Raffles Education

[winston]

NEWS RELEASE

RAFFLESEDUCATIONCORP NOT MATERIALLY AFFECTED BY ORIENTAL CENTURY’S LATEST DEVELOPMENT

Singapore, March 12, 2009 - Mainboard-listed Raffles Education Corporation Limited (“RafflesEducationCorp” or “the Group”), the largest private education group in the Asia-Pacific region, refers to the latest announcement, “Announcement - Request For Voluntary Suspension Of Trading In Shares”, by its associate company, Oriental Century Limited (“Oriental Century”).

The Group wishes to confirm that it is not materially affected by this development at Oriental Century in which it holds a 29.9% interest and has invested S$30.2 million since December 2006. The Group is a passive investor and has no management role in Oriental Century.

Oriental Century contributed S$2.0 million in net profit to the Group, accounting for 2.0% of Raffles Education Corp’s net profit for its last financial year ended June 30, 2008 (“FY2008”). The Group reported a net profit of S$99.4 million on the back of its revenue of S$190.0 million for FY2008.

In the worst case, where Oriental Century ceased to be a going concern, RafflesEducationCorp will need to write-off fully its investment. Should this happen, this would result in a write-off of S$34.6 million, equivalent to 1.5 Singapore cents per share, and the Net Book Value will be reduced from 16.46 Singapore cents per share as of December 31, 2008 to 14.96 Singapore cents per share.

“We will review our options when more information is available,” said Mr Chew Hua Seng,Raffles Education Corp’s Chairman and CEO.

[greenhoney]

i wonder will more such issue crop up in the future now that the credit lines have frozen and they cannot leverage as they used to. this one like causeway liao.... jamm

[learn2win]

无风不起浪

The beauty of chinese wisdom.

[winston]

From Lim & Tan:-

Raffles Education (RE)

RE said that its 29.9% owned associate company Oriental Century (OC) had contributed $2mln to its
bottom-line last year, representing about 2% of its net profit of close to $100mln.

Since Dec’06, RE had invested $30.2mln in OC.

Assuming full write off of this investment, RE’s bottomline would be hit by a oneoff impairment charge of
$34.6mln, while its shareholders funds would be reduced from $382mln to $347.4mln.

Consensus net profit forecast of about $100mln would be reduced by 34.6% to $65.4mln this year.

RE’s PE and price to book ratios would be 12.2x and 2.1x versus 7x and 1.9x respectively had the impairment
not occurred.

While RE’s share price had been under significant pressure recently, given the recent spate of corporate
governance and fraud cases reported by China related stocks (and magnified by OC’s latest announcement),
we fear that the market would question RE’s S$500-600mln worth of acquisitions done in China since 2006-
2007.

This compares with RE’s shareholders fund of $382mln or $347.4mln assuming the full writedown of OC and its
market cap of $732mln. And RE has $226mln worth of intangible assets on its balance sheet reflecting past
acquisitions paid for above their book values. As a result, we believe the stock will likely underperform the market (versus our previous expectation of outperform

Oriental Century (OC)

OC, a 29.9% associate company of Raffles Education (RE) and provider of kindergarden education services in
China said that KPMG (its auditor) informed them on 9 March’09 that they had difficulties seeking the
reconfirmation of bank balances and that there were doubts about the authenticity of a bank confirmation
received earlier.

Later that day, the CFO of the company informed the Audit Committee that he had serious doubts over the
existence of the actual bank balances held by the bank as at Dec’08.

On 10 March’09, the Board of the company was informed by the Founder, Executive Chairman and CEO Mr Wang that the company’s cash of RMB234.336mln as at Dec’08 was substantially inflated and that he had over the years inflated sales and cash balances and had diverted unspecified sums to an interested party and that he had made up fictitious accounting and related records to the directors, CFO and auditors to believe that the cash were in existence.

Mr Wang has since stepped down and as the company is unable to reasonably assess its real financial position
as well as its ability to continue to operate as a going concern, the company has requested that the suspension in trading of the counter (has been suspended since 2 days ago) to continue until further notice.

