Wednesday, December 8, 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.

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

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.

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