Shares in a number of Chinese education companies dropped sharply in Hong Kong on Thursday, following on from declines in their US-listed peers the day before, after a report by short seller Muddy Waters said China’s TAL Education had inflated its net profit figures.
Muddy Waters said TAL, one of China’s largest private education services providers, was combining “the old school China fraud playbook of simply pencilling in more favourable numbers with the more sophisticated asset parking fraud of Enron”.
It said the company had overstated net profit by at least 43.6 per cent and said it had found two sets of fraudulent transactions which inflated its 2016 to 2018 pre-tax profits by up to US$153.2 million, or 28.4 per cent. TAL shares plunged by more than 10 per cent on the New York Stock Exchange on Wednesday.
TAL said on Thursday that the report contained “numerous errors, unsupported speculation and malicious interpretations of events,” and that it would review the allegations and consider appropriate action to protect the interests of its shareholders. It did not elaborate.
In Hong Kong on Thursday, shares in 21st Century Education Group, China Xinhua Education, Minsheng Education and China Maple Leaf Educational Systems fell between 3 per cent and 5.6 per cent. The stocks had steadily risen in recent weeks as investors saw potential in a China education market that is expected to be worth 2.9 trillion yuan (US$461 billion) by 2020, according to an estimated by accounting firm Deloitte.
In 2017 alone, seven Chinese education companies went public in Hong Kong and the US. The increasing number of Chinese firms from all industry sectors listing in the US has sparked a wave of investigative reports into the finances of firms amid concerns over compliance, and even formed the basis for a documentary, The China Hustle, that features Carson Block, the founder of Muddy Waters, talking about allegations of fraud among Chinese firms.
Meanwhile on Friday, China’s third-largest tutoring services provider, Puxin, is to list on the New York Stock Exchange, in a bid to raise around US$120 million.
“Investors need to watch out for some of the listed companies that have a relatively high price to earnings ratio,” said securities analyst Jack Wu Yukai at Tiger Brokers, an online brokerage backed by investors including Jim Rogers and Zhen Fund.
For Puxin, as it has made quite a number of acquisitions over the past years, investors might take the acquisitions as a risk factor when deciding whether to put their money into the company after the publicity around TAL, and this could affect the company’s valuation, Wu said.