{ "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": 33, "pageCount": 71, "prevPage": 32, "nextPage": 34, "slideType": "other", "function": "expose_contradiction", "density": "dense", "nDataPoints": 0, "notes": "This slide functions as a narrative exposé of corporate malfeasance, specifically highlighting the 'orphaned' status of Shujia and the circular nature of the GZ 1-1 transaction.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 0.9, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-aa4b5c012f2a/33", "deckHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a#slide-33", "components": [ { "bbox": null, "kind": "callout", "text": "We believe this was contrived and that these transactions lacked substance.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-25b2-736e-8e67-d1f63c14b501", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.115, "w": 0.744, "x": 0.128, "y": 0.825 }, "kind": "disclaimer", "text": "81 http://www.gd-n-tax.gov.cn/pub/003025/dq_51391/tzgg/201802/t20180212_1848338.html\n82 TAL FY2017, p. F-49\n83 Instead, TAL’s purchase price accounting for the GZ 1-1 re-acquisition presented the total purchase consideration of $50,000,000 as netting out against $49,999,939 (combined intangible assets: $4.6m student base, -$1.2m deferred tax liabilities, and $46.6m goodwill) to just $61.00, almost zero.\n84 https://www.oddup.com/article/this-shanghai-based-startup-is-trying-to-disrupt-the-education-industry-lands-us-18m-funding", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "ac3bf7bd-b321-49e9-b3e5-889762ff38cb", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.045, "w": 0.744, "x": 0.128, "y": 0.755 }, "kind": "paragraph", "text": "We suspect that Changing Edu agreed to participate in this scheme because TAL had become a significant shareholder. Moreover, Changing Edu appears to have attracted notice as a top-tier venture investment with almost $90 million of “funding” from TAL.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "8bfb37b2-eeb3-4e06-8a4d-a539ba2d5bd4", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.385, "w": 0.744, "x": 0.128, "y": 0.205 }, "kind": "paragraph", "text": "We learned about Shujia from multiple conversations our investigators had with GZ 1-1 and Changing Edu staff. In the course of our diligence we also obtained SAIC financials and credit reports for Changing Edu’s VIE, Shanghai company, and Guangzhou companies. Shujia was established on April 3, 2016. In our interviews with Changing Edu former managers, we learned that Shujia had been planned as a “Special Purpose Entity” to be the counterparty in the GZ 1-1 transaction. In our interviews with TAL was not interested in taking Shujia as part of the purported re-acquisition. Shujia was originally 100% held by Shanghai Qingqing. Changing Edu’s co-founder, Guozhi Hu was the original Executive Director and Legal Representative. On January 20, 2016, Guozhi Hu was replaced in these positions by Mr. Xiansuo Lin, who had previously acted in a similar capacity for four of TAL’s branch offices in Chengdu. Mr. Lin remained the listed representative for Shujia until November of 2017, at which time he was replaced by Changing Edu’s Chairman, Changke Liu. By this time, it appears Shujia had largely become an orphaned company. In January 2018, a local tax office in Guangzhou posted Shujia as among its list of “irregular tax payers”, meaning that the company had not kept up with basic administrative reporting and tax payment compliance. After the “re-acquisition” of GZ 1-1, Mr. Lin appears to have returned to rejoined TAL in Beijing with a promotion.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "bde3c464-4e52-45e0-ad1e-fd81b9a36858", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.115, "w": 0.744, "x": 0.128, "y": 0.625 }, "kind": "paragraph", "text": "TAL reported that just 15 months after the disposal, it was buying back GZ 1-1 at the same price because Changing Edu felt that GZ 1-1 “no longer fit with its overall business strategy”. The consideration for the supposed repurchase was non-cash: merely cancellation of shares previously issued to TAL. (Sino-Forest reported billions of fraudulent sales and profits through non-cash transactions.) Upon reconsolidation, TAL did not reverse its previous $50 million gain. We believe this was contrived and that these transactions lacked substance.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d7355d7c-69f8-4a0f-b50b-e4441d863379", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.015, "w": 0.605, "x": 0.128, "y": 0.595 }, "kind": "source-note", "text": "Sources: Shujia SAIC files and National Tax Office Guangzhou Yuexiu District Announcement.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "dcb35673-a9a9-4565-957b-177d85abd128", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.021, "w": 0.662, "x": 0.128, "y": 0.168 }, "kind": "title", "text": "How did we learn about Shujia and what did we know about it?", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6d2be9ba-df0a-4585-a643-d5c930e5ef55", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "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 }, { "to": 71, "from": 24, "beatId": "f1a1059e-e779-4948-a18b-bd7e979146da", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Appendix Data", "beatSlug": null, "evidence": "The document includes extensive data and financial reports to support its claims", "position": 2, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "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 }