New Oriental Education & Technology Group Inc. (EDU:US) rose the most since July in New York as a buyout offer for Chinese tutoring firm Ambow Education Holding Ltd. fueled speculation the bigger company may also be targeted.
Ambow soared a record 53 percent March 15 after Baring Private Equity Asia Ltd. proposed acquiring the Beijing-based provider’s stock at a premium. New Oriental, China’s biggest private education provider, surged 8.4 percent after equity research firm 86Research Ltd. said the company is “very likely” a buyout candidate. The Bloomberg China-US Equity Index (CH55BN) declined 3.4 percent last week, the most since Feb. 8.
At least 19 Chinese companies listed in the U.S. went private from April 2010, a Roth Capital Partners report dated Nov. 5 showed, as increased scrutiny from investors and regulators over accounting practices depressed valuations. Companies on the China-US gauge of the most liquid Chinese stocks in New York traded at 13 times estimated earnings March 15, the cheapest level in 2013. New Oriental has slumped 43 percent in the past year, and Ambow (AMBO:US) lost 79 percent.
“New Oriental has a far better brand than Ambow and the weakness in share price makes its risk-reward attractive to private-equity investors,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which manages about $700 million of investments, including Chinese stocks, said by phone March 15 from Lisle, Illinois. “If someone bought Ambow, investors may assume others are looking at peers in the space.”
American depositary receipts of New Oriental climbed to a three-week high of $16.02 on March 15 in the steepest rally since July 20. Ambow rose to $1.55, jumping the most since its U.S. initial public offering in August 2010.
Ambow reported total cash of about $52 million at the end of March 2012, according to its latest financial statement (AMBO:US), while New Oriental had $282 million as of November, the Beijing- based company’s Jan. 29 earnings release showed.
The move to go private will continue to be a theme among Chinese U.S.-listed companies, 86Research analysts led by C Ming Zhao wrote in the note. Stocks including Focus Media Holding Ltd. (FMCN:US), the subject of what will be China’s biggest leveraged buyout, and Spreadtrum Communications Inc. (SPRD:US) have faced scrutiny from short sellers including Muddy Waters LLC and the Securities and Exchanges Commission is investigating potential fraud by nine unnamed companies.
Baring’s Asia Private Equity Fund V LP offered to purchase Ambow for $1.46 per ADR, a 44.5 percent premium over the $1.01 closing price March 14, according to regulatory filings dated March 15. Baring said that it’s able to finance the transaction with its own equity capital.
Ambow, which hasn’t reported earnings since July, “is facing difficult challenges in the current market that we believe can be better addressed as a private company,” Baring said in the filing.
New Oriental has lost 28 percent since saying July 17 that the SEC was investigating its accounting practices. Muddy Waters, a research firm founded by short seller Carson Block, followed with a report July 18 questioning the ownership of some of New Oriental’s schools and alleging that the company may have inflated its financial statements.
The company had 744 schools and learning centers in China at the end of November, from 527 a year earlier, according to the January report.
New Oriental’s media manager Sisi Zhao couldn’t be reached outside business hours in Beijing. An e-mail to her wasn’t immediately returned on March 15.
The cost of protecting against losses in Chinese stocks relative to U.S. equities rose to a one-year high last week on concern governmental measures to curb property price gains will threaten the recovery in Asia’s biggest economy.
The AlphaShares Chinese Volatility Index, derived from options on companies listed in Hong Kong, climbed to 16.7 March 13, 48 percent above the Chicago Board Options Exchange Volatility Index and the biggest gap since March 2012. The premium has widened from as low as 7 percent Feb. 28. Both the Hang Seng China Enterprises Index (HSCEI) and the Bloomberg China-US gauge touched three-month lows last week.
China’s legislature named Xi Jinping the nation’s new President and Li Keqiang premier last week at its annual meeting. While the nation emerged from a seven-quarter slowdown at the end of 2012, the new leaders face manufacturing expanding at the slowest pace in five months and quickening inflation. The central government tightened housing market restrictions March 1 to curb rising prices.
“You haven’t had much policy commentary coming out of the new regime in China, and we only had one decent quarter and there was some softening in January and February figures,” Mark Luschini, the chief investment strategist at Janney Montgomery Scott LLC, which manages $55 billion in assets including Chinese equities, said in a telephone interview from Philadelphia March 15.
BYD Co. (BYDDY:US), the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc. (A:US), sank 9.9 percent to $6.04 in U.S. over-the-counter trading March 15, the lowest close since Jan. 7.
The Shenzhen-based company, China’s biggest maker of electric vehicles, plans to issue new stock valued at as much as a 20 percent stake, two people familiar with the matter said, asking not to be identified because the proposal hasn’t been made public.
Shareholders don’t like additional offerings, which dilute the value of their investment, according to Joe Phillippi, principal of consulting firm AutoTrends Inc. and a former equity analyst for UBS Warburg Ltd.
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