CapitalWatch has monitored the fall from grace of Chinese e-learning platform GSX Techedu Inc. (NYSE: GOTU). On Friday, shares in the company tumbled an additional 9%, to $13.71 apiece, as it announced the effectiveness of its name change to Gaotu Techedu Inc.
That follows the change of the stock symbol from “GSX” to “GOTU.” Year-to-date, the stock is down 71% - in early January, the e-learning platform traded at just under $50 per share. Then, in February, it spiked at $149.05 per share on a wild market rush.
Changing the name is not a good sign for the company. Now, it will be a bit tougher to do quick due diligence on the stock for investors. And this stock especially needs that work: Several notable short-sellers have said their “short” on GSX, alleging fraud in their books.
It all started more than a year ago, at about the same time when China’s main coffee chain, Luckin Coffee (OTC: LKNCY) was going down in shambles after confirmed manipulation of its financial and operational records. That resulted in its delisting from the Nasdaq, change of top managers, a $9 million fine in China and a $180 million settlement with the U.S. Securities and Exchange Commission, lawsuits against shareholders, and bankruptcy.
Still, Luckin is a legitimate business operating over 6,000 coffee stores in China. Its new CEO hopes to regain that trust with shareholders and users; in March, it announced the restructuring of its debt “to comprehensively address its capital structure and better position it for long-term success.” Shares in LKNCY are now trading at $7.72, about double their level of a year ago (still down from about $50 per share in January 2020, however). For GSX, now Gaotu, there isn’t as much assurance.
Grizzly, Muddy Waters, Citron, and other research firms have released reports in 2020 claiming GSX Techedu is a fake and up to 80% of its users are bots. Muddy Waters called GSX a “massive loss-making business” and an “almost completely empty box.” At the time, the firms failed to convince investors that GSX is a “China Hustle” firm, however; over the summer, shares in the company doubled to over $80 per share and in August briefly skyrocketed to $130.
Then in early April of this year, Grizzly Research renewed investor fears by publishing follow-up allegations of fraud at GSX in a report titled “Seven Reasons Why Deloitte CANNOT Sign GSX Annual Audit.” Among those reasons it cited exploding expenses after the short-seller reports of 2020, unrealistic teachers without certificates, low returns on long-term investments, “mysterious private placement” in December 2020, and others.
In March of this year, GSX concluded its internal investigation saying it did not uncover any evidence to support the claims of fraud. Not surprisingly, GSX denied Grizzly’s recent claims as well.
Now, however, investors are more wary. GOTU has failed to recover since it began to slide in late March, in part due to China’s tightening regulatory environment in the afterschool tutoring market. New bans in the industry are expected to be imposed this month and nearly all U.S.-listed Chinese educators have tumbled in trading over the past few weeks.
On top of these troubles, GSX is facing lawsuits. Several investor rights litigators are investigating into the company or have filed with the court “to recover damages for GSX investors.” Rosen Law wrote in April: “(1) GSX overstated its profitability, revenue, student enrollment figures, teacher qualifications, and teacher selection process; (2) the foregoing, once revealed, was foreseeably likely to have a material negative impact on the Company’s financial results; and (3) as a result, the Company’s public statements were materially false and misleading at all relevant times. When the true details entered the market, the lawsuit claims that investors suffered damages.”
The name Gaotu comes from “the successful integration of our K-12 businesses under the Gaotu K12 brand last September,” as Shannon Shen, the company’s chief financial officer, said in the first quarter report. The company provides large-class after-school tutoring in China.