New Oriental Education (EDU) Drops Again as Muddy Waters 'Gets Short'


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July 18, 2012 12:04 PM EDT Send to a Friend
As if New Oriental Education (NYSE: EDU) didn't already have enough problems with the recent SEC investigation, now the China-focused, fraud busters over at Muddy Waters Research have slapped a "strong sell" on the stock and is now short the stock.

Muddy said "it is probable that EDU will have a significant restatement and possible that its auditor will resign."

The firm cited:
  • EDU has reported 392% revenue growth since going public. The revenue growth has been built on store growth of 338% during this time. EDU tells investors that its entire store network is company-owned, but this is a lie. As recently as last month, EDU president and CFO Louis Hsieh adamantly denied that EDU has any franchisees. This report shows Hsieh’s statements are patently false – EDU has numerous franchisees. However, these franchisees are not a hidden bonus for investors. Rather, they are part of a substantial fraud in EDU’s accounts.
  • It is virtually certain that EDU uses the upfront franchise and other fees to inflate its cash balances in order to receive unqualified audit opinions from its auditor.
  • EDU's Beijing operation (which is approximately 35% of EDU’s reported revenue) has prepared financial statements for 2009 – 2011 are fraudulent. EDU has submitted these financial statements to its domestic regulator, the Civil Affairs Bureau (“CAB”).
  • It is probable that EDU used these same financials in the preparation of its U.S. filings.
  • EDU's corporate structure is far more problematic than just a weak VIE. The schools that conduct its operations are ultimately state property. We question how EDU can consolidate them.
  • We believe that as a result of our exposure of these problems with EDU’s reporting, EDU will restate historical results – likely significantly; and, that its auditor will resign.
Muddy Waters full report can be seen here.

Shares of EDU are down 10 percent mid-day, following the report.

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