China firm GSX Techedu blames Muddy Waters' fraud claim on misunderstanding

GSX says it's committed to high corporate governance standards

GSX Techedu Inc. fired back against accusations the company is a “near-total fraud.”

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The educational software provider said research firm Muddy Waters “lacks a basic understanding” of its business after an assessment that at least 70 percent of GSX users are bots that dragged its stock down 7.3 percent on Monday.

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GSXGSX TECHEDU65.08+1.18+1.85%

GSX “regrets to see confusion” and will continue to make its best attempt to ensure investors "fully understand all aspects" of its business, the company said in a statement on Tuesday.

Its business model focuses on large live online classes, which typically begin as smaller groups with multiple tutors, GSX said in an explanation of why large numbers of students appear to be signing up at precisely the same time.

“Typically, a tutor offers a prep session before a paid class to warm up students with games and quizzes,” the company added.

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“When the formal class starts, the tutor will transition all his or her students from the small groups to the instructor's large class, and the instructor takes over. If a tutor fails to do so in time, the system will automatically switch classes for students, usually around the class start times, thus causing large groups of users to join classes at the same time,” the firm said.

GSX disputed Muddy Waters’ claim that there was a 28.2 percent IP address overlap between students, instructors and tutors, saying its dataset for paid classes conducted between January and March showed a 0.78 percent overlap.

GSX said it's “committed to maintaining the highest standards of corporate governance.”

Muddy Waters responded to GSX’s statement with a series of tweets on Tuesday, saying the Beijing-based company's claim of a misunderstanding was the same response employed by the previous seven companies that were delisted following its investigations.

Muddy Waters vowed to “show more GSX fraud” soon.

Muddy Waters’ report came weeks after Citron Research called GSX “the most blatant Chinese stock fraud since 2011.”

Citron accused GSX of overstating revenue by up to 70 percent, and said the company should “immediately halt trading and launch an internal investigation.”

The allegations against GSX come as the U.S. considers stricter requirements for Chinese companies trying to list on American exchanges in retaliation for Beijing's handling of the COVID-19 pandemic.

Additionally, exchange operator Nasdaq on Monday evening proposed rules that will tighten restrictions for foreign companies trying to list shares. The measures include a mandate that companies from some countries, including China, raise at least $25 million in their initial stock offerings and a requirement that audits be conducted to make sure international franchises meet global standards.

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Chinese beverage-chain Luckin Coffee was informed by Nasdaq on Tuesday that its shares will be delisted after an internal investigation showed the company’s chief operating officer and other employees fabricated sales.