refers to users logging in online classes "implausibly early", the total percentage of likely bots reached 80.8 percent.

However, GSX said that Muddy Waters' analysis lacked necessary understanding of how the company operates its classes. 

For every class there are one teacher and one teaching assistant, GSX said in a statement Tuesday. The assistant starts warming up activities with students in smaller online groups about half an hour before the teacher takes over, then the system switches students into one large online class.

This teaching model explains the patterns of Early Joiners and Burst Joiners, GSX said. Besides, because K-12 courses are usually scheduled at the same time in different days or weeks, the Precision Joiners pattern is explained.

GSX also denied the percentage of students sharing the IP with a teacher or an assistant, which Muddy Waters claimed was 28.2 percent, and said the figure is only 0.78 percent based on its own calculation.

Muddy Waters also warned long holders of GSX that as Chairman Chen Xiangdong pledged 318 million U.S. dollars of shares, they may face the risk of margin lenders aggressively selling the stocks and crashing the price. 

Regarding this, GSX said Chen only pledged 5.1 million American depositary receipts on April 7, and acquired commitment of 50 million U.S. dollars from Credit Suisse. The deal has been disclosed at investor conference call on April 9.

Before Muddy Waters, GSX has become the target of short sellers Grizzly Research, Citron Research, and Scorpio VC in 2020. Share price of GSX has declined by 25.52 percent since the first short-selling report on February 25, but still more than tripled the IPO price of 10.50 U.S. dollars in June last year.

Email: gaohan@nbd.com.cn