New Oriental Education & Technology Group Inc. (EDU:US) headed for the biggest decline on record in New York after China’s largest education services provider said the Securities and Exchange Commission is investigating the company.
The American depositary receipts of New Oriental lost 27 percent to $16.22 by 12:05 p.m. in New York, poised for the biggest drop since the company’s initial public offering in 2006. The shares led declines in the Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese stocks in the U.S.
The Beijing-based company was informed on July 13 that the regulator issued an order of investigation, it said in a statement today. The SEC may review the consolidated earnings of its subsidiaries, New Oriental said.
Profit for the quarter ended May 31 rose 14 percent from a year earlier to $16.3 million, and student enrollment increased 7.7 percent from a year earlier, it said in the statement. Analysts had forecast net income of $17.6 million, the average of eight estimates compiled by Bloomberg showed.
“The SEC investigation creates uncertainties that make it more difficult to make a valuation argument supportive of the stock,” Jeffrey Meuler, a Pittsburgh-based analyst at Robert W Baird & Co., said by phone today. “The stock would have been down as response to the fundamentals even if there wasn’t a SEC investigation. The enrollment growth was the slowest in recent history.”
Meuler lowered (EDU:US) his rating on the company to neutral from outperform, cutting his 12-month price target to $19 from $32, according to a research note today.
The SEC is investigating “whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., a variable interest entity of the Company, and its wholly-owned subsidiaries, into the Company’s consolidated financial statements,” New Oriental said in today’s statement.
The company changed shareholding structure of Beijing New Oriental so that it’s held solely by a group controlled by Chief Executive Officer Minhong Yu, according to a PR Newswire statement distributed on July 11.
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