China’s second accounting scandal in less than a week is underscoring concern over lax corporate governance at some of the country’s fastest-growing companies.
TAL Education Group (好未來教育集團), a tutoring business for kindergarten to year 12 students whose success turned founder Zhang Bangxin (張邦鑫) into one of China’s richest people, delivered the latest bombshell on Tuesday, after saying a routine internal audit found an employee had inflated sales by forging contracts.
The Beijing-based company said the wrongdoing affected its “Light Class” business that generates as much as 4 percent of revenue and the worker is now in police custody, but it did not give further details on the value of the affected sales or how long they had taken place.
Photo: Bloomberg
TAL’s American depositary receipts (ADRs) sank as much as 18 percent in late US trading.
The sell-off follows the 83 percent slump in NASDAQ-listed Luckin Coffee Inc (瑞幸咖啡) since the company announced on Thursday last week that its chief operating officer and some underlings might have fabricated billions of yuan in sales for last year.
Accounting firm Ernst & Young later said it discovered the fabrications when it audited the firm’s financial statements.
Trading in its ADRs was suspended on Tuesday.
While China Inc is no stranger to claims of financial irregularities — particularly from short sellers who have targeted both TAL and Luckin in the recent past — the fresh wave of revelations is once again putting the spotlight on corporate malpractice at US-listed Chinese firms.
The fallout has already affected other listings from the nation and is likely to deter some overseas investors from buying into future initial public offerings.
The cases are “reviving the big question for investors in Chinese firms: The financial data may look pretty, but can you trust it?” Prudential Brokerage Ltd (信誠證券) associate director Alvin Cheung (張智威) said. “The latest case has further fueled anxiety over Chinese firms’ financials, especially under a slowing economy and a difficult business environment.”
Moves in other education stocks show how investor nerves can quickly spread: New Oriental Education & Technology Group Inc (新東方教育科技集團) lost 4.6 percent in US post-market trading.
Hope Education Group Co (希望教育集團) yesterday fell 3.3 percent in Hong Kong, while CAR Inc (神州租車), a vehicle-rental firm founded by Luckin’s chairman, dropped another 17 percent.
The declines vindicate short sellers such as Carson Block’s Muddy Waters, which has for years targeted Chinese firms listed on US exchanges.
Peer Wolfpack Research on Tuesday released a new critical report on iQiyi Inc (愛奇藝), alleging that the video-streaming company overstates revenue and subscriber numbers.
Muddy Waters assisted Wolfpack in its research and said it is also short of the company.
Iqiyi denied the claims. ADRs in the company fell 3 percent in extended trading.
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