Two more US-listed Chinese companies come under financial scrutiny, less than a week after Luckin Coffee’s accounting fraud

Yujing Liu

Two more US-listed Chinese companies are under scrutiny for allegedly inflating their financial data, less than a week after Luckin Coffee admitted to a US$310 million accounting fraud, in a simmering scandal about corporate governance that may block the pipeline of companies seeking to raise funds on US markets.

TAL Education Group, a Beijing-based operator of tuition centres listed on the New York Stock Exchange, said an employee may have inflated the sales of a business segment worth hundreds of millions of dollars. Separately, Nasdaq-listed Chinese video streaming company iQiyi was accused by activist short sellers Wolfpack Research and Muddy Waters of making up its 2019 revenue by up to 44 per cent, while its user number was inflated by 60 per cent.

Shares of both companies fell in after-hours trading. TAL shares plunged by as much as 28 per cent, most recently changing hands at US$45.90. Shares of its biggest competitor New Oriental Education & Technology Group fell 6 per cent in after-hours trading in New York.

Shares of iQiyi fell 3.6 per cent to US$16.68 in after-hours trading, even after the company denied the short sellers’ accusations.

“The company believes that the report contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations regarding information relating to the company,” iQiyi said in a statement.

The episode comes at an inopportune time, as American and Chinese diplomats and government officials exchanged verbal barbs about who is to blame for the coronavirus pandemic, while a 20 month-long trade war continues to simmer. The growing scandal may add to the uncertainties that further dampen investors’ mood for initial public offerings (IPOs), pushing back the time needed for deal flows and capital raising exercises to recover, bankers said.

The pipeline of Chinese companies seeking to raise funds in the US is sparse this year. UTime Limited, a Shenzhen-based maker of wireless equipment, announced on March 18 its plan to raise US$21 million on the Nasdaq. Separately, China Liberal Education Holdings Limited, a Beijing-based educational services provider, is scheduled for its trading debut on Nasdaq after its US$8 million IPO.

Asia-Pacific drove IPO proceeds to their highest level in two years in the first quarter, with US$25.9 billion raised globally, according to Refinitiv. IPO activity in China was relatively robust, deal makers said, as Chinese companies priced several listings in early January and the mainland government acted swiftly to help prop up business and markets as the health crisis worsened.

In the quarter, Shanghai overtook Hong Kong as the world’s biggest market for fundraising, bolstered by Beijing-Shanghai High Speed Railway’s 307 billion yuan (US$4.5 billion) IPO in early January.

Tom Zhang Bangxin, founder and chief executive officer of TAL Education Group, speaking during 2019 Global Education Summit on November 25, 2019 in Beijing. Photo: VCG/VCG via Getty Images

TAL provides mainly K12 after-school tutoring, covering age groups from kindergarten to high school, with 676 physical learning centres across China in operation last year, according to its annual report. The company is expected to announce its 2020 results around April 25.

The errant TAL employee had been taken into custody by Chinese police after the company reported the case, according to a statement. The staff may have conspired with external vendors and forged contracts to fabricate sales of its newly introduced “Light Class” online teaching modules, which are estimated to account for 3 to 4 per cent of the company’s 2020 revenue.

The “Light Class” modules are valued at up to US$138 million, out of TAL’s US$3.4 billion in revenue for the year ended February 29, according to a Bloomberg poll.

A cup of Luckin Coffee’s brew during the company's IPO at the Nasdaq Market site in New York on May 17, 2019. Photo Reuters

“TAL highly values the integrity of business practices and the ethics of employee conducts, having zero tolerance of any illegal act,” the company said.

Still, TAL’s fabrication of financial data may have begun as early as 2016, according to a 2018 report published by Muddy Waters, led by the short seller Carson Block. TAL denied the allegations at that time.

TAL would be Muddy Waters’ second successful short in a week, after Luckin Coffee lost US$2.11 billion in market value over its accounting scandal. The Xiamen-based operator of a chain of online coffee vendors that likened itself as a challenger to Starbucks, reported last week that its chief operator officer and several staff had fabricated Luckin Coffee’s sales by 2.2 billion yuan (US$309 million) between the second quarter and the fourth quarter of 2019. Shares of Luckin Coffee, which began trading on the Nasdaq exchange last May, halted trading on April 7 for an announcement.

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