Raffles Education’s Oriental Century confirmed fraudulent accounts

Raffles Education’s share price is expected to be badly hit once its trading halt is lifted at 2pm despite management’s assurance that associate, Oriental Century’s accounting woes would not have a material impact on the Group. As mentioned this morning, Raffles Education will write off about S$35m should the 29.9%-owned associate fail. This is equivalent to S$0.015 per share while book value will fall to S$0.1496 a share from S$0.1646 a share. Share price fell 11.3% to S$0.315 before the trading halt was implemented. We downgrade the stock to Neutral from Outperform and cut target price to S$0.30 from S$0.72.

It is confirmed that Raffles Education's 29.9%-owned associate Oriental Century (ORIC) had fraudulent accounts. ORIC's management has said that the company's financial statements are not reliable, with the cash and sales inflated. In FY08, associates accounted for S$2.5m of pre-tax profits with ORIC contributing almost all, with ORIC carried at S$34.6m on Raffles Education's books. Raffles Education's management will await the outcome of ORIC's investigation before making a decision on whether to writedown the stake. Our FY09-11 core EPS estimates are trimmed by 2-3% to account for the removal of ORIC's profit contribution. The near-term risk aversion to companies with significant exposure to China is likely to depress the company's valuations. Our target price is lowered to S$0.30 based on 5.5x CY10/PE, a 10% discount to its previous trough of 6x, from S$0.72 based on 12x CY10 P/E. Downgrade to Neutral from Outperform.

Oriental Century has requested for a suspension of trading in its shares. It was announced that the cash and cash equivalents amount reported on the Group’s balance sheet for the FYE 31-Dec 08 of Rmb234.3m, was substantially inflated. Mr. Wang, the Executive Chairman and Chief Executive Officer of the company had over the years, inflated sales and cash balances and had diverted unspecified sums to an interested party. He also made up fictitious accounting records to mislead directors, the CFO and the auditors to believe that the cash was in existence. Oriental Century last closed at S$0.155. Cut loss immediately should the trading suspension be lifted.

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