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I have several years of experience working with 2 successful hedge funds. I have a macro and value orientation.
  • Is China Education Alliance 'Mostly a Hoax'? Recent Developments Suggest 'Yes' 0 comments
    Mar 8, 2011 1:40 AM | about stocks: CEAI
    China Education Alliance ("CEU") has drawn a lot of attention since Kerrisdale Capital published its first report on November 2010; CEU's stock price has declined steadily, from $4.00-$5.00 per share to less than $2.00 per share during this time.  Recent developments suggest more downside may be warranted. As a result, I recommend you sell, if you own shares of CEU.

    (1) Abrupt Departure of Zibing Pan - China Education Alliance announced that Zibing Pan ("CEU") resigned on February 28th as CFO, effective March 1, 2011, apparently for 'health issues'. This was filed in an 8K last Friday, March 4th 2011, after market hours. 

    While Mr. Pan may very well have left due to 'health issues', something doesn't seem right; The sudden nature of his resignation, no evidence that he is staying on in a transitory role, and the convenient timing of his departure (just 2-3 weeks before Mid-March, when CEU's 10K is expected) don't exactly inspire confidence. Of course, it's possible Pan may have suddently gotten ill and is rendered medically unfit to serve as CFO. A more compelling and likely explanation, however, seems to be that something is very wrong within CEU and Pan wants to distance himself as much as possible.

    (2) Alice Lee Rogers - While Pan's departure in itself is troubling;  the background and circumstances revolving around the new CFO, Alice Lee Rogers, makes Pan's departure look innocent by comparison.

    Ms. Rogers was a board member and chairwoman of the audit committee of CYXI, another Chinese reverse merger whose stock went to zero and whose CEO was sentenced to death by China for none other than... fraud. Note that Rogers' tie to CYXI, which appears to be material information to me, is omitted from the CEU 8K.

    Also, she spent three years with Kabani and Co., the same auditor of Bodisen Biotech, one of the first China reverse merger blowups. Rogers was with Kabani the same time the Bodisen Biotech blowup occurred. Makes you wonder.

    Given Ms. Rogers' history with a few very questionable entities, and the fact CEU has had 4 CFOs in 3 years, you would think that CEU would be hesitant to say something like: "Ms. Rogers will serve as our Chief Financial Officer for a term of three years". Yet that is exactly what is stated in the CEU 8K! As the saying goes, sometimes reality is wilder than fiction.


    (3) Management Agreement with Nanchang Institute of Technology, ("NIT")
     - CEU announced today that it is lending 50 million RMB, interest free, to NIT (roughly $7.6 million). It's unclear why CEU would suddenly enter the business of lending, when their returns in their existing business, per the financials, would create more value. They do get a 'management fee' (which equates to a 20% interest rate on the loan), in exchange for "managing the daily operations of NIT". Note that the management fee differs from interest, because the lender doesn't have to provide any goods/services to earn interest; interest is compensation for borrowing. 
     
    So why is CEU doing this? For those still trusting the company (or desperate to recoup their losses), they may interpret this as 'proof' CEU has the cash as reported in its 10Q. Certainly possible. What if, however, this agreement was a surreptitous means by which CEU is funneling away money raised from foreign investors, AND simultaneously assuring gullible idiot investors that CEU has the cash?

    As wild and unfair as this may sound, I think its fair to ask and wonder, given the serious concerns voiced here as well as by others.


    (4) Out of date information, Investor Relations Ambiguity, etc. - CEU's website, http://www.chinaeducationalliance.com/ , lists Zibing Pan as the current CFO. This could be an innocent mistake, but CEU has had 7 days (according to their 8K, Rogers has been CFO effective March 1) to update this information. Given the friction CEU has endured with US investors, one would think that updating material information on the English language website would be a priority. Also, the 'SEC Filings' page under the 'Investor Relations' does not include filings after 12/22/2010. There are a few other examples that paint a mosaic that is not very flattering.

    On a related note, it is unclear who exactly is CEU's current Investor Relations contact. http://www.chinaeducationalliance.com/contact.jsp indicates that Alan Sheinwald of HSC Global is their IR guy. Strangely, CEU stated that engaged the IR firm Christiansen to 'design, facilitate, and execute its investor and media relations programs.' So are they both working for CEU? I have reason to believe neither are working for CEU currently, as their most recent 8K does not include a HSC Global nor Christiansen contact (previous 8K filings included an IR contact; the most 8K only includes Alice Rogers information). 




    MY RECOMMENDATION - If you are long CEU, I recommend you panic. You should sell now, given the concerns listed above as well as by others.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CEU over the next 72 hours.
    Themes: China Stocks: CEAI
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