Published March 13, 2009

Accounting scandal rocks another S-chip

Oriental Century CEO 'cooked books'; biggest shareholder Raffles Education awaits inquiry result

By LYNETTE KHOO AND OH BOON PING

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(SINGAPORE) In a stunning disclosure yesterday, Catalist-listed Oriental Century - which is 29.9 per cent owned by the Raffles Education group - acknowledged that its chairman and CEO Wang Yuean had admitted cooking the books for years and diverting money to an interested party. The fresh accounting scandal at the China-based education provider will deal another blow to investor confidence in S-chips.

At an urgently convened board meeting on Tuesday, Mr Wang confessed that he had been inflating sales and cash balances. This raises the risk that the company's financial statements for previous years including fiscal 2008 may be inaccurate and unreliable, Oriental Century said.

'The Board is concerned that the group's ability to operate as a going concern may be in doubt, pending clarity on the financials of the group,' it added. The company thus requested for the voluntary trading suspension of its shares.

Its largest shareholder, Raffles Education - which interestingly has no representation on the Oriental Century board - halted the trading of its shares in the morning session while it held a teleconference with reporters. It said that in the worst-case scenario that Oriental Century ceases to be a going concern, Raffles Education may need to fully write off its entire investment of $34.6 million or 1.5 cents per share. This will reduce its net book value from 16.46 cents per share as at Dec 31, 2008 to 14.96 cents per share.

CEO Chew Hua Seng stressed, however, that such a write-off was a non-cash item and that Raffles Education would await the outcome of an investigation by KPMG.

Mr Chew maintained that the latest developments would not materially affect the group. 'We have strong cash-flow management system in place,' he said.

Oriental Century contributed $2 million to Raffles Education's $99.4 net profit for the financial year ended June 30, 2008.

KPMG regional leader for Asia Pacific audit Tham Sai Choy told BT that notwithstanding the confessions by Mr Wang, the auditors still need to independently verify the facts and seek confirmation with the PRC bank.

According to Oriental Century's filing with SGX, KPMG had informed Oriental Century's chief financial officer (CFO) on Monday that they were finding it difficult to reconfirm the bank balance and had doubts about the authenticity of a bank confirmation they had earlier received.

Mr Wang had instructed the CFO to defer the bank reconfirmation until the board meeting on Tuesday. On Monday, the CFO advised the audit committee that he had serious doubts over the company's actual bank balance as at Dec 31, 2008.

'KPMG later informed the Audit Committee that their follow-up audit enquiries with the bank indicated that the bank had no knowledge of having issued the confirmation received by KPMG earlier and there was a significant difference between the book and actual cash balance as at Dec 31, 2008,' Oriental Century said.

Mr Wang resigned as chairman, director and CEO on Tuesday but still owns a 25.4 per cent stake in the company. Chief investment officer Lei Hua has been appointed as acting CEO.

Oriental Century's shares have been suspended since March 9. Since then, Raffles Education shares have plunged about 19 per cent before recovering yesterday from the sell-off. Reversing a sharp dip after the trading halt was lifted, Raffles Education shares ended the day 7.9 per cent higher at 34 cents.

But some analysts are now concerned about the risks that Singapore companies may face in their exposure to Chinese companies.

CIMB-GK yesterday cut its rating on Raffles Education to 'neutral' from 'outperform', noting that this episode 'highlights the risk of investing in China, with even the experienced management from Raffles Education caught off-guard'.

Raffles Education first bought its stake in Oriental Century in 2006. It now owns at least 15 education providers in China. But unlike in other subsidiaries, it is a passive investor in Oriental Century without board or management representation.

Explaining this, Mr Chew said that Oriental Century is a listed company with its own management, auditors and governance structure. 'We feel it is sufficient,' he said.

In the meantime, Raffles Education will not seek to change the management or board at Oriental Century as the latter's business model remains strong, he added.

CIMB-GK cut its core earnings per share estimates for Raffles Education by 2-3 per cent for fiscal 2009 to 2011 to account for the removal of Oriental Century's profit contribution.

Other analysts felt otherwise. The impact on Raffles Education's bottom line is minor, and the sell-off in its shares was overdone, wiping off more market value than the possible impairment loss it may incur from Oriental Century.

'One bad investment doesn't make a company less reliable,' said DBS Vickers analyst Andy Sim.

Credit Suisse also kept its 'buy' rating on Raffles Education and earnings estimates on the belief that its fundamentals remain intact.