Education stock rises after boss retaliates

PUBLISHED : Saturday, 21 July, 2012, 12:00am
UPDATED : Saturday, 21 July, 2012, 12:00am


Shares in New York-traded New Oriental Education & Technology Group rebounded after it hit back at allegations from short seller Muddy Waters that it had made fraudulent financial statements.

However, fund managers said the harm had already been done, and with the group still under a US Securities and Exchange Commission investigation over its finances and shareholding structure, the share price was unlikely to quickly recover to its pre-crisis level above US$20.

Shares in New Oriental rose 18 per cent to close at US$11.25 on Thursday on the New York Stock Exchange after a two-day slump. In late morning trade yesterday, they had gained a further 11.2 per cent to US$12.45.

The private education institute is the latest target of short-seller research firm Muddy Waters, which has previously sent other US-listed Chinese companies tumbling after accusing them of financial misrepresentation. Short-selling involves the sale of borrowed stock to profit from a subsequent decline.

In an interview with the mainland's 21st Century Business Herald, New Oriental's founder and chief executive Michael Yu (pictured) dismissed the accusations made by Muddy Waters' Carson Block as 'fiction' - saying it was equivalent to equating a pimple with cancer.

Yu countered that what Muddy Waters did was 'extort money from US investors who do not understand China well'. While Yu acknowledged some of the research findings, he said short sellers had 'no moral standards' and attacked companies whether they were good or bad.

Block - one of the first to start a short-selling wave against Chinese companies which led regulators to suspend trading in four of his first five targets - said on Wednesday New Oriental had inflated its earnings by falsely claiming that it owned all of its 664 learning centres, when most of them were held by franchisees. Block said the group's financial statements from 2009 to 2011 were fraudulent and would lead to the resignation of auditor Deloitte Touche Tohmatsu.

New Oriental said on Thursday that while the company did permit a small number of third parties to run two of its education programmes, it never included their student numbers or facilities - some 21 schools - in its statements.

The group said it booked only the licence and training fees paid by its franchisees, which accounted for less than 0.01 per cent of earnings for the fiscal year to May 31, 2010, and 0.045 per cent for last year.

New Oriental's claim was backed by Mirae Asset Securities analyst Eric Wen, who hit back at Block's allegations, arguing he wrongly stated certain facts, made mistaken assumptions and used incorrect methodology in reaching his conclusions. It maintained its 'buy' rating and expected the stock to rise to US$21.

Wells Fargo Securities analyst Trace Urdan reiterated his 'outperform' rating on New Oriental, saying such a level of fraudulent activity would have been difficult to hide.

But Block told Bloomberg TV yesterday that New Oriental was just trying to downplay his findings and insisted the company was 'understating' its activities with third-party operated locations. But he would not respond when asked how much he had earned from shorting stocks.

Alex Wong Kwok-ying of Ample Capital Group said false alarms from short sellers put their credibility at risk.

Many stocks - including Spreadtrum Communications and Focus Media - have managed to rebound after they proved their innocence.