{ "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": 9, "pageCount": 71, "prevPage": 8, "nextPage": 10, "slideType": "villain_critique", "function": "expose_contradiction", "density": "dense", "nDataPoints": 7, "notes": "The slide uses a forensic accounting narrative to challenge the legitimacy of TAL's financial reporting regarding Shunshun.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-aa4b5c012f2a/9", "deckHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a#slide-9", "components": [ { "bbox": null, "kind": "callout", "text": "TAL claims its first investment in Shunshun was in December 2015. This is a lie - and an important one.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-25b2-736e-8e65-5b9b20c78638", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.78, "x": 0.11, "y": 0.53 }, "kind": "paragraph", "text": "If Deloitte were of the opinion that TAL and Shunshun were already under common control, then TAL would not have been able to apply purchase accounting. Consequently, TAL would not have accrued the fair value gains of $27.1 million obtained through its multi-step investment in Shunshun.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "1952dbaa-1d7a-4aed-9d30-23a500fae691", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "TAL then incrementally increased its investment in Shunshun, ultimately valuing the company at $105.9 million (from an initial valuation of $35.1 million in under a year). This rocketing valuation enabled TAL to book valuation gains of $27.1 million on its earlier investments, and consolidate up to an estimated additional $24.8 million of pre-tax profit. (We believe that of that $24.8 million, approximately $19.7 million is simply made up – i.e., from sales that never happened.)", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a14a5f8d-8033-4745-be07-fee2b8a1d465", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.18, "w": 0.78, "x": 0.11, "y": 0.34 }, "kind": "paragraph", "text": "TAL claims its first investment in Shunshun was in December 2015. This is a lie – and an important one. TAL’s actual first investment in Shunshun was five months earlier, in July 2015. TAL transferred DFRL to Shunshun the following month (August 2015). Therefore, the transfer of DFRL was a related party transaction, which ordinarily should receive more scrutiny than an arms-length transfer. We believe the apparent relative lack of scrutiny was foundational to improperly inflating profits. We also see the lie as an attempt to conceal that TAL was likely already effectively exerting control over Shunshun, which would have nullified TAL’s ability to book valuation gains.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a56c0945-5836-4896-87aa-925738c9a4fb", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.78, "x": 0.11, "y": 0.25 }, "kind": "paragraph", "text": "TAL not only booked fraudulent profits from the Shunshun / DFRL transactions – it improperly avoided consolidating $16.5 million of losses Shunshun generated. This is important because following TAL’s initial investment, Shunshun appears to have built its business by selling a dollar for 30 cents.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a8dc978d-7c70-4a90-8708-e08ebeca25d8", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "\"If the primary beneficiary of a variable interest entity (VIE) and the VIE are under common control, the primary beneficiary shall initially measure the assets, liabilities, and noncontrolling interests of the VIE at amounts at which they are carried in the accounts of the reporting entity that controls the VIE (or would be carried if the reporting entity issued financial statements prepared in conformity with generally accepted accounting principles [GAAP]).\" — Deloitte US Roadmap to Common Control Transactions", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-25b2-736e-8e65-5f87d3808249", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.28, "w": 0.78, "x": 0.11, "y": 0.62 }, "kind": "source-note", "text": "Footnotes 3-8 detailing financial figures, SEC filings, and accounting standards.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "4a90ba43-2646-419a-a7b7-5cfbdf591a7d", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "a6469c95-eca6-496e-940f-19331bc1c02d", "evidence": "The slide explicitly identifies 'fraudulent profits' and 'lies' regarding investment timelines to conceal control.", "confidence": 0.95 } ], "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": 28, "from": 5, "beatId": "11c13b7b-b36c-475f-9c6c-e855711d459e", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Preempt Rebuttal", "beatSlug": null, "evidence": "The document anticipates potential rebuttals to its claims", "position": 1, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 20, "from": 8, "name": "Iceberg", "slug": "10-iceberg", "bestFor": "Consulting, complex problem solving, organizational change", "matchId": "99149f44-5959-4c86-aa77-8f6fb44bba5b", "evidence": "The document reveals the iceberg principle, where TAL Education's transactions appear legitimate but have hidden implications", "position": 1, "objective": "What are the implications of TAL Education's transactions?", "structure": "The Symptom (Visible) -> The System (Hidden) -> The Root Cause", "confidence": 0.7, "description": "Reveal that the visible problem is merely a symptom of a deeper root cause" }, { "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 }