May 18, 2020 - 10:04pm EST by
2020 2021
Price: 32.84 EPS 0.42 0.81
Shares Out. (in M): 252 P/E 78.6 40.4
Market Cap (in $M): 8,275 P/FCF 22 12
Net Debt (in $M): -220 EBIT 166 314
TEV ($): 8,055 TEV/EBIT 48.5 25.8
Borrow Cost: General Collateral

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This stock is part of the hot and hyped Chinese online education sector.  Best of breed peers TAL and EDU have done very well and are well regarded.  Investors certainly were enamored with the opportunity to invest in another up and coming Chinese online education name.  Enter GSX - with its reported 382% YoY rev growth and +178% EPS growth YoY in Q1.   They tout 350%+ YoY rev growth over the last 6 quarters with 15% net income margins.  Net income and cash flow have hockey sticked up lately. GSK is up 212% since IPO in July 2019.  

GSX however is most likely a fraud,  is very expensive and expectations are high, looks way too good to be true, and even if it is true will have fundamental headwinds going forward.    

Citron and Grizzly and Muddy Waters and JL Warren have been attacking the company lately and continue to do so.  JL Warren also has a detailed interview with a firm that says that they've created 40% of the students and review for some teachers.  Muddy Waters also cites a former employee who is familiar with how the company uses bots to create fake users and believes 70-80% of revs are fake.  Citron thinks 70% of revs are fake.   Furthermore, looks like there are sketchy related party transactions, fake students, fake profiles, fake teacher profiles, weird reporting, etc. 

On a day where Chinese internet is was flat (5/14/20) because Trump said they're looking at companies with sketchy accounting, GSX was down 7% while other China internets were flattish +/- 1%.  Clearly, if the SEC or Trump administration follow through on their threats of cracking down or delisting companies with sketchy account, GSX is certainly going to be caught in the crosshairs.    

On 2020 numbers trades at:  79x P/2020 EPS, 79x EV/2020 EBITDA, 8.5x EV/revs,  for projected 200% rev growth, 130% EPS Growth.  Of course very heady multiples

Even if the biz is legit,  they are facing headwinds as students go back to live classes and the online boost slows.  Also big competitors (TAL, etc.) are getting into the K-12 space (GSX's focus) and are spending more on customer acquisition, which will hurt GSX's margins 

I think there's 70-80%+ downside.  LK was down 80% before being halted for the last month.  If 70% of revs are fake, the stock could easily be down that much and more. 

GSX since IPO 

Stock Details

IPOed in 6/2019 at $10.10 and has shot up to $45, now at $33.    CS, Barclays, CLSA and DB were lead.  Many bulge brackets cover this (Barclays, Nomura, CS, GS, UBS, DB, JPM, CLSA, etc.).   The auditor is Deloitte (the firm and lead auditor have been involved in other sketchy Chinese ADRs).

- there are 11 buys, 3 holds, and 1 sell (CLSA).  CLSA seems to be the only one who has done work on it and thinks about it logically.  The rest are cheerleaders

- There are no reputable large holders on the holders list.  

- 18% of the float is short


Valuation on consensus estimates - very expensive 

- $220mm cash, negligible debt,  $7.8bn mkt cap

- 2020:  79x P/2020 EPS, 79x EV/2020 EBITDA, 8.5x EV/revs,  200% rev growth, 130% EPS growth

- 2021:  42x P/E, 39x EV/EBITDA,  5.1x EV/revs,  67% rev growth, 87% EPS growth

- they also announced a $150mm buyback program (apparently to show confidence in their company and refute short sellers).  What high growth company and such high multiples even bothers with a stock buyback?


Comparables (TAL and EDU and Koolearn - all well known and more legit)

- TAL  (40-60% growth)

   2020: P/E 61x 2020,   48x EV/EBITDA ,   6,7x   P/S

   2021:  P/E 38x 2021,   28x EV/EBITDA,  4.8x P/S

- EDU  (20-30% growth)

   2020: P/E 38x 2020,   29x EV/EBITDA ,   4,8x   P/S

   2021:  P/E 27x 2021,   20x EV/EBITDA,  3.7x P/S

- Koolearn not profitable,  60% rev growth, 14x P/S and 9x P/S 


The business model and numbers don't really add up.  Purported reasons for their success:

"Analysts and management have been attributing this apparent phenomenal growth to its great management skills, low sales and marketing costs (aka student acquisition costs), and its high profitability achieved by its ground-breaking ‘star-instructor, dual-teacher, large class’ model." 

 < however, this biz model make sense since large classes generally don't work in online education because most online classes work best for test prep.  After users take the test, they leave, so there's high churn and those students aren't usually profitable.  GSX says they do this for K-12

 < GSX has very high ASPs, higher than offline classes from other providers, which again doesn't make sense.  People pay more for in-person classes than a large online class with a lot of students 

- supposedly, GSX says they have 'star teachers',  but some whistleblowers are saying that's not the case.  GSX just hires young people and fakes their resume and background.  Either way, even if they have 'star teachers',  they'll run out of these teachers as they grow or other firms will hire them away

- if GSX is really doing this well,  the bigger players (TAL, EDU, Koolearn, etc.) should be able to hire away the teachers or take away their students.  GSX really doesn't have a moat 


 - GSX says they have very low customer acquisition costs even though they just use WeChat and other conventional advertising methods.   Again it's unlikely they have a secret sauce. 

