(Bloomberg) -- Chinese tutoring firm TAL Education Group said a report by short seller Carson Block’s Muddy Waters alleging that the company inflated earnings -- and causing its American depositary receipts to tumble -- is erroneous and deceptive.
“The allegations made by this short seller contains numerous errors, unsupported speculation and malicious interpretations of events,” Beijing-based TAL said in a statement Thursday. TAL’s board and its audit committee will review the allegations and “consider appropriate actions to protect the interest of its shareholders."
In a report posted on its website, Muddy Waters said TAL began fraudulently creating profits as early as fiscal year 2016, by penciling in more favorable numbers along with engaging in more sophisticated asset parking transactions.
“It’s a real business but its profits are fraudulent,” Block said on Bloomberg TV Wednesday. “It is a real business with real students and learning centers. It’s just not able to grow nearly as profitably as it’s been portraying.”
Block’s activist investment firm has in the past wagered against Chinese companies, many of which he claims engage in fraudulent behavior. Forestry company Sino-Forest Corp. lost more than two-thirds of its market value in two days after Block first criticized it in 2011, and was subsequently delisted.
Two transactions inflated the company’s pre-tax profits by up to $153.2 million, or 28.4 percent, between fiscal years 2016 and 2018, the report said. Between 2016 and 2017, TAL “fraudulently overstated” its operating profit by at least 21 percent, pre-tax profit by at least 39 percent and net income by at least 43 percent, it said.
Most important, Block told Bloomberg TV, is the shareholder registry for TAL.
“When you look at the shareholder registries you see that TAL has been lying about investments and how it made these investments and that really goes to the heart of what they’re doing,” Block said.
TAL’s American depositary receipts tumbled 10 percent Wednesday. The shares had rallied about 154 percent last year, and this year the ADRs were up about 38 percent. The educational service company has 2.3 million students in 42 cities across China, according to its website.
In Hong Kong, China Maple Leaf Educational Systems Ltd. fell 2.9 percent and Wisdom Education International Holdings Co. declined 1.1 percent.
Block has said that fraudulent Chinese companies pose a risk to U.S. markets as the firms draw capital back to their home country. He said China can list fraudulent companies in the U.S. with impunity and they operate at the behest of the government, which doesn’t follow the same rules as many other countries when it comes to issues such as intellectual property theft.
TAL was a mixed bag for hedge funds in the first quarter. Thirty-six funds bought the stock, including Coatue Management and Point72 Asset Management, while 28 sold at least some of their stake, according to data compiled by Bloomberg News.
Some of Block’s calls on Western companies have missed the mark. His 2013 take on U.S. cell-phone antenna operator American Tower Corp., in which he said shares may drop 40 percent, failed to shake the company. Since then American Tower has rallied nearly 97 percent.
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