GSX Techedu - Ancient Chinese Secret

Summary

• GSX has been on a rocket ride, up $50 from the time Muddy Water and many other astute shortsellers uncovered alleged fraud at the Company regarding enrollment, revenues and cashflow.
• Without going into all the gory details, the main issue relates to bot accounts and fake enrollment, which means the financials and entire Company are a sham.
• We've watched the stock go vertical and at current levels we think valuation must play.  A $24BN valuation meaning 28x 2020E revenues suggests GSX is priced well beyond perfection.
• Today, the SEC hosts a panel to discuss foreign issuers and the need for higher standards for their continued and/or future listings on U.S. exchanges.
• We expect the United States to require foreign issuers - especially those from China - to adhere to stringent US GAAP accounting, use PCAOB certified auditors approved by regulators, and file more regular financial reports with the SEC as domestic issuers do.  Had such requirements been in place, massive frauds such as that exposed at Luckin Coffee weeks ago would not have cost investors billions in losses.  We predict sentiment will change towards Chinese issuers during and after the hearing as the administration drains the swamp of Chinese pump and dumps.  At current levels you don't need fraud to sell GSX, but with fraud the stock could trade down 80% and still be expensive.  We initiate coverage of GSX with a SELL recommendation.  Our price target is $47, or 10x 2021E revenues.  Any revelation of fraud would likely collapse our price target to pennies.

Former WSJ and II ranked sell-side analyst covering special situations and TMT.