GSX Techedu, one of the fastest-growing Chinese online education providers, has seen its share price slide after a damning report by short-seller Citron Research labelled the firm “the most blatant Chinese stock fraud since 2011”.

After climbing more than 90% between 1 January and 25 February, from $23.74 to $45.42, New York-listed GSX Techedu was trading at $29.67 on 16 April – two days after the report was published. Earlier this year, GSX Techedu became the first listed ed tech company to reach a market capitalisation of $10 billion. 

"GSX Techedu Inc. is overstating revenue by up to 70% and should immediately halt trading and launch an internal investigation," Citron said in the report. "They are not even in a 'fake it till you make it' situation. Their forward growth trajectory is as foolish and fraudulent as their previous financials."

US law firm Wolf Haldenstein Adler Freeman & Herz announced on 15 April that it is investigating “serious and disturbing class action claims” about GSX Techedu on behalf of shareholders.

The allegations came shortly after GSX Techedu competitor TAL Education – one of the world’s largest education companies, also based in China but listed in New York – admitted to sales fraud.

Citron Research is the second short-seller this year to allege that GSX Techedu is a fraudulent organisation. In February, US-based Grizzly Research published a scathing report in which it accused GSX Techedu of fabricating student numbers, overstating profitability, offloading costs and committing capital expenditure fraud – concluding that “GSX’s success is actually based on a fraudulent scheme”.

Shortly after Grizzly’s report was published on 25 February, Sandy Qin, head of investor relations at GSX Techedu, rubbished the claims during a 30-minute phone call when contacted by this publication.

But there are parallels between allegations set out in both firms’ reports.

For instance, both Grizzly and Citron alleged that there was a major discrepancy between figures filed by GSX Techedu in credit reports in China and filings with the US Securities and Exchange Commission, Wall Street’s watchdog.

According to Citron, there was a “75% discrepancy in net profits”, which stood at nearly 80% in the final quarter of last year, according to GSX Techedu. This profit margin is considerably higher than that of competitors, including TAL Education, Yuanfudao and DAO.

In response to this particular allegation, GSX Techedu told Citron: “The gap between the company's credit report and S-1 filing was actually GAAP difference between China and U.S. after the group's restructured to spin-off 2B business in 2017. The difference is totally reasonable and legitimate and has nothing to do with operational numbers.”

However, after scouring filings related to a spin-off or divestiture alongside accounting experts, “the conclusion is that management is lying,” said Citron.

Both Grizzly and Citron also alleged that GSX Techedu has fabricated its student numbers, which is did, according to Citron, by “planting fake student users in WeChat groups”. This ploy, which was used to inflate revenues, is evidenced by identical student comments, explained Citron, which included in its report numerous screenshots capturing instances of duplicated feedback.

Citron stressed that investors should not take comfort in the fact that GSX Techedu is audited by a Big Four organisation.

“It is interesting to note that GSX's auditor is Deloitte,” said Citron. “This is the same auditor that was used in the Longtop and China Media Express frauds – both exposed by Citron.

“We are not saying that all of their clients commit fraud, but don't for a minute think because GSX has a Big Four auditor they are clean and that history won't repeat.”