{ "docId": "019dd923-622c-750b-8b96-0238cb402647", "docSlug": "0900eea60013", "documentTitle": "New Oriental Education & Technology Group (EDU)", "authorId": "51_Muddy_Waters", "authorName": "Carson Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2012-07-18 00:00:00", "orientation": "portrait", "aspectRatio": 0.7070758, "pageNumber": 15, "pageCount": 97, "prevPage": 14, "nextPage": 16, "slideType": "research-note", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 8, "notes": "The slide presents a forensic accounting argument regarding potential misrepresentation of franchise consolidation and tax exemptions in SEC filings.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-0238cb402647/15", "deckHref": "/decks/019dd923-622c-750b-8b96-0238cb402647", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-0238cb402647.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-0238cb402647#slide-15", "components": [ { "bbox": null, "kind": "callout", "text": "There are two reasons why it is virtually certain that EDU is consolidating the franchises.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-e6ec-7186-b7c7-59fda6f32860", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.82, "x": 0.09, "y": 0.78 }, "kind": "paragraph", "text": "EDU's franchise contract makes it probable that EDU is consolidating its franchisees' financials – even though the franchisees, and not EDU, own the stores, assets, and cash flows. EDU's franchisees are required to provide their financials to EDU during EDU's audit, and according to EDU's fiscal year. EDU's fiscal year for SEC reporting purposes ends May 31st. The franchise agreement we viewed provides:", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0587ae2a-491b-4141-92ab-8ff73527ef66", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.82, "x": 0.09, "y": 0.36 }, "kind": "paragraph", "text": "As we showed supra, it simply is not true that NRRR schools are generally exempt from EIT. The following statement also from the 20-F strongly implies that the BJ Operation has an EIT exemption: As a result, preferential tax treatments for our schools vary among different cities. In some cities, our schools are subject to a standard enterprise income tax rate of 25% (which was 33% prior to January 1, 2008), while in other cities, our schools are subject to a 2% to 3% tax on gross receipts in lieu of the standard enterprise income tax or are exempted from the enterprise income tax.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "78b8f65c-86e0-4f3c-bfad-b64bd607da6b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.82, "x": 0.09, "y": 0.21 }, "kind": "paragraph", "text": "EDU’s 20-F strongly implies that Deloitte believes the BJ Operation is non-profit (emphasis added): The subsidiaries of New Oriental China, which were registered as private schools (the “school-subsidiaries”), are subject to income taxes determined in accordance with The Law for Promoting Private Education (2003) where those school-subsidiaries registered as private schools not requiring reasonable returns (similar to a not-for-profit entity) are treated as public schools and are generally not subject to enterprise income taxes.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "97cd8378-efcb-45f8-a569-c26cc02520e8", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.82, "x": 0.09, "y": 0.65 }, "kind": "paragraph", "text": "There are two reasons why it is virtually certain that EDU is consolidating the franchises. First, the franchise contract is designed to give EDU cash and reports that assist with its audit needs, but don't make sense from a legitimate economic perspective. Second, with franchisee fee payments and enrollment data flowing into EDU's system, Deloitte would be very sensitive as to whether the controls exist to separate them.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b79df756-2ab3-4425-908a-0692a9b0acba", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.82, "x": 0.09, "y": 0.07 }, "kind": "paragraph", "text": "51% the prior year as EDU consolidates more stores from outside of these cities. (FY2009 – 54%, FY2008 – 60%, FY2007 – 65%.) EDU CFO Louis Hsieh told investors in a June 2012 conversation that Beijing and Shanghai together account for approximately 38% of current revenue.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "deaeb169-4292-4655-9053-ee6db74e5a3c", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "The subsidiaries of New Oriental China, which were registered as private schools (the “school-subsidiaries”), are subject to income taxes determined in accordance with The Law for Promoting Private Education (2003) where those school-subsidiaries registered as private schools not requiring reasonable returns (similar to a not-for-profit entity) are treated as public schools and are generally not subject to enterprise income taxes. — EDU FY2011 20-F, p. 47.", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd952-e6ec-7186-b7c7-5eb323d13305", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.25, "x": 0.09, "y": 0.91 }, "kind": "source-note", "text": "18 EDU FY2011 20-F, p. 47. 19 EDU FY2011 20-F, p. 48.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f990803b-94d8-4146-932d-a7673921c94e", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.82, "x": 0.09, "y": 0.61 }, "kind": "title", "text": "New Oriental Almost Certainly Consolidates its Franchises’ Results as its Own", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b8a3d161-1e4b-4dc5-8541-0c35eba9c4bf", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 20, "from": 5, "beatId": "e3846e8e-4c09-4695-9dc4-32ebd1a71686", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Alleged Fraud", "beatSlug": "overcoming-monster-the-monster", "evidence": "The report presents evidence of alleged financial misreporting and fraud", "position": 1, "confidence": 0.8, "parentBeatName": "Hook", "parentBeatSlug": "hook" } ], "loops": [ { "to": 15, "from": 5, "name": "Pattern Hunter", "slug": "02-pattern-hunter", "bestFor": "Time-pressed audiences, building consensus, when data is strong", "matchId": "f9d9d6a5-d4d5-419d-a67e-2765be94ba81", "evidence": "The report searches for and finds patterns of alleged financial misreporting", "position": 0, "objective": "To identify patterns of financial misreporting", "structure": "Evidence A -> Evidence B -> Evidence C -> Pattern/Conclusion", "confidence": 0.7, "description": "Group multiple pieces of evidence that together point to a pattern or conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }