Grizzly Research, Citron Research and Muddy Waters claim China based after school tutoring platform GSX Techedu Inc (GSX) are overstating revenues while founder and chairman Larry Chen has refuted these allegations and stated that “they don’t understand the business model”. Short sellers have been actively increasing their exposure to GSX, with shares shorted increasing by 124% since the end of March. GSX short interest is now $815 million, 27.30 million shares shorted, 21.21% of its float and a stock borrow fee of 4.05%.
GSX is the fourth largest HK\Chinese equity short trading on U.S. exchanges behind perennial shorts Alibaba (BABA), Pinduoduo (PDD) and JD.com (JDD). Over the last month we saw an additional $143 million worth of new short selling in the stock, an increase of +21% in less than a month. This coincides with a recent trend of increased short selling in HK\Chinese equities trading on U.S. exchanges. Overall, total short interest for these stocks is $23.20 billion and shares shorted increased by +10% or +$2.08 billion. GSX’s incremental rate of short selling is more than twice as large as the other HK\Chinese equities trading on U.S. markets.
Comparing GSX to other stock in the Diversified Consumer Services Sector, it is the second largest short in the sector behind Chegg (CHGG) and has the largest increase of short sales over the last 30 days in the sector. Interestingly, three of the top five most shorted stocks in the sector are HK\China based. GSX Techedu (GSX), Tal Education (TAL) and New Oriental Education & Technology (EDU) make up 37% of the total shorts in the Diversified Consumer Services Sector.
Short sellers have been rewarded while increasing their short exposure in May. GSX short sellers are the most profitable shorts of all the HK\Chinese equities trading in the U.S. exchanges in May, with a month-to-date mark-to-market profit of +$246 million, +27% on its average short interest. GSX shorts are still down for year as the ADR had rallied strongly earlier in the year. GSX shorts are now only down -$58 million, -9.67&, for the year. If GSX’s recent price weakness continues, shorts may be in the black in the very near term.
Although there has been a recent lull in GSX short selling as its stock price has plateaued around the $29-$31 range we can expect short selling to continue if its stock price continues its short term downward trend. Even though stock borrow fees have increased recently, as seen in our Black App, there is still ample supply in the stock loan market with over five million shares available to borrow. Stock borrow rates will trade around the 4% to 5% fee range until another couple of million shares of short selling hits the tape and then borrow rates will probably trend sharply higher.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.