Monday, December 13, 2010

A Dispute As To Whether It Exists

Some incredible events have taken place recently with respect to a company by the name of China Education Alliance (CEU), a provider of education and training in China. The company was discussed on this site three months ago in an article titled "Too Good To Be True?" because of the potential for fraud. Recently, allegations of fraud have spread, and the company was forced to respond with an emergency conference call to assert that its operations are indeed real!

The allegations started to heat up about two weeks ago when a firm by the name of Kerrisdale Capital released a report detailing their investigation of the company. Kerrisdale uploaded several videos demonstrating problems with the company's payment system and online offerings. Furthermore, Kerrisdale sent Chinese-speaking investigators to the company's main training center in Harbin, China. Apparently, they found that the company's main training center was devoid of personnel, furniture and any other evidence that any operations exist, as shown in the following video:

Following the release of Kerrisdale's report, shares of CEU fell some 40%. But a few days later, the stock had already recovered most of those losses as the company offered a few releases to help quell shareholder concerns. To bolster investor confidence, the company also scheduled an impromptu conference call to directly answer investor questions that could be e-mailed in advance.

Unfortunately for the company, it appears the conference call did little to assuage investor fears, as the stock closed down 30% following the call. The company did answer a number of questions, but offered little in the way of proof. For example, to explain why the company's training center was empty (as shown in the video above), the CFO simply stated that the center had been undergoing remodeling at the time of the investigation.

And then, a few days later, shares once again recovered to a large extent, as the company announced a share buyback program. Perhaps this bolstered investor confidence that the company's cash holdings actually exist!

Some heavy bets (both short and long) have likely been placed on this company. Value investors should stay away (unless, of course, they have uncovered some evidence that has convinced them as to whether the company's operations are real or not) as downside risks are high no matter which side of the bet one is on. Only one side can be right, while the other side will get demolished. It will be interesting to see how this situation unfolds.

Disclosure: None


Chris said...

Another company with numbers "too good to be true" is GPRC. The company is a recycling firm that reverse mergered into a failed mortgage company based in the US. The auditor is BDO which while not Big Four quality is still well regarded. Chinese companies scare me though. Even more than ours, their management is under very strong pressure to hit its numbers. One needs to be very scrupulous in conducting due diligence.

Paul said...


I've been looking at ITEX and wanted to bring it to your attention, too. The have operating income of about $2 million market, cap of about $15 million, and cash about $5 million, no long term debt and the CEO has over $9 million and a pretty small salary. Let me know what you think!

Saj Karsan said...

Hi Paul,

There's quite the battle going on there! This company has been discussed on this site here and here.

Paul said...


Wow! A ton of great information. Thanks again! :)