浑水做空好未来研究报告（英文版）-2018.06-70页-7mb

Muddy Waters Research Terms of Use Summary

Core Content Overview

This document outlines the Terms of Use for Muddy Waters Research and Muddy Waters Capital LLC, detailing the legal framework governing the use of their research reports and the disclosure of potential conflicts of interest. It also includes a detailed analysis of TAL Education Group (TAL), alleging fraudulent financial reporting from FY2016 to FY2018.

Main Points of the Terms of Use

• Terms of Use Supersedes Previous Agreements: The current Terms of Use replace any prior terms for older reports.
• Disclaimer of Investment Advice: The reports are for informational purposes only and not investment advice.
• Conflict of Interest Disclosure: Muddy Waters and its related persons are short TAL Education Group, meaning they benefit from a decline in its stock price.
• No Updates to Reports: Muddy Waters will not update reports to reflect changes in positions.
• Copyright and Distribution: Users must not distribute or share the content without the specified link to Muddy Waters Research.
• Jurisdiction and Liability: All disputes are governed by California law, and Muddy Waters disclaims liability for any claims, losses, or damages arising from the use of the information.
• Statute of Limitations: Any claims must be filed within one year of the alleged harm.

Key Information on TAL Education Group

Summary of Alleged Financial Fraud

• Report Date: June 13, 2018
• Company: TAL Education Group
• Ticker: NYSE: TAL US
• Industry: China For Profit Education
• Stock Price: $45.65
• Market Cap: $26.0 billion
• Average Daily Volume (90-day): $171.6 million

Alleged Profit Overstatements

• Cumulative Overstatement: TAL's net income margin was reported as 12.4%, but the actual margin was only 8.8%.
• Estimated Profit Inflation: From FY2016 to FY2018, TAL inflated its pre-tax profits by up to $153.2 million, or 28.4%.

Fraudulent Practices Identified

• Asset Parking Schemes: TAL used straw party transactions and purchase accounting games to inflate profits.
• Two Major Transactions:
  • Shunshun Transaction: Estimated to inflate pre-tax profits by $66.5 million.
  • Guangzhou One-on-One (GZ 1-1) Transaction: Estimated to inflate pre-tax profits by $60 million.
• Implied Fair Value Gains: TAL booked $27.1 million in fair value gains from its investment in Shunshun, which was later valued at $116.5 million.
• Deferred Revenue: TAL allegedly booked $24.8 million of deferred revenue from the Shunshun transaction without matching costs.
• Losses Avoided: TAL improperly avoided consolidating $16.5 million in losses from Shunshun.

Evidence and Methodology

• Research Methodology: Muddy Waters conducted extensive research, including reviewing PRC government files, third-party credit reports, and interviewing insiders.
• Lack of Auditor Scrutiny: Deloitte China failed to identify related party transactions, despite the ability to do so through public SAIC records.
• Legal and Regulatory Context: The document references past China stock frauds and the SEC's inability to effectively punish auditors due to "state secrets" and legal protections.

Conclusion and Key Takeaway

• TAL is accused of fraud: The report highlights numerous inconsistencies, lies, and improbable explanations that suggest intentional profit inflation.
• Occam's Razor: Investors are urged to apply Occam's Razor to conclude that the simplest explanation is that TAL is committing fraud.
• Impact on Investors: The report serves as a roadmap for investors to replicate the research and uncover the true financial state of TAL.

Summary of Fraudulent Transactions

Transaction 1 – Shunshun

• Initial Investment: TAL invested in Shunshun in July 2015, not December 2015 as claimed.
• DFRL Transfer: TAL transferred DFRL to Shunshun in August 2015, making it a related party transaction.
• Profit Inflation: This led to $27.1 million in fair value gains and $24.8 million in pre-tax profit.
• Losses Avoided: TAL improperly capitalized $16.5 million in losses.

Transaction 2 – Guangzhou One-on-One (GZ 1-1)

• Ownership Transfer: TAL claimed to have sold GZ 1-1, but personnel were unaware of the change.
• Continued Control: TAL appears to have retained control over GZ 1-1, suggesting a fraudulent disposal.
• Deferred Revenue: The $50 million gain from the disposal is questioned, as it was not supported by financial records.
• Financial Mismatch: The financial performance of GZ 1-1 does not align with its reported gains.

Key Takeaways

• Muddy Waters shorts TAL and benefits from its decline.
• TAL's financial reports are fraudulent, with significant overstatements of profits.
• The auditor (Deloitte China) failed to identify related party transactions and overlooked key financial disclosures.
• The report is part of a series, with Part I focusing on two major fraudulent transactions.
• The analysis is based on extensive due diligence and cross-referencing of multiple sources.