Muddy Waters is short TAL Education Group. Investors might recall the dark days of 2010 and 2011, during which numerous U.S.-listed China companies went down as frauds. According to the recent documentary, the China Hustle, there were approximately 400 frauds from China listed on U.S. exchanges. Out of literally hundreds of blatant frauds, almost no company chairman did any prison time. Charlie Munger is fond of saying “Show me the incentive, and I’ll show you the outcome”. Defrauding U.S. investors from China has proven to be a “heads I win, tails you lose” proposition. So, it does not shock us when we see that TAL began fraudulently creating profits as early as FY2016. Since the beginning of FY2016, the value of Chairman Zhang’s shares have skyrocketed from $900 million to close to $7.5 billion. The prospect of becoming Bobby Axelrod rich is a powerful incentive, especially when you have no downside if caught.

We continue our series of reports with a look at another transaction with a quantifiable above-the-line impact, Firstleap. We focus on Firstleap second also because it is a bit of a brainteaser – we invite investors to try to reconcile to the numbers TAL reported. Taken together, Parts I and II show the variety of levers available to TAL to fraudulently inflate profits – all three transactions are obscure transactions to which investors seemed to pay scant attention at the time, and yet they have each made material contributions to profit overstatements.

In this brief presentation we explain why we think Peiyou offline enrollments are declining.

In addition to reporting fraudulent profits, TAL has been misleading investors about the health of its core Peiyou business. TAL’s core Peiyou business appears to be in decline. We believe that Peiyou offline Q3 revenue YoY growth was likely negative, despite TAL CFO Rong Luo stating the growth rate was “healthy” and implying it was in line with small class revenue growth of 52.4%. We also suspect that Peiyou online is not doing well. Peiyou online Q4 sequential growth seems to have been at best high single digit, and quite possibly negative.