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New Oriental Leads Tumble on SEC Probe: China Overnight

New Oriental Education & Technology Group Inc. (EDU) tumbled the most on record, leading declines in New York-traded Chinese stocks, after the company said the U.S. regulator started a probe into the consolidation of its units’ financial statements.

American depositary receipts of New Oriental, China’s largest private education provider, lost 34 percent to $14.62 yesterday in New York, the biggest decline since its initial public offering in 2006. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in New York slid 1.9 percent to a nine-month low of 84.91. Sina Corp. sank to the lowest since September 2010 while Ctrip.com International Ltd. (CTRP) slumped to the least in three years.

New Oriental said yesterday the Securities and Exchange Commission is investigating its accounting practices, the second Chinese company in a month incurring a regulator probe. The SEC ordered on June 29 a two-week trading suspension of China Medical Technologies Inc. (CMEDY), citing questions on the accuracy of reported information. Sino-Forest Corp. filed for bankruptcy in March after it was accused by a short-seller of misstating business and assets.

“Investors’ confidence in Chinese companies hasn’t improved at all and most people probably just have given up on the space,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which manages $700 million, said by phone from Lisle, Illinois. “Even if we don’t know whether it’s company specific, in this type environment, people sell things first and ask questions later.”

China ETF Jumps

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., climbed 2.2 percent to $33.19, set for the biggest gain in two weeks. The Standard & Poor’s 500 Index (SPX) added 0.7 percent to 1,363.67 as Federal Reserve Chairman Ben S. Bernanke told senators that the central bank is prepared to act to boost growth if the labor market doesn’t improve.

Bernanke told lawmakers yesterday that progress in reducing unemployment is likely to be “frustratingly slow” and repeated that the central bank is ready to take further action to boost the recovery, while refraining from pledging any new policies.

New Oriental said 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,” according to its statement yesterday.

The company changed the shareholding structure of Beijing New Oriental so that it’s held solely by a group controlled by Chief Executive Officer Minhong Yu, according to the company’s statement on July 11.

A spokesman at the SEC declined to comment when contacted by Bloomberg News yesterday.

Variable Interest Entities

Chinese Internet companies such as Sina and Baidu (BIDU) Inc. have used so-called variable interest entities, or VIEs, to work around Chinese restrictions and seek foreign investors since 2000.

Sina, which provides a Twitter-like service in China, dropped 7.3 percent to 44.36 in New York, the lowest level since Sept. 10, 2010. Beijing-based social media company Renren Inc. (RENN) declined 3.5 percent to $4.14, the lowest price since January. Baidu, the nation’s biggest online search engine, fell 2.2 percent to $104.98, the least since January 2011.

Investors didn’t consider it an issue for U.S.-listed companies to have VIE structures when they first became listed, according to Trace Urdan, an analyst at Wells Fargo & Co.

‘Harder and Harder to Own’

“Since then we’ve had a number of stories of how people manipulated the VIE structure in China to take advantage of U.S. shareholders,” Urdan said by phone yesterday from San Francisco. “The bigger issue is simply that every day with each new development in China, these Chinese stocks become harder and harder for investors to own because of the risks and the risks seem to continually build.”

21Vianet Group Inc. (VNET), an Internet data center services provider, tumbled 16 percent to $9.37, the biggest slump on record. Video website owner Youku Inc. (YOKU) lost 11 percent, the most since November, to $16.03. Its smaller competitor Tudou Holdings Inc. also sank 11 percent to a four-month low of $24.34. The two companies said in March Youku will acquire Tudou in a stock swap deal.

New Oriental’s profit for the quarter ended May 31 rose 14 percent from a year earlier to $16.3 million, it said in yesterday’s statement. Analysts had forecast net income of $17.6 million, the average of eight estimates compiled by Bloomberg showed.

New Oriental Forecasts

For the June-August quarter, the company forecast a 26 percent to 31 percent growth in revenue to at least $342.7 million, compared with a 41 percent in the same period last year. Analysts projected $354 million in sales. CEO Yu said “the lower-than-normal projected revenue growth” is partly due to “the negative impact from a slowing of Chinese consumer discretionary spending” in the statement.

The Shanghai Composite Index (SHCOMP) of shares traded in mainland China rallied 0.6 percent yesterday to 2,161.19, rebounding from a three-year low, after the government said it will boost railway infrastructure investment and forecast economic growth will pick up in the second half.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net

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