{ "docId": "019dd923-622c-750b-8b96-aa4b5c012f2a", "docSlug": "aa7e6c3950ac", "documentTitle": "TAL Education Group (TAL)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2018-06-13 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 3, "pageCount": 71, "prevPage": 2, "nextPage": 4, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "dense", "nDataPoints": 3, "notes": "Discusses Sino-Forest, SEC regulatory failures, and TAL Education Group.", "elementsJson": [ "paragraph", "bullet_list" ], "metadataConfidence": 0.9, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-aa4b5c012f2a/3", "deckHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a#slide-3", "components": [ { "bbox": null, "kind": "callout", "text": "Defrauding U.S. investors from China has proven to be a “heads I win, tails you lose” proposition.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-25b2-736e-8e64-ec933d5d0c21", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.72, "x": 0.14, "y": 0.09 }, "kind": "list", "text": "Significant non-cash transactions – this was one of the major flags of the granddaddy of all China frauds – Sino-Forest. Non-cash transactions are far too easily manufactured in China to be trustworthy.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "391af9e3-ce70-4499-8203-a27a1ada8589", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.78, "x": 0.11, "y": 0.16 }, "kind": "paragraph", "text": "There followed a retrenching period where many of the problematic companies were de-listed or became penny stocks. The perception was that the companies left standing were the “real” companies. However, what did not happen is as important as what did happen.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "271296be-0692-4713-a7da-f4269d7d1be2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.16, "w": 0.78, "x": 0.11, "y": 0.23 }, "kind": "paragraph", "text": "Out of literally hundreds of blatant frauds, almost no company chairman did any prison time. A Securities and Exchange Commission judge ordered that the practice licenses of the China affiliates of the Big Four, who had issued unqualified audit opinions to blowup after blowup, be suspended for six months. However, the suspensions never came into effect. Instead, the U.S. government settled with the affiliates for $500,000 each, which is roughly equivalent to a yearly audit fee for one small client. In fact, it became difficult for the SEC to act against auditors because auditor working papers supposedly became “state secrets” that would subject an individual to prison time for providing them to a U.S. regulator. In other words, after about 400 frauds, virtually nobody has been meaningfully punished.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "41899818-2daf-4ffa-aba2-8633e0804452", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.13, "w": 0.78, "x": 0.11, "y": 0.41 }, "kind": "paragraph", "text": "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.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f1d354d4-9d0a-4ba2-9941-155ae495a57b", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "Show me the incentive, and I'll show you the outcome — Charlie Munger", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-25b2-736e-8e64-f203a0c89da2", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "incentive-structure", "slug": null, "matchId": "313c0608-fa23-4b67-9a95-fb8356ef8e03", "evidence": "Charlie Munger quote regarding incentives and outcomes", "confidence": 0.8 } ], "arcBeats": [ { "to": 71, "from": 3, "beatId": "9de0976e-28e1-420f-a107-b337349d49c9", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Expose Contradiction", "beatSlug": null, "evidence": "The document is primarily composed of slides that expose contradictions in TAL Education's financial reports", "position": 0, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 4, "from": 3, "name": "Aha Moment", "slug": "03-aha-moment", "bestFor": "Data-heavy sections, research findings, analytical arguments", "matchId": "6d494cda-01af-4a24-8336-8ffbc13c84ce", "evidence": "The document presents a clear contradiction in TAL Education's financial reports, leading to an aha moment", "position": 0, "objective": "Is TAL Education's financial reporting accurate?", "structure": "The Problem/Question -> What the Data Shows -> The Insight", "confidence": 0.8, "description": "Establish a tension, present data, then deliver the insight that changes everything" }, { "to": 71, "from": 2, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "173d833e-f506-46f1-a81b-f0c40e490cd2", "evidence": "The document implies that investors who fail to address these discrepancies may suffer significant financial losses", "position": 2, "objective": "What is the cost of not addressing TAL Education's financial discrepancies?", "structure": "The Status Quo -> The Hidden Costs Accumulating -> The Future State of Inaction -> The Tipping Point", "confidence": 0.6, "description": "Quantify what happens if the audience does nothing" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }