New Oriental Education & Technology Group Inc. (EDU:US) fell to the lowest in five years in U.S. trading yesterday after short-seller Muddy Waters LLC said the financial statements for the Chinese company’s units are fraudulent.
The education company’s American depositary receipts (EDU:US) fell 35 percent to the lowest level since 2007, a day after losing 34 percent on July 17, when New Oriental said it was being investigated by the U.S. Securities and Exchange Commission.
New Oriental, which prepares individuals for exams including the Graduate Management Admission Test, is the latest Chinese company accused of improper accounting practices. Muddy Waters in June 2011 accused Sino-Forest Corp. of overstating its assets, sparking a 74 percent drop in its shares before regulators suspended trading of the stock. Sino-Forest filed for bankruptcy protection in March.
“Any sense that there isn’t total honesty, total transparency sends investors fleeing,” Timothy Ghriskey, chief investment officer at New York-based Solaris Group, which manages about $2 billion in assets, said by phone yesterday. “Investors are nervous in this environment. It hurts an entire group of stocks.”
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., retreated 0.7 percent to $32.97 yesterday. The Standard & Poor’s 500 Index (SPX) added 0.7 percent to 1,372.78 after U.S. housing starts increased at the fastest rate in almost four years.
New Oriental’s ADRs have fallen in nine consecutive trading days, the longest stretch of declines since the Beijing-based company’s initial public offering in 2006.
Muddy Waters questioned the ownership of some of New Oriental’s schools and the consolidation of their financial statements with the parent company. Carson Block, the founder of Muddy Waters, wrote in a report that his firm believed New Oriental would be forced to restate historical results and that its auditor would resign.
Three phone calls to the press office of New Oriental in Beijing went unanswered. A call to the Beijing press office of Deloitte Touche Tohmatsu CPA Ltd. wasn’t returned.
New Oriental said on July 17 that it was informed July 13 that the SEC issued an order of investigation. The regulator may review the consolidated earnings of its subsidiaries, the company said in a statement.
Analysts at Oppenheimer Co. cut their recommendation (EDUS:US) on New Oriental yesterday to market perform from outperform, while Jefferies Group Inc. downgraded the company to hold from buy, lowering its 12-month price target to $18 from $33. Goldman Sachs Group Inc. suspended its rating on the shares.
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