Veteran short-seller Carson Block is returning to his roots of shorting Chinese companies he alleges are frauds, this time pointing the finger at TAL Education Group, a provider of tutoring and other educational services in China that is listed on the New York Stock Exchange.
Shares in TAL were down more than 8 per cent on Wednesday after Mr Block’s hedge fund, Muddy Waters, published a report claiming that TAL has been fraudulently overstating its profits since at least 2016. The fund is seeking to profit on its prediction that the company’s shares will continue to fall.
Muddy Waters is famous for its research and detailed attacks on companies such as Sino-Forest, the Chinese timber group.
Sino-Forest shares sank in June 2011 when Muddy Waters accused the company of overstating its assets and questioned the identities of anonymous customers at the heart of its business model. The forestry group filed for bankruptcy protection in 2012.
But Mr Block has not always been proved right. Shares in Bank of the Ozarks and the German advertising firm Strooer both took a hit after Muddy Waters announced short positions, but have mostly continued to rise since then. Short-sellers operate by publishing research on companies they believe have inflated share prices, after they have already taken a short position
TAL did not immediately respond to requests for comment after business hours in China.
The company, which has a market capitalisation of around $23bn, may be Mr Block’s largest target yet.
The hedge fund said it spent several months retrieving more than a thousand pages of Chinese government files on entities that are associated with or belong to TAL, obtained credit reports on many of the entities, made site visits and interviewed “scores of people” who worked for TAL or its partners.
The allegations made by Muddy Waters include claims that TAL has been overstating its net income, operating profit and pre-tax profit over the past two fiscal years.
“The reality is that TAL’s margins have deteriorated more than have been reported,” Muddy Waters claimed in the report which criticised the company’s accounting.
TAL is one of the most prominent companies in China’s otherwise highly-fragmented education sector and the software tools it develops are widely used in public and private schools across the country. It became one of the first Chinese education groups to list in New York, with about a dozen more following suit.
It has also set up international collaborations with universities in Israel and the US to research the application of artificial intelligence in educational technology and has a textbook publishing co-operation with the University of Cambridge, Bai Yunfeng, president of TAL Group, told the Financial Times this year.
This article has been amended from the original to include an accurate picture of Carson Block
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