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Short sellers were positioning themselves for a RYB slump even before claims of abuses surfaced

The short sellers targeting RYB, could well have based much of their decision making on the company’s 200-plus page prospectus document, in which it strangely devoted 37 pages to the risks facing its business

PUBLISHED : Thursday, 30 November, 2017, 5:15pm
UPDATED : Thursday, 30 November, 2017, 11:30pm

Short sellers were already setting RYB Education up for a plunge in its share price, even before its kindergarten in Beijing was put under investigation over allegations of child abuse.

Shares in the New York-listed company have risen steadily since its debut in September, with short-sellers increasing their bearish wagers.

Shorting interest in RYB rose to its highest level on October 31, according to data compiled Bloomberg.

That was just three weeks before allegations and complaints among parents began to surface and spread that some children at the outlet in Beijing’s Chaoyang district had been found with needle marks on their bodies, and further allegations of children being drugged and sexual abuse.

The company’s shares plunged 38 per cent in overnight trading last Friday, sending the stock below its initial public offering price of US$18.50.

It touched an all-time high of US$31.14 on October 2, just three days after its first day of trading.

The short interest in RYB seemed to be running counter to general bullishness by overseas investors in China’s booming education industry, with new schools and companies opening to cater for everything from pre-schooling tutoring to foreign language training.

US-traded shares in Oriental Education & Technology Group and TAL Education Group have at least doubled this year on optimism that Chinese parents will spend more of their disposable incomes on courses offered outside the official state school hours.

… cannot assure that our teachers will completely follow our service manual and standards all the time … misbehaviour or unsatisfactory performance of our teachers will hurt our reputation and potentially our operation results and financial performance
Two lines from RYB’s 200-plus page prospectus document

The short sellers targeting RYB, could well have based much of their decision making on the company’s 200-plus page prospectus document, in which it strangely devoted 37 pages to the risks facing its business, with brand and reputation maintenance, and the quality of its teachers topping the list.

In one astonishing line, the company admits it “cannot assure that our teachers will completely follow our service manual and standards all the time”.

And there is even a line in the document about how “misbehaviour or unsatisfactory performance of our teachers will hurt our reputation and potentially our operation results and financial performance”.

The latest RYB scandal is the second case of alleged child abuse reported in China this month.

Two teachers and a cleaner at a kindergarten in Shanghai were detained in early November when leaked videos showed pupils being beaten up and force-fed mustard.

As of November 15, 399,731 RYB’s shares were shorted, compared with an all-time high of 441,429 shorted stocks two weeks earlier, according to data compiled by Bloomberg.

That accounts for less than 2 per cent of the company’s 21.7 million shares outstanding.

Hedge funds control 35 per cent of public institutional holdings in RYB, the third highest among the 20 Chinese companies trading in the US, Bloomberg data showed.

RYB’s shares closed at US$20.33 on Wednesday, rebounding 24 per cent from its of nadir of last week, after initial findings by the Beijing police said one teacher at the kindergarten had pricked children with a sewing needle as a disciplinary measure, while adding they considered the other claims of children being drugged and sexually molested, were fabricated by parents.

With additional reporting from Laura He in Hong Kong.

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