New Oriental: Investors Get Short Seller Fatigue 新东方股价回升 投资者对卖空机构失去耐心
The accounting scandal surrounding education services firm New Oriental (NYSE: EDU) continues, with a US law firm announcing a class action lawsuit against the company after its shares plummeted when it disclosed it was being investigated by the US securities regulator. (lawsuit announcement) But in what may be a positive development, it appears that investors have largely ignored many of the claims made by an opportunistic short seller immediately after New Oriental’s original disclosure. That means that after more than a year of watching a non-stop stream of short seller attacks that have hammered overseas-listed Chinese stocks, investors may finally be growing skeptical of such attacks and their accusations of accounting misdeeds.
I don’t think that I’m quite ready to declare that the confidence crisis that has punished overseas-listed Chinese stocks for more than a year now is officially over; but instead, I do think this latest reaction to New Oriental’s scandal reflects the fact that confidence is slowly starting to return to the sector, meaning we could finally see a resumption of new IPO activity perhaps by the end of this year.
Let’s look at the latest news in this scandal, including what New Oriental is being accused of under this new lawsuit. The legal action accuses the Chinese firm of causing its shares to plummet 34 percent when it disclosed in July that it was being investigated by the US Securities and Exchange Commission for undisclosed reasons. (previous post) The suit also seeks compensation for another 35 percent drop in New Oriental’s share price a day later when short selling firm Muddy Waters released its own report predicting the company would soon make a major restatement and that its auditor would resign.
New Oriental has been largely silent through all of this, except to say in its original statement it believes the SEC investigation may be related to its accounting treatment of its Beijing subsidiary. A quick look at New Oriental’s share price through all this shows the company’s stock fell to $14.62 after its original disclosure, and then dropped to $9.50 after the Muddy Waters report came out.
But in the month and a half since the Muddy Waters report came out, the stock has largely erased most of the losses from the second drop, having closed on Friday at $13.90. Perhaps investors are skeptical because the major restatement that Muddy Waters predicted still hasn’t happened, and neither has the resignation of the company’s auditor.
At the end of the day, this case seems to demonstrate that investors are increasingly losing patience with opportunistic short sellers, who are fast losing the little bit of credibility they still have. In fact, Muddy Waters’ credibility was already under pressure after its failed attack last year on outdoor advertising specialist Focus Media (Nasdaq: FMCN), and another short seller named Citron has also lost credibility after mounting numerous unsuccessful attacks on security software specialist Qihoo 360 (NYSE: QIHU). This loss of investor patience in the short sellers could bode well for the sector, as it could reflect returning investor confidence in these companies — a critical element before any recovery can come for their battered share prices.
Bottom line: A rebound in New Oriental’s share price could reflect returning investor confidence to US-listed China stocks, helping to fuel a rebound in the IPO market possibly by year end.
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