- GSX seems too good to be true

- they say they're generating so much cash from all the upfront deferred revenue that they receive,  which again is very impressive and seems too good to be true for a company growing this fast in such a competitive area


JL Warren

JL Warren (a Chinese research firm), called a 'brushing' firm (i.e. a company that does fake accounts, fake reviews, fake revs,  etc.) and did a really detailed Q&A with them (pasted in one of the Citron reports).  The brushing firm says that management at GSX directly contracted for brushing services.  That's pretty wild.   The brushing firm has very detailed information about their relationships with GSX.  She thinks 40% of total enrollment is fake and revs are inflated by 40%.  The brushing firm basically said so.   Citron alleged the same thing;  management has obviously denied it saying they have no cooperation with any brushing firm. 

- this brusher also confirmed that they worked with an employee at TAL (which recently came clean with that information) 

- brushing is commonplace in China,  but not to this degree


Citron thinks revs may be overstated by 70% and they're going to publish more reports on them.  They've published 3 reports so far

- basically says very few in China have heard about the company and they're not listed in comparisons of online education offerings in China

- there are numerous related parties (that GSX denies any involvement with) that are helping to find/acquire users and hide costs 

- the biz model doesn't make sense, and doesn't add up

- they don't show up on many web analytics search / web traffic data


Grizzly Reports also thinks there's fraudulent / fake revs and accounts

- the company has basically no web traffic or search queries.  Doesn't show up in app stores, and app downloads are small and not growing 

- plus a lot of related party transactions to hide losses 

- looks like a lot of the reviews and students are duplicate / fake

- GSX hires fresh grads, makes them work a lot, gives them fake profiles & reviews & students


Muddy Waters (one of the most accurate and successful of the China short sellers) published on them today

They say 70-80% of GSX techedu's users are fake.   GSX was down -7% today

- this is based on GSX's own user and attendance data files cover 54k users.  

- A former GSX manager corroborated their analysis and explained GSX's bot operation.  

- thinks the fraudulent revs are at least equal to the real revs


To summarize:

The #s look too good to be true.  Growing at 382%, with 70% gross margins, with 15% net income margins.  Usually fast growing companies aren't profitable and aren't generating as much cash as they are

This is a $7.8bn market cap company that few have heard of, even in China.   The other well known names (TAL, EDU, Koolearn) I and everyone else know of.  GSX is relatively unknown inside and outside of China.   At least Luckin actually had the stores,  but overstated revs and traffic 

The CFO left right before the 2019 IPO, and other top management have fled

Early investors have been selling 

Anything online had a benefit in Q1 from COVID as people stayed at home, that should fade in coming quarters as in-class learning starts up again and China gets back to normal.  China has done a great job fighting COVID,  so I'm not concerned about flare ups  

GSX TechEdu's company name also sounds scammy.  Their mission statement: "making education better through technology" is also laughable 


Recent earnings report

Q1 - beat, reported on 5/6.  Spent a lot of the call refuting the short sellers

- rev grew +382% YoY, 14% beat

- EPS +178% YoY, 8% beat

- on the Q1 earnings call,  they went through the names of the banks where their cash is held, they also made it clear upfront that there are no sketchy related party transactions, they tried to refute the bear cases (didn't do a good job)


- guided to rev growth +331-340% YoY

Keeping up this type of growth, even if real, will be extremely difficult and lead to disappointments or multiple contraction


Risk to the short

- maybe this is really that good

- it's in a hot area in China (online education, which is secularly growing),  peers trade rich as well 

- Chinese people like to spend a lot on education


Some sell side quotes that raise red flags

“GSX surprised the market when it first publicly filed the IPO prospectus in May 2019, as one of the very few profitable online AST companies with over 400% revenue growth in 1Q19. This is exceptional in China’s online AST market as the great majority of the players remain loss making due to substantial upfront investments into student acquisition and technology.” – Goldman Sachs (February 2020)   < sounds too good to be true

“A significant portion of GSX operations is conducted within the WeChat ecosystem, including traffic and student acquisitions, tutor-student interactions, live class offerings, payments.” – Goldman Sachs (February 2020)   < it doesn't make sense that GSX should have better customer acquisition costs and better customer lifetime value if they're just using WeChat and advertising on WeChat.  

GSX is the only profitable player in the K-12 online education space – attributed to its star-teacher, large-size, live-class business model, higher price point and low customer acquisition costs (CAC).” – Bank of America Merrill Lynch (April 2020)   < these don't add up.  It's like they have it all some how 




Short interest



TAL 1 year



EDU 1 year

Koolearn 1 year



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- SEC / US regulators crack down.  

- Citorn, Muddy Waters, Grizzly Reports all continue to attack the company

- fundamentals slow as China gets back to normal

- competition heats up,  customer acquisiton costs rise, ASP falls

- more whsitleblowers

- more negative press

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