China Distance Education’s management team has offered to buy the organisation, less than a week after US President Donald Trump ordered regulators to crack down on Chinese companies listed in the US that fail to uphold accounting standards.

The company received a preliminary non-binding offer from Zhengdong Zhu, co-founder and chief executive, and his wife, Baohong Yin, co-founder and deputy chair, to buy all outstanding shares for $9.08, in cash, per American depositary share ($2.27 per ordinary share).

Under the take-private deal, the management team and its “affiliated entity” – likely a financial sponsor – would pay $307 million for China Distance Education, whose market capitalisation currently stands at nearly $278 million.

China Distance Education’s board said it had “just received the proposal letter and has not had an opportunity to carefully review and evaluate the proposal or make any decision with respect to the company’s response to the proposal”.

The company’s share price climbed 12% when markets opened on 8 June following the announcement.

The organisation, which is listed in New York but based in China, is one of many in Trump’s sights, as his administration seeks tighter control over mainland-headquartered companies that tap global investors through US stock exchanges.

Less than a week ago, Trump set a 60-day deadline for US financial regulators to recommend ways to clamp down on US-listed Chinese organisations amid concerns that the Chinese government is preventing auditors from thoroughly assessing accounts – giving rise to fraud.

“China’s actions to thwart our transparency laws raise significant risks for investors,” said Trump. “The time has come to take firm action in an orderly fashion to put an end to the practice that has tacitly permitted companies with significant Chinese operations to flout protections United States law requires for investors in United States markets.”

It has been said that intensifying scrutiny stemmed from a scandal linked to Luckin Coffee, which vowed to become China’s answer to Starbucks and floated on the Nasdaq exchange in 2019 but earlier this year was found to have falsified £250 million of transactions.

Muddy Waters, the short-seller which first raised alarms over dubious accounting practices at Luckin Coffee, has since gone after GSX Techedu, an online tuition provider listed on the New York Stock Exchange whose operations are based in China. The short-seller – the third this year to accuse GSX Techedu of malpractice – called the company a “blatant fraud” and accused it of overstating profits by 70%. Numerous lawsuits have been filed against GSX Techedu but the firm denies all allegations.

One source suggested that “US-listed Chinese groups will de-list” as regulatory scrutiny is ratcheted up.

The source said: “China doesn’t allow the auditors to provide access to their workings to overseas regulators; China chooses to classify these as state secrets – presumably to avoid the company directors getting sued for the constant frauds.

“[The] US is using this as a threat to de-list them all.”

There are numerous China-based education companies that have pursued listings in New York, either on the city’s incumbent stock exchange or the Nasdaq, to tap capital from international investors and use it to grow mainland operations. These include Bright Scholar Education, TAL Education Group, New Oriental Education & Technology Group, as well as Koolearn, Ambow Education and Sunlands Technology Group.

But in the case of China Distance Education, it is “hard to conclude whether the delisting is related to accounting practices”, said Mariana Kou, chief executive of Research Study Education Group and a former senior equity analyst at CLSA, an investment bank.

“The founding couple has proposed to buy the shares and take the company private, so it could be because they think the stock is undervalued; they don’t think the benefits of staying listed outweigh the costs anymore (there are lots of accounting and legal professional fees involved to keep a company listed); or they want to do some massive restructuring, which involves lots of costs that can affect stock prices, and then get re-listed at a later stage as a bigger and stronger company (although this is more of a private equity approach),” said Kou, in an email to this publication. 

Date published: 12 June 2020

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