[winston]

The low was 0.255. it is now 0.34. That is a 33% swing !

Do you know why you are selling or buying ? Do you have all the information to make an informed decision ?

[financecaptain]

Education business is easier to be subject to accounting fraud.
Look at ABC Education and Informatics...

[winston]

Education business is easier to be subject to accounting fraud.
Look at ABC Education and Informatics...

Yes, my remisier also warned me about the above. However, I still have not wrapped my head around why the Education Business would it be easier to subject to accounting fraud.

Education has an easy Business Model. As you collect the fees then only you book them as Revenue. It can also be seen in the Cash Flow..

The risks here seems to be the "Diworsesification" process ie. overpaying for acquisitions, not doing Due Diligence properly, Integration Risk, Financing Risk etc..

[winston]

From Citi:-

Hold: Addressing Concerns over Oriental Century

REC addresses concerns over Oriental Century — REC hosted a conference call this morning to discuss the latest development of associate Oriental Century, specifically, its Chairman & CEO Mr. Yuean Wang’s resignation and Oriental Century's statement to the SGX that Mr. Wang had "inflated sales and cash balances and had diverted unspecified amounts to an interested party," according to Bloomberg.

On the call, REC management confirmed that Mr. Wang had misappropriated Oriental Century’s funds and redirected these to his own company. Other than the potential write-off and reduced associate profits, REC stated that it is not otherwise exposed and its cash balance is not at risk.

Considering likely heightened investor concern over this incident until Oriental Century’s audit investigation is concluded, despite REC’s reassurances, we change REC’s risk rating to Speculative (from High) and lower our TP to S$0.40, (from S$0.60) based on 0.35x PEG (9x CY09E P/E). REC shares were suspended this morning and will resume trading in the afternoon.

Quantifying financial impact — REC holds a 29.9% stake in Oriental Century and has been a passive investor. Oriental Century contributed S$2.0m in net profit, or 2% of REC’s total, in FY08. Per REC's press release: "In the worst case, where Oriental Century ceased to be a going concern, RafflesEducationCorp will need to write-off fully its investment. Should this happen, this would result in a write-off of S$34.6m...", which would represent its S$30.2m cash investment plus share of accumulated profits. This would be a non-cash charge. The timing and possibility of a partial write-off depend on the audit investigation.

Potential related concerns — REC stated that its cash balance is protected, and that each of its Chinese subsidiaries/schools’ operations are monitored by a checks & balances system. Shares may be depressed should concerns persist.

REC has limited role in investigation — REC management said they have been in contact with the lead independent auditor in charge of the Oriental Century audit investigation. While REC has advised for Oriental Century to be kept as a going concern, considering its students’ welfare, its involvement is very limited.

REC cash management efforts continue — Although not directly related to this incident, REC management explained that they are still actively managing the company’s cash flow, with intent to pay down all bank borrowings in four quarters, partly with cash conserved from the scrip dividend scheme. While
deferral of outstanding payments for the OUC acquisition by 1 year was confirmed at its 2Q results in Feb, REC indicated that they are still negotiating for longer deferral, made easier by the financial crisis.

[iam802]

On the plus side, Raffles Education seems to be able to react and hold a press conference pretty fast.

However, if they are just interested in being a passive investor, is there a need to hold such a high stake in OC?

Why not at 20% (is that enough to recognise revenue contribution??)

[winston]

Singapore Hot Stocks-Raffles up depite Oriental financial woe

SINGAPORE, March 12 (Reuters)

Shares of Singapore's Raffles Education , which holds 29.9 percent of Chinese education provider Oriental Century , jumped as much as 14.3 percent, rebounding from a 19 percent drop earlier in the day.

Oriental Century said earlier on Thursday its chief executive Wang Yuean "substantially inflated" the company's balance sheet for its 2008 full year financial results [ID:nSIN502690].

Raffles said it is not materially affected by this development, though its shares initially plunged after the release of a trading suspension.

A local trader said investors remain bullish on Raffles shares, and shrugged off the impact of Oriental as the contribution from the Chinese firm was not significant.