What’s going on here?

• 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, delivered the latest bombshell after a routine internal audit found an employee had inflated sales by forging contracts. 

Forgery is usually considered a crime when a person creates a false document or alters a genuine one with the intent to defraud. For example, someone may change a check worth $100 to $1,000.

What does it mean?

• The company’s American depositary receipts sank 18% in late U.S. trading. The sell-off follows the 83% slump in Luckin Coffee Inc. since the company announced that its COO and some underlings may have fabricated billions of yuan in sales for 2019.
• While China Inc. is no stranger to claims of financial irregularities, 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 IPO.
• “The latest case has further fueled anxiety over Chinese firms’ financials, especially under a slowing economy and a difficult business environment,” said Alvin Cheung, associate director at Prudential Brokerage Ltd.

Image: Luckin Coffee shares have plummeted over fake sales concern

The bigger picture

Quick reactions

• Moves in other education stocks show how investor nerves can quickly spread:
  • New Oriental Education & Technology Group Inc. lost 4.6%,
  • Hope Education Group Co. fell 3.3% in Hong Kong,
  • while CAR Inc., a car-rental firm founded by Luckin’s chairman, dropped another 17%.
• The declines justified short sellers like Carson Block’s Muddy Waters, which has for years targeted Chinese firms listed on U.S. exchanges.

Watch out for the others

• 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.

Content source: Sofia Horta e Costa. (2020) Two Accounting Scandals in China in One Week Burn Investors. Bloomberg. Available from: https://www.bloomberg.com/news/articles/2020-04-08/two-accounting-scandals-in-one-week-burn-investors-in-china-inc [Accessed at 8 Apr, 2020]