(Corrects to include in fourth paragraph reference to updated Wells Fargo note clarifying that it had no reason to believe New Oriental was the subject of an SEC investigation in story originally published Dec. 5.)
Most Chinese stocks fell in New York, led by Internet companies, after U.S. regulators accused units of the Big Four auditors of refusing to cooperate on a fraud probe of China-based companies.
The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. dipped 0.1 percent to 91.87 yesterday as 41 companies on the gauge retreated. New Oriental Education & Technology Group Inc. (EDU:US) tumbled the most since July as Wells Fargo & Co. said the education services provider is at risk of being delisted after the Securities & Exchange Commission accused the auditors of refusing to cooperate in a fraud probe of companies based in China. Sina Corp. (SINA:US) and Baidu Inc. (BIDU:US) tumbled to two-year lows and Youku Tudou Inc. sank the most since September.
The SEC said Dec. 3 that Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. have refused to cooperate with accounting investigations into nine companies traded in the U.S. Wells Fargo said the probe puts New Oriental and Ambow Education Holding Ltd., both traded in the U.S., at risk of being delisted, according to a report by analyst Trace Urdan. The SEC hasn’t named the nine stocks it’s focused on.
In an update to the Dec. 4 report, Urdan said Wells Fargo has no reason to believe and didn’t intend to imply that New Oriental is the subject of a particular SEC investigation. Urdan’s intention was to identify an “emerging risk” to Chinese (CH55BN) stocks listed in the U.S.
The regulator’s allegations against the auditors “just clearly adds risk onto those U.S.-listed Chinese stocks,” Sam Mahtani, who oversees about $5 billion as director of emerging markets at F&C Asset Management Plc, said by phone from London. “It creates short-term uncertainty and volatility, which as an investor you really don’t need at the moment.”
The auditors claim Chinese law prevents them from assenting to the SEC’s demands, hindering U.S. efforts to probe allegations of fraud that have contributed to the 18 percent slump in the China-US gauge since January 2011. Chinese law bans the removal offshore of audit papers, while foreign regulators aren’t allowed to work inside the nation’s borders.
BDO China Dahua Co. was also named by the SEC in the action, according to the Dec. 3 administrative order.
New Oriental dropped 11 percent to $18.08, its steepest one-day decline since July 18. Volumes were quadruple the daily average over the past three months. Wells Fargo’s Urdan retained ratings equal to buy on both New Oriental and Ambow, according to the note.
American depositary receipts of New Oriental sank 34 percent on July 17 after the Beijing-based company said that the SEC was investigating the consolidation of its units’ financial statements.
New Oriental has been targeted by short seller Carson Block and his research firm Muddy Waters LLC for allegedly inflating cash balances to gain auditor approval. The company said in September that a committee of independent company directors found no evidence to back up Muddy Waters’ allegations. Block countered this by saying he was “more convinced than ever” they were misleading investors.
Carly Westerman at public relations firm Brunswick Group LLP said yesterday by e-mail in New York that she would relay questions on whether New Oriental will delist or had further contact with the SEC to its management in Beijing.
Block said in a Bloomberg TV interview last week that he had lost interest in shorting Chinese stocks listed in North America, alleging that the government in China was protecting companies by helping them conceal public records.
Sina, owner of China’s Twitter-like Weibo service, tumbled 7.4 percent to $42.09, the lowest level since Aug. 30, 2010. ADRs of Baidu, owner of the nation’s most-popular search engine, slid 5.9 percent to $90.24, the least since Sept. 20, 2010. Ctrip.com International Ltd. (CTRP:US), the no. 1 online travel company, retreated 8.1 percent to $17.93, the biggest slump since July 25. Youku Tudou, which owns the biggest video websites in China, plunged 7.8 percent to $15.27.
“The result of this is that, unfortunately, there is a lot less faith among investors in U.S.-listed Chinese companies that have audits done by auditors based in China,” Kevin Pollack, a managing director at Paragon Capital in New York, said by phone. “As an investor, if a company has a China-based audit firm, it’s a factor to take into consideration. It’s not necessarily a red flag, but it’s an area where there could be a potential problem.”
Ambow (AMBO:US), a Beijing-based private education provider, climbed 1 cent in New York to $2.85, after falling as much as 2.8 percent earlier. Jenny Zhan, Ambow’s chief strategy officer, said by phone from Beijing yesterday that the company’s auditor is PWC and that it hasn’t received any SEC documents regarding the allegations. She declined to comment on whether the company was delisting.
Ambow said Sept. 6 that an internal probe found its tutoring centers are legally registered. The investigation was sparked by reports on China state television that an Ambow unit exaggerated training results and that school registrations were incomplete.
Focus Media Holding Ltd. (FMCN:US), an advertising company whose accounting Muddy Waters’ Block has also queried, dropped 1.7 percent to $23.99 in U.S. trading. Calls and e-mails to Jing Lu, who is responsible for Focus Media’s investor and media relations in Beijing, weren’t immediately returned yesterday.
Melco Crown Entertainment Ltd. (MPEL:US), a Hong Kong-based casino operator, tumbled 7.7 percent yesterday in New York to $14.19, the steepest one-day slide since May 14. Concern China’s government may boost scrutiny of junket operators, which provide credit to high stakes gamblers, sank casino stocks in Asian trading.
Police in mainland China and Macau have detained people from at least three of the biggest junket operators in recent weeks, the Wall Street Journal reported, citing people familiar with the situation. By acting as middlemen, junket operators help drive the VIP business that accounts for about two-thirds of casino revenues in the world’s largest gambling hub.
The iShares FTSE China 25 Index Fund (FXI:US), the biggest Chinese exchange-traded fund in the U.S., climbed 0.6 percent to $37.01 in New York, the steepest gain this month. The Bloomberg Chinese Reverse Mergers Index (CHINARTO), which tracks a basket of companies that gained U.S. listings after buying firms that already trade, slipped 0.6 percent to 74.93.
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