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TAL Education Stock Tanks 10% on Muddy Waters 'Short' Report

Short-seller Muddy Waters unveiled another financial scheme today, alleging a Chinese education provider reported false financials and business transactions.

Anna Vodopyanova
    Jun 13, 2018 3:06 PM  PT
TAL Education Stock Tanks 10% on Muddy Waters 'Short' Report

The stock of TAL Education Group (NYSE: TAL) tanked 10 percent Wednesday after noted short-seller Muddy Waters said the company has been "fraudulently overstating" its profits for at least the past two years and reported "fraudulent" business transfers.

"Part I" of the 70-page report by Muddy Waters Capital LLC was released Wednesday morning, sending the stock of the Beijing-based company to $41.11 per American depositary share, down $4.54 per share from yesterday's close.

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(Muddy Waters Part I of TAL Report)

In addition to the allegedly inflated financials, shown in the image above, the K-12 after-school tutoring provider conducted a number of transactions, which the company repeatedly lied about, Muddy Waters said.

The first transaction was a virtually uncompensated transfer by TAL of one of its businesses, Beijing Dongfangrenli Science & Commerce Co. Ltd., to Beijing Shunshun Bida Information Consulting Co. Ltd., which was described as a student counselling service. TAL became an investor in Shunshun in July 2015, a month before the transfer, according to Muddy Waters. The short-seller said that TAL lied when it reported the acquisition of a 30-percent stake in December of that year "to escape auditor and investor scrutiny." Shunshun was launched in the same year and "barely existed," Muddy Waters said. 

Following the transfer of Beijing Dongfangrenli, TAL increased its investments in Shunshun, essentially raising the value of the company to up to $116.5 million. In consequent financial reports, TAL inflated the profit of this combined business, which reported mounting losses in 2016 and 2017, Muddy Waters said.

The second transaction that Muddy Waters alleged was fraudulent was a purported asset transfer of TAL's Guangzhou One-on-One tutoring business to Changing Education, a student-tutor matching platform in which TAL holds a stake. Muddy Waters said the transaction overstated pre-tax profits by up to $59.4 million for the previous two years, while the transfer of this business did not take place at all. Guangzhou remained under ownership of TAL after Changing Education said its business strategies conflicted; however, the profit gain was not reversed from TAL's financials, Muddy Waters claimed.

Muddy Waters said the information it gathered came from official documents, including files from China's State Administration for Industry and Commerce (SAIC), and credit reports on certain entities associated with TAL, as well as physical visits to TAL's sites and interviews with employees of TAL and its partners.

In April, TAL announced better-than-expected financial results for the first quarter. The company said its revenue jumped nearly 60 percent to $504.1 million, compared with $316.3 million a year ago. Net income attributable to TAL increased nearly 70 percent year-over-year to $198.4 million, or 34 cents per fully diluted share, from $116.9 million a year ago. TAL said its strong revenue growth was driven by stable demand in all cities and a rapid growth of its online courses. The company also said that student enrolment almost doubled year-over-year.

TAL's auditor is Deloitte Touche Tohmatsu.

Muddy Waters did not say when it would release the second part of the report on TAL Education or what information it would contain.

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The stock of TAL Education closed at $41.11 per share, down 10 percent on the day after Muddy Waters released its "short" report.

(Source: Thomson Reuters Eikon)


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