WHEN IT COMES TO ACCOUNTING standards and corporate governance, the Far East has a reputation like the Wild, Wild West, so investors tend to shoot first and ask questions later at the first whiff of trouble. After the Chinese tutoring company Ambow Education (AMBO) delayed its U.S. regulatory filing and restated 2011 results, stricken investors swiftly sent the company's New York-listed shares down 41% last month. Ambow, quite clearly, has been pronounced guilty until proven innocent, but let us now hear from the defendant. Based in Beijing, Ambow has two primary businesses. It runs "Better Schools" programs, which prepare kids for exams, and a "Better Jobs" segment, which helps post-secondary students land jobs. The latter boasts a leading 15% share of China's fragmented market for practical training for information-technology careers, and part of that revenue comes from selling training software Ambow co-developed. Recently, however, Ambow decided to take a more conservative tack with its accounting, on the advice of PriceWaterhouseCoopers. Instead of recognizing revenue when software is shipped to new distributors, Ambow will now count those sales only after it has been paid. As a result of that change, Ambow had to revise down the US$279 million it originally reported in 2011 revenues—by about $14 million. It also cut roughly that same amount from the $46.2 million it reported in 2011 profits, causing the company to fall short of analysts' forecasts. But those payments were essentially deferred, and so far this year Ambow has already received $12.2 million, or 87% of the $14 million, notes Jefferies' Hong Kong-based analyst Anita Chen. And Ambow has also increased its bad-debt provisions by more than $2 million for accounts overdue by 90 days. Still, investors are thoroughly spooked, and Ambow shares have slumped more than 56% below the levels where they went public in 2010. At about 4.34, the stock fetches just six times 2012 profits, a steep discount to the average multiple of 23 commanded by Ambow's peers. Taek-Geun Kwon, a managing member of the San Francisco-based hedge fund Toro Investment Partners, thinks that Ambow shares should be worth at least twice as much. For one thing, Ambow generates gobs of free cash flow that could come in handy when expanding further into China's second-tier cities. "Also, the tutoring and English-as-a-second-language businesses are becoming more crowded in China, but not many companies have the scale or scope of Ambow's IT training business," including its network of teachers and relationships with tech companies and universities, Kwon adds. Another good sign: Insiders have been buying shares. And more than 40% of the stock is held by private-equity investors, many of whom had bought into Ambow at higher prices. This swells the horde of powerful, well-connected investors hell-bent on restoring the stock to its former glory.
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