Commentary on Political Economy

Wednesday, 8 April 2020

Two Accounting Scandals in China in One Week Burn Investors

Updated on 
  • TAL Education plunges in late trading over forged contracts
  • Luckin Coffee earlier said officials may have fabricated sales
People wearing protective masks gather outside a Luckin Coffee outlet in Shanghai, China on April 3.
People wearing protective masks gather outside a Luckin Coffee outlet in Shanghai, China on April 3. Photographer: Qilai Shen/Bloomberg
China’s second accounting scandal in less than a week is underscoring concern over lax corporate governance at some of the country’s fastest-growing companies.
TAL Education Group, a tutoring business whose success turned founder Zhang Bangxin into one of China’s richest people, delivered the latest bombshell on Tuesday after saying a routine internal audit found an employee had inflated sales by forging contracts. The company’s American depositary receipts sank as much as 18% in late U.S. trading.
The sell-off follows the 83% slump in Nasdaq-listed Luckin Coffee Inc. since the company announced that its chief operating officer and some underlings may have fabricated billions of yuan in sales for 2019. Accounting firm Ernst & Young later said it discovered the fabrications when it audited the firm’s financial statements. Trading in the ADRs was suspended Tuesday.
While China Inc. is no stranger to claims of financial irregularities -- particularly from short sellers who have targeted both TAL and Luckin in the recent past -- the fresh wave of revelations is once again putting the spotlight on corporate malpractice at U.S.-listed Chinese firms. The fallout has already affected other listings from the nation and is likely to deter some overseas investors from buying into future initial public offerings.
The cases are “reviving the big question for investors in Chinese firms: the financial data may look pretty, but can you trust it?” said Alvin Cheung, associate director at Prudential Brokerage Ltd. “The latest case has further fueled anxiety over Chinese firms’ financials, especially under a slowing economy and a difficult business environment.”
Luckin Coffee shares have plummeted over fake sales concern
Moves in other education stocks shows how investor nerves can quickly spread: New Oriental Education & Technology Group Inc. lost 4.6% in U.S. post-market trading. Hope Education Group Co. fell 3.3% in Hong Kong Wednesday, while CAR Inc., a car-rental firm founded by Luckin’s chairman, dropped another 17%.
College Admissions Anxiety Mints Billions for China’s Tutor King
Morgan Stanley, Credit Suisse Among Lenders to Luckin Boss
Luckin Coffee Scandal Deals Blow to China Inc.’s Reputation
Tycoon Behind Luckin Loses $1 Billion After Accounting Scandal
The declines vindicate short sellers like Carson Block’s Muddy Waters, which has for years targeted Chinese firms listed on U.S. exchanges.
Peer Wolfpack Research released a new critical report on Iqiyi Inc. Tuesday, alleging that the Chinese video-streaming company overstates revenue and subscriber numbers. Muddy Waters assisted Wolfpack in its research and said it’s also short the company. Iqiyi denied the claims. ADRs in the company fell 3% in extended trading.
— With assistance by Ken Wang

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