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TAL Education Stock Inches Down After Third Report by Short-Seller Muddy Waters

CapitalWatch Staff 2018-11-19 14:55 PM
TAL Education Stock Inches Down After Third Report by Short-Seller Muddy Waters

The stock of TAL Education Group (NYSE: TAL) rebounded today after another report by short-seller Muddy Waters sent the education company's stock down 1 percent on Monday.

Muddy Waters Capital LLC published a slide on TAL Education on Monday, titled "Peiyou in Decline," which alleged that the education company has fabricated the financial results of one of its core businesses.

TAL's stock regained ground in early trading Tuesday, but in the afternoon was trading down 18 cents, at $39.58 per American depositary share.

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The shares of TAL declined by an additional 18 cents Tuesday to $39.58 per share in the afternoon.

(Source: Thomson Reuters Eikon)

In the presentation, Muddy Waters said that offline enrollments of Peiyou appear to decline, though TAL, in its third quarter results, reported enrollment increased nearly 92 percent and revenue grew 62 percent.

"The Peiyou fraud is more difficult to quantify, but our research suggests fraudulent overstatement of Peiyou revenue of approximately 25% to 30%," Muddy Waters said in a statement.

The report was the third in a series began in June. "Part I" was a 70-page document that stated TAL Education has been "fraudulently overstating" its profits for at least the past two years and reported two "fraudulent" business transfers of Beijing Dongfangrenli and Guangzhou One-on-One tutoring. The stock of the company tanked 10 percent at the time.

In the second publication, the short seller said its investigation considered the January 2016 purchase of Firstleap, which it titled "Another Fraudulent Accounting Lever." According to Muddy Waters' research, by extrapolating from several reported figures regarding enrollment, revenue, gross profit, and other data, it concluded that "deferred revenue in the Firstleap acquisition appears to be inflated by 2x to 3x or more," leading to a possible overstatement of between $21 million and $29 million.

TAL Education rebutted allegations, saying the reports were erroneous and speculative. The company said its internal audit committee "reviewed the result of the investigation and concurred with the conclusion that the allegations were baseless."

Muddy Waters concluded "Part III" by saying its next report will provide details on why the firm believes that Peiyou's financials from TAL Education were fabricated.