Muddy Waters Report Sinks New Oriental: China Overnight

Internet ADRs Rebound on Bets Selloff Overdone
Online travel agency International Ltd. jumped 6.8 percent, rebounding from a three-year low. Photographer: Nelson Ching/Bloomberg News

New Oriental Education & Technology Group Inc. sank to a five-year low, leading declines in New York-traded Chinese stocks, after short seller Muddy Waters LLC said financial statements at its units are fraudulent.

The Bloomberg China-US Equity Index of the most-traded Chinese shares in New York slid 0.2 percent to 84.73. New Oriental tumbled 35 percent to the lowest level since 2007 after losing 34 percent the previous day. Online travel agency International Ltd. jumped 6.8 percent, rebounding from a three-year low. Youku Inc. and Tudou Holdings Ltd. jumped the most in two months after the video website operators said shareholders will meet next month to approve their merger.

Beijing-based New Oriental, a provider of education services, said on July 17 the U.S. Securities and Exchange Commission is investigating its accounting practices. Muddy Waters questioned the ownership of some of New Oriental’s schools and the consolidation of their financial statements with the parent company. Youku, which runs the most popular video website in China, said yesterday shareholders will meet next month to approve its acquisition of smaller competitor Tudou.

“Any sense that there isn’t total honesty, total transparency sends investors fleeing,” Timothy Ghriskey, chief investment officer at New York-based Solaris Group, which manages about $2 billion in assets, said by phone yesterday. “Investors are nervous in this environment. It hurts an entire group of stocks.”

China ETF Slumps

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., retreated 0.7 percent to $32.97. The Standard & Poor’s 500 Index added 0.7 percent to 1,372.78 after U.S. housing starts increased at the fastest rate in almost four years.

New Oriental tumbled to $9.50, the lowest price since March 6, 2007. The American depositary receipt has lost 57 percent in two days.

The schools are “part of a substantial fraud in EDU’s accounts,” Carson Block, the founder of Muddy Waters, wrote in a report yesterday on the short seller’s website. “We believe that as a result of our exposure of these problems with EDU’s reporting, EDU will restate historical results and that its auditor will resign.”

Muddy Waters sparked a 74 percent drop in Sino-Forest Corp. before regulators suspended trading of the shares. Sino-Forest filed for bankruptcy protection in March.

Recommendations Cut

Sisi Zhao, a spokeswoman at New Oriental in Beijing, didn’t return phone calls when contacted after hours. A call to the Beijing press office of auditor Deloitte Touche Tohmatsu CPA Ltd. wasn’t returned.

Analysts at Oppenheimer Co. cut the recommendation on New Oriental yesterday to market perform from outperform, while Jefferies Group Inc. downgraded the company to hold from buy, lowering its 12-month price target to $18 from $33. Goldman Sachs Group Inc. suspended their rating on the shares.

Youku surged 7.4 percent to $17.21, the biggest rally since May 21, after losing 11 percent on July 17. Tudou advanced 9 percent to $26.53.

The statements from Youku and Tudou “are positive for their stocks as there were people who were doubtful about the deal,” Andy Yeung, a New York-based analyst for Oppenheimer & Co., said by phone yesterday. “The shareholders approval is the final step before the merger is completed.”

The merger, which was valued at $925 million when announced, has a current value of $653 million, data compiled by Bloomberg show.

Ctrip, SouFun

Ctrip, China’s biggest online travel agency based in Shanghai, jumped 6.5 percent to $14.51, the steepest gain in six months. The company will report second-quarter financial results on July 24 after U.S. trading closes.

SouFun Holdings Ltd., China’s largest real estate website, climbed 1.7 percent to $14.05, snapping a two-day decline.

China’s new home prices in June rose in the most number of cities tracked by the government in 11 months as buyer sentiment improved after the central bank cut interest rates.

Prices climbed in 25 cities out of the 70 the government looks at, the most since July last year, and the levels fell in 21 from a month earlier, according to data released by the statistics bureau yesterday.

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