Investments

Nov
29
2010

China Education Alliance, Inc.

Broken Websites, Empty Training Center and Fabricated SEC Filings Suggest Fraud

UPDATE – December 7, 2010

China Education Alliance hosted a conference call this morning to address investor concerns. We believe that the call was essentially 45 minutes of false information and misleading statements. We’ll review the call and the new information provided on the company’s websites, and determine whether a response is necessary at a later date.

For now, we’ll make two points. First, the CFO stated at a conference presentation in November that the company’s Heilongjiang Zhonghe Education Training Center is fully operational, provides IT training, is highly profitable, and has been at the same location since 2005. We have video footage of the CFO’s statement and will make that available if necessary. This previous statement made during the November conference conflicts with the CFO’s new claim that the center is being “re-modeled” for a new school for the arts. Second, we had multiple investigators examine the company’s websites from inside Harbin, as opposed to only the United States. For instance, this report from one of our investigators was done from inside Harbin.

We fully stand by our report and our claim that China Education Alliance is mostly a hoax.

UPDATE – December 2, 2010

This morning, CEU issued a press release announcing that their auditor, Sherb & Co., “performed confirmation procedures on most of the Company’s bank balances.”

Such confirmation procedures in no way vindicate the company of fraud. We are certain that such “confirmation procedures” are routinely done on the cash balances of companies that are defrauding investors and fabricating their SEC financial statements. We’re not sure about the specific details of how China Education Alliance is able to show Sherb & Co. cash balances that match SEC filings. But we believe that many companies in China can find a way to show inflated bank balances to their auditors, and satisfy “confirmation procedures”.

The company does not have business assets that can generate the revenue and net income that it reports in its SEC filings.

We stand by our report that China Education Alliance is defrauding investors and has fabricated its SEC financial statements.

We will continue to update this post as additional news comes out.

ORIGINAL POST:

We believe that China Education Alliance (CEU) is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC filings and that the company is mostly a hoax.

We have put together a 30-page report on CEU and why we believe it is a fraud.

Click here for our report on China Education Alliance

Our evidence includes:

  • The company’s websites do not work, despite the fact that CEU is an online education provider and its websites are the company’s main revenue-generating assets. We have recorded three videos here, here and here which show that the main www.edu-chn.com and www.pk1234567.com websites have non-functioning payment methods and are full of broken links and HTML errors.
  • The company’s websites receive a fraction of the visitor traffic generated by comparable sites such as those operated by China Distance Education Holdings (DL), which reports lower revenue and lower margins than CEU despite having functioning websites, a larger number of web assets, operational payment schemes and no broken links on their sites.
  • We hired an investigator to visit the company’s training center in Harbin and found it to be barren of desks and teaching equipment. We provide a video where we present a slideshow of the empty building. We also explain why we are confident we visited the correct location.
  • The company’s local filings to the Chinese government show that the online business generated less than $1 million in revenue in 2008. We provide SAIC filings from 2006, 2007 and 2008, including both original Chinese photocopies as well as English translations.
  • The company’s financial figures are not believable when compared to publicly traded comparable companies. CEU reports higher margins and revenue growth when compared to DL, CEDU and CAST, despite having a non-functioning website and a vacant training center.
  • The company has had 4 low-quality auditors in the past 6 years. In contrast, the comparable Chinese education providers DL, CEDU and CAST all have top-4 auditors.
  • The company raised capital in 2009 at an irrationally low valuation without providing a sensible rationale for why the capital was needed. It already supposedly had $38 million of cash on its balance sheet prior to its unnecessary capital raise.

Our complete findings are available in our report.

Kerrisdale Capital is short and owns options in the securities of CEU.