Short Sellers Piling Into GSX Techedu Following Fraud Accusations

Chinese online education stock GSX Techedu Inc GSX is down 34.1% since Aug. 6, largely due to reports from short sellers Citron Research and Muddy Waters Research accusing the company of being a fraud.

According to S3 Partners analyst Ihor Dusaniwsky, GSX was the most aggressively shorted stock of the past week.

Fraud Allegations: In the previous five trading days, GSX experienced $923 million in new short-selling activity, Dusaniwsky said. Citron, Muddy Waters and Grizzly Research have been accusing GSX of fraud throughout 2020.

“My children love TikTok, We own $BABA, but $GSX continues to be a stock fraud. Using this opp. to add to a position. Confidence in the auditors/regulators. Look at the chart on Wirecard you will know that shorting isn't easy but neither is maintaining fraudulent financials,” Citron tweeted on Aug. 7.

Dusaniwsky said GSX short interest exploded from around 12.2 million shares to 42.1 million shares from the end of March to mid-June. From that point, heavy losses drove short sellers away from the stock in droves, and short interest dropped back down to 20.3 million shares by Aug. 10.

Dusaniwsky said GSX short-selling trends have once again taken an abrupt 180-degree turn, with 13 million new shares sold short in the past week.

Huge Losses For Short Sellers: GSX’s short interest now stands at $3 billion, an extremely high 25.9% of the stock’s total float. Despite the fraud accusations, Dusaniwsky said GSX short sellers have had extremely bad timing with the volatile stock year-to-date. GSX short sellers have endured $2.1 billion in mark-to-market losses so far in 2020.

In the near-term, Dusaniwsky said GSX short selling will likely continue as long as the stock continues to trend lower.

“Short sellers may be looking to ride GSX’s stock price back down into the $40’s and even lower
if there is any traction to the ‘fraud’ accusations,” he said.

Benzinga’s Take: Luckin Coffee Inc - ADR LKNCY and TAL Education Group TAL are just two examples of a number of U.S.-listed Chinese companies that have admitted to fraud in recent years. If China continues to allow its companies to deceive American investors, it will have an increasingly difficult time tapping the U.S. equity market.

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