New Oriental Education and Tech Group Inc (EDU)

[sleepthief]

DJ HEARD ON THE STREET: Detention for New Oriental


By Tom Orlik

The education of U.S. investors on the risks of overseas-listed Chinese stocks continues.
Shares in New Oriental Education & Technology Group (EDU), one of China's largest private education providers, plunged 57% in the last two days, wiping almost $2 billion off the market value. An investigation by the Securities and Exchange Commission, combined with allegations of fraud from short seller Muddy Waters, were the reasons for the fall.
The SEC probe, announced in New Oriental's earnings report on Tuesday, concerns the company's complex ownership structure, known as a variable interest entity. That structure allows New Oriental - an offshore holding company listed in New York - to control an education business inside China that isn't allowed to be foreign owned.
The VIE structure is widely used by overseas listed Chinese internet and education companies. But some observers worry that in a dispute with company management over control of assets and profits, the Chinese courts might not side with investors. Shares in online video company Youku and web portal Sohu, which use the same structure, fell in sympathy.
New Oriental's woes were compounded on Wednesday when short seller Muddy Waters published a report accusing the company of fraud. The short seller alleges New Oriental boosted revenue by disguising franchises as wholly owned outlets. Like other recent short seller reports on Chinese stocks, the allegations are suspicious though not conclusive. But against a backdrop of falling Chinese growth, and with market sentiment fragile, suspicions are enough to do significant damage. The continued hemorrhaging of New Oriental's market value in the wake of Muddy Water's allegations shows investors believe there is a case to answer.
While waiting for a response from management, some homework for investors: write out a hundred times, 'I will not buy shares in Chinese stocks without doing due diligence'.

(Tom Orlik writes Heard on the Street from Beijing. He can be reached at [phone], or at [e-mail])

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(END) Dow Jones Newswires
July 19, 2012 05:02 ET (09:02 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.- - 05 02 AM EDT 07-19-12