GSX Techedu, the New York-listed Chinese ed tech accused of fraud by multiple short-sellers, burnt through cash in the first quarter as its cost of revenues rocketed by more than 100%, leading to a loss.

The online tutoring provider, which is under investigation by the US securities watchdog, said that net revenue increased by 49.5% year-over-year to RMB1.9 billion (£210 million).

However, the cost of revenues – related to recruitment of tutors and increased compensation, as well as rent and learning materials – jumped 101.7% to RMB571.5 million.

The sharp uptick in cost of revenues highlights the rising cost of competing in China’s rapidly expanding tutoring market, encompassing online and offline providers, estimated to be worth some $120 billion.

While gross profit increased 35% year-on-year to RMB1.4 billion, GSX Techedu recorded a net loss of RMB1.4 billion, compared with net income of RMB148 million in the same period of last year.

Paid course enrolments – a key performance metric in the online tuition segment – fell to 767,000 from 774,000, a decrease of 1% year-on-year. Online K12 paid course enrolments reached 632,000, compared with 647,000 a year prior – a decrease of 2.3%  

Larry Xiangdong Chen, founder, chairman and chief executive, said: “Since the end of last year, we have been reinforcing our efforts to control our selling expenses, while expanding our investments on teaching content, technology, and teaching talent.

“We have always believed that the core of ‘online education’ is ‘education’, rather than ‘online’. Extensive traffic growth no longer works for this industry, while every player has to compete by refining operations.

“As a company that prioritises efficiency, we have decided to return to the core of education, return to quality-driven growth, and return to profitability over the longer-term.”

A London-based hedge fund manager told this publication: “It’s clear they have had to completely change the story. They are burning cash, growth is one-tenth of what they were reporting a year ago. It’s an absolute mess.”

GSX Techedu’s share price climbed 17% after it published its first-quarter earnings – but year-to-date, the company is down 61%, trading at around $19 per share.

Over the past 18 months, GSX Techedu has been at the centre of vicious attacks by short-sellers, which have accused the firm of misreporting financials and faking student numbers. The company has faced calls to be de-listed from the New York Stock Exchange.

In December, GSX Techedu raised $870 million from unidentified investors through a private share placement – a move that prompted intensified scrutiny by hedge funds.

Carson Block, founder of Muddy Waters Research, one of the world’s best-known short-sellers that has unearthed several cases of Chinese fraud, tweeted at the time of the capital raise: “IF the placement is actually real, cannot imagine the buyers doing this w/o [without] having been seriously short beforehand. But who are the buyers? Who would step up and write a check [sic] for the biggest and most obvious stock fraud in the world? And why?”

Regulatory upheaval in China, combined with accusations of fraud, is piling pressure onto GSX Techedu’s share price and that of other listed China-based tuition providers, some of which have lost more than a fifth of their value this year.

New rules reported to be under consideration by Chinese authorities could ban cash-burning marketing activities while significantly reducing the number of hours students are allowed to spend in before- and after-school tuition classes.

Date published: 28 May 2021

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