Doubts Linger on New Oriental, Citic Securities 新东方和中信证券料将面临更多动荡
I’d like to start off this Monday with a brief apology for my own erratic writing these last few days, as I’ve been traveling in the US and my schedule has become a bit spotty. But that said, I’ll begin this sunny Monday in Los Angeles with some postscripts to items I wrote about last week on troubled education services firm New Oriental (NYSE EDU) and leading Chinese brokerage Citic Securities (HKEx: 6030; Shanghai: 600030), neither of which is inspiring much confidence in investors these days.
First let’s look at New Oriental, which spooked investors last week when it disclosed the US securities regulator was investigating its accounting. (previous post) That announcement triggered a 34 percent plunge in New Oriental’s stock, prompting infamous short seller Muddy Waters to release a report further questioning the company’s accounting, which in turn triggered another big drop in the stock. New Oriental responded by denying the Muddy Waters accusations, and announcing a senior management share buy-back plan (company announcement) and the formation of a special committee to investigate claims in the Muddy Waters report (company announcement), sparking a small rally in the company’s shares.
So where did New Oriental’s shares stand at the end of the day? At the height of the crisis after the Muddy Waters attack the shares were down some 57 percent from their levels before all the bad news began. Since refuting the Muddy Waters claims, they are still down 45 percent. So what does all this say? To me, it looks like investors have largely dismissed the Muddy Waters report, which indeed looks rather opportunistic, but are still clearly worried about the securities regulator’s investigation.
Look for more turbulent times when the results of that investigation are finally announced, including the strong possibility for yet another sell-off. As I’ve said previously, I also wouldn’t be surprised if 1 or 2 other big US-listed Chinese companies announce similar investigations when they start releasing their second-quarter earnings results in the next few weeks, as the regulator tries to restore investor confidence in this group of troubled companies.
Moving on, let’s take a look at Citic Securities, which announced some preliminary results last week that reflected a temporary uptick in its second-quarter business fueled by a first-quarter rebound in China’s stock markets. (previous post) Following that announcement, Citic Securities announced later in the week that it had finally reached a deal for a previously announced plan to buy 20 percent of Credit Agricole’s (Paris: ACA) CLSA brokerage unit for $310 million, with an option to buy the remainder for another $910 million. (English article)
Investors have responded to the CLSA announcement by dumping Citic Securities shares, which fell more than 7 percent in Monday trade. Clearly there’s some doubts about the price that Citic Securities is paying for the brokerage. But perhaps more importantly, investors are probably worried that Citic, despite its industry leading position in China, has little or no experience running an international operation like CLSA’s. I completely agree with their view, and see stormy times ahead for the CLSA unit over the next 2 years as Citic tries to run the operation.
Bottom line: New Oriental Education and Citic Securities are set for more turbulence, as the former faces a regulatory investigation and the latter tries to integrate a major international acquisition.
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