Ambow Leads ADR Slump to Cheapest Level: China Overnight

Ambow Education Holding Ltd. is leading a decline in Chinese education providers listed in the U.S., trading at its cheapest-ever level as investors wait for updates on earnings and an internal probe.

American depositary receipts of Ambow sank 8.2 percent to $1.35 Feb. 8 in New York, trading at a record-low 2.1 times estimated earnings. The stock has plummeted 40 percent in 2013, the biggest decline on the Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. Tal Education Group has lost 4.5 percent, while New Oriental Education & Technology Group Inc., China’s biggest private education company, is down 13 percent.

Ambow last reported earnings in July, when it posted a $12.7 million net loss for the first quarter. As a so-called foreign private issuer, the Beijing-based company isn’t required to file quarterly financial results, according to spokeswoman Mandy Li. Ambow’s valuation compares with an average of 13 times forward earnings for the China-US gauge.

“When the stock goes so low, people decide it’s not worth owning anymore and they just get rid of it,” Trace Urdan, a senior analyst at Wells Fargo & Co. in San Francisco, said by phone Feb. 8. “People are concerned about what the real fundamental earnings of the company are.”

The Bloomberg China-US gauge fell 4.2 percent last week, the steepest slump since May.

Suntech Power Holdings Co. sank 15 percent as Raymond James & Associates Inc. said in a Feb. 6 note that shares of the world’s largest solar-panel maker may plunge 50 percent in the next two months. Baidu Inc. lost 11 percent, the largest weekly drop since August, as China’s most-used search engine reporting the smallest profit increase since 2009 spurred analysts to cut price targets on the stock.

Internal Probe

Ambow sank 23 percent last week, while New Oriental slid 3.6 percent. Beijing-based Tal Education gained 7.6 percent, the first weekly advance in three weeks.

Ambow said July 5 that it would conduct an internal investigation into allegations by a former employee of financial impropriety and wrongful conduct in connection with the purchase of a training school in 2008. The company said in a filing that it wouldn’t comment until the probe was complete.

“It shouldn’t be the case that the investigation should prevent them from reporting because there are other companies that are conducting internal investigations that have reported earnings,” said Urdan, who has the equivalent of a buy rating on Ambow. “When you list in the U.S. it’s certainly the expectation that you will supply quarterly earnings.”

Sales Estimates

Ambow spokeswoman Li declined to comment on the internal investigation and whether it has had an impact on the timing of earnings statements when contacted by e-mail Jan. 30. The company is obliged to report results by the end of April, she said.

A foreign company listed on a U.S. exchange must file annual reports and register each public offering of securities in the U.S., according to the Securities & Exchange Commission’s website. Interim reporting is done based on the practice of the company’s home country and exchange, the SEC said.

Revenue for Ambow grew 12 percent last year to 1.97 billion yuan ($316 million), according to the mean of two analysts’ estimates compiled by Bloomberg, from 1.76 billion yuan in 2011. Adjusted earnings-per-share was 2.36 yuan last year, according to estimates, down 39 percent.

Investors should avoid Ambow ADRs, even though the stock is cheap, until the company can show that it has reined in spending, according to Craig Sterling, an analyst at EVA Dimensions who rates Ambow the equivalent of buy.

‘Destroying Value’

“They’re destroying lots of value because they keep spending money on capital and they’re just not getting as much incremental sales,” Sterling said by phone Feb. 8. “It’s not a cheap stock because it’s a good company, it’s lack of confidence, definitely.”

Cisco Systems Inc., the world’s biggest maker of computer- networking equipment, sold its investment in Ambow last year, after holding 7.35 percent of the company in 2011, a filing from the San Jose, California-based technology company showed Feb. 8.

New Oriental, also based in Beijing, reported Jan. 29 a net loss of $15.8 million for the three months ended Nov. 30. Tal Education projected Jan. 22 that revenue for the quarter through February will rise to $60 million, short of the mean analyst estimate for $64.3 million.

‘Slowing Down’

Education in China “is such a huge market, demand has never been a problem,” Ella Ji, an analyst with Oppenheimer & Co. in New York, said by phone Jan. 29. “Everyone is realizing that just opening centers aggressively without caring about the bottom line is not sustainable, and so the entire industry is slowing down.”

Suntech dropped to $1.45 in New York Feb. 8, capping its weekly biggest slump since September. Citigroup Inc. rated the company, based in China’s Jiangsu province, a sell in new coverage. They set a price target of $1.50, citing concerns over issues including a lack of financial reporting and liquidity.

Baidu’s ADRs slid to $96.86 Feb.8, posting the steepest weekly loss since August. The Beijing-based Internet company, facing competition from new search engines in China, said Feb. 4 that first-quarter revenue may be as little as $945.4 million, below the $969 million mean of 11 analysts’ estimates compiled by Bloomberg. More than 10 analysts who cover Baidu reduced their price targets during the week.

ETF Retreats

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., lost 4.7 percent to $39.85 last week, the steepest retreat since June. The Standard & Poor’s 500 Index rose 0.3 percent to 1,517.93 in its sixth weekly advance.

The Hang Seng China Enterprises Index slipped 0.3 percent Feb. 8 to 11,649.78, for a weekly retreat of 4.6 percent, the biggest slump since May. The Shanghai Composite completed its second straight week of gains, up 0.6 percent to 2,432.40.

Shanghai trading is closed next week for the Lunar New Year holiday, while Hong Kong will be shut for the first three days of the week.

ADRs of 3SBio Inc. jumped 6.9 percent Feb. 8 in New York to $14.74, the highest level since March 30. The Shenyang, China- based biotechnology company said that it had agreed to be taken private by merging with Decade Sunshine Ltd. for $2.20 a share and $15.40 per ADR, according to a PR Newswire statement.

3SBio joins a growing number of Chinese companies seeking to delist from U.S. exchanges after concern about corporate governance depressed valuations. Focus Media Holding Ltd., a Shanghai-based advertising company which short sellers said overstated its ad network, agreed to be bought in December for $3.7 billion in China’s largest leveraged buyout.

NetEase Inc., a Beijing-based web games developer, surged to $51.99 last week, the highest price since November. Its 10 percent weekly rally was the biggest among companies on the China-US gauge. Deutsche Bank AG analyst Alex Yao raised his recommendation on NetEase to buy from hold Feb. 8, and boosted the price target to $58 from $51.

To contact the reporters on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net; Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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