Chinese e-learning king TAL Education admits inflated sales

Linda J. Dodson

HONG KONG — Online tutoring company TAL Education has admitted to inflating sales figures, joining a growing list of scandals linked to U.S.-listed Chinese companies and further hampering market confidence in the aftermath of Luckin Coffee’s $310 million fraud.

Beijing-based TAL said on Tuesday evening U.S. time that it discovered one employee had “wrongly inflated sales” of an educational program by forging contracts and other documentation. TAL did not reveal the exact figure of the fabricated sales but said the program at issue contributed roughly 4% of its total revenue in fiscal 2020.

Shares of the New York-listed company were down nearly 18% following the announcement.

TAL’s admission marks the second Chinese accounting scandal in less than a week. Nasdaq-listed Luckin Coffee, which made its name as a challenger to Starbucks in China, last Friday reported falsified transactions worth 2.2 billion yuan ($310 million), the equivalent to over 40% of its 2019 revenue. No less than its chief operating officer was involved and the company lost $5 billion in the market cap the same day.

While investors are still absorbing these shocks, iQiyi, another Chinese company listed in the U.S., is also under fire. Due diligence firm WolfPack Research on Tuesday accused the Chinese video-streaming platform of “massively [inflating] its user numbers and revenue while at the same time hiding the fraud from auditors and investors by overpaying for content, acquisitions, and other assets,” according to a report released online.

WolfPack Research’s backers include California-based short-seller Muddy Waters Research, which previously sounded alarms on Luckin and TAL, accusing both companies of falsifying transactions. Although iQiyi denied any wrongdoing, its shares still fell 3.58% on Tuesday.

The reported frauds, as well as fresh allegations, have apparently triggered market concerns far beyond the three companies. “$BABA next?” one Twitter user wrote to Muddy Water on Tuesday, referring to New York-listed Chinese e-commerce giant Alibaba Group Holding. “Wow, do we play it safe and just short everything from China?” another tweet read.

“This is an emerging disaster for overseas China equity markets,” said Brock Silvers, managing director at Adamas Asset Management in Hong Kong. “All Chinese companies listed in the U.S. — even including PetroChina, China Telecom, Alibaba, and — are now being viewed with suspicion. And this occurs at a terrible time for China, as U.S. arguments in favor of greater decoupling gain steam.

“Chinese law prohibits Chinese companies from submitting to normal U.S. auditing standards, and four Senators have already introduced a bill requiring them to do so. Should Trump be reelected … either Beijing will relent on auditing standards or Chinese firms may start to face U.S. delisting threat,” he added.

Until the scandals hit, TAL and Luckin Coffee were highflying companies in their respective fields. The Chinese online educational firm, founded in 2003, generated more than $850 million in revenue during the December-February quarter, a nearly 20% increase from a year earlier. Luckin Coffee, which went public as recently as May 2019, raised $561 million in its initial public offering.

In its statement on Wednesday, TAL said the employee accused of the misconduct has been taken into custody by the local police.

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