China Education Alliance (PINK:CEU)

China Education (NYSE:CEU) has been the newest casualty of fraud allegations brought on by a wave of short attacks on the ChinaHyrid space. We understand why investors may have targeted CEU due to its nearly $20 million equity raise it closed on October 5, 2009, a raise which really made little sense for a company that revealed $31.5 million in cash on its balance sheet just prior to the deal.

Non-matching SAIC vs. SEC filings and a less than stellar onsite visit to CEU's brick and mortar vocational location were used as an argument to help round out the fraud case presented by kerrisdalecap.com on November 29, 2010. CEU has fought back commenting that “the Company’s auditor, Sherb & Co., LLP performed on site confirmation procedures on most of the Company’s bank balances in the People’s Republic of China (“PRC”).”

I have discussed my thoughts on the SAIC issue in several instances throughout 2010.

CEU is a Foreign Invested Enterprise (FIE), inferring that SAIC filings should have been audited by a local PRC firm and should be the same filings that were submitted to the PRC State Administration of Taxation (SAT). Investors may wrongfully assume that the auditor's verification of cash balances pokes a hole in the FIE, SAT, SEC chain relationship. Remember that there are at least two types of fraud to consider: Business fraud vs. tax fraud.

For the more serious issue of business fraud, investors will have to make their own assumptions, but the Kerrisdalecap allegations are very compelling.  We would urge kerrisdalecap to continue its investigation against CEU, especially the charge that the vocational business is a hoax.  It may also entail uncovering a scheme to prove that either the auditor or that some or all of five CEU’s banks have colluded with the company to manipulate cash balances.  Another tactic that could be used would be for the company to arrange a short-term transfer of cash to its accounts via a loan.

It is certainly a good sign that companies are finally getting off their rumps and commenting about auditors actually seeing bank statements. This is something we have urged IR firms to make happen for some time now. Although we can be thankful for their efforts, we need more, as evidenced by CEU disastrous reaction to the company's emergency conference call this morning..

Even if the auditors give a stamp of verification on existing cash balances basically endorsing operations, tax fraud could still exist if they do not publicly and independently verify SAT documents as opposed to just viewing a tax certificate provided by the company.  Regardless, CEU needs to make its SAT documents public. If they can be reconciled with SEC filings and shown that they differ from SAIC documents it could be a big win for the ChinaHybrid space, give additional credence to the veracity of SAIC filings and discredit the  SAIC, SAT, SEC relationship for FIE's that we believe to be accurate. It is time for CEU and Sherb to man up and set an example for other ChinaHybrid firms. If you have nothing to hide, show us your hand.  We have initiated a preliminary investigation into the operations of CEU, especially since management commented that it will not make SAT documents available.  

Please reference our Qingdao Footwear Inc (OTC BB:QING) note for what can happen when tax fraud is found in China.

GeoNuggets® - Quick Check List Highlighting Undiscovered Opportunities

China Education Alliance (OTCBB:CEUA)

Company Description: China Education Alliance (the Company), Inc. is a leading educational service company offering high-quality online education materials and on-site training and tutoring to families, provincial education officials, administrators, schools and teachers in China . The Company distributes online test preparation materials, researchers' materials, study guides, audio recordings, and provide vocational skills and certification training.

Data Ended 6/18/2009

• Price = $2.90
• Trailing EPS = $0.46
• Fully-Taxed Trailing EPS = $0.31
• EPS Estimate = $0.62
• Fully-Taxed EPS Estimate = $0.43
• P/E based on Fully-Taxed Trailing EPS = 9.35

1. CEUA meets 10 out of 10 GeoBargain® Requirements ^a
   
   

   	Requirement	Comments
   	Recent 52-week High (generally within 3 months)	$3.40 on 6/1/2009
   	30% EPS Growth Rate	Full year 2008 vs 2007 EPS growth rate of 33% Forecast 2009 EPS growth rare of 54%
   	10% Revenue Growth	1st Qtr. 2009 vs 2008 revenue increased 102%. Full year 2008 vs 2007 revenue growth rate of 43%
   	Strong Balance Sheet	As of 1st Qtr 2009
   	Positive Cash Flow	$3.9 Million as of 1st Qtr. 2009 $9.8 million for 2008
   	Debt to Equity Ratio less than 20%	0%
   	Current Ratio is at least 2:1	15:1
   	Return on Equity is at least 15%	19.3% trailing, 20.5% for 2008
   	Minimum Pre-tax Operating Margins of 8%	41.4% as of 1st Qtr. 2009, 42.6% for 2008
   	Preferably Under 50 Million Shares	24.4 million shares as of  Qtr. 2009
   	High Insider Ownership (generally greater than 15%)	57.7% as of March 23, 2009
   	Limited Institutional Ownership (generally less than 20%)	<20%
   	P/E Divided by EPS Growth Rate (PEG Ratio) is Less Than 1.	0.18

   
   
2. Over the last ten years, there has been increased awareness of the value of educating the youth of China. (Source Wikipedia). Initiatives to help students receive higher education and respected degrees has prompted a nationwide expansion of tools geared towards the edification of an increasing number of individuals.  Although the Chinese government has always considered education an important component of its economic and social development, the recent emergence of its market economy has made schooling a top priority in order to maintain a healthy growth of available learning resources.  CEUA provides services and products that meet the market demand for learning material that stresses the importance of doing well in standardized tests, a vehicle which the government has adopted as a predominant measure for evaluating students at different levels of the learning process. (Source 2008 10K)
   
   
3. China Education Alliance is expanding into vocational training and education, adding another element of growth to its business.  As China continues to focus on attaining its modernization goals, there will be an increasing number of people entering into vocational programs geared towards imparting technical skills to its students. In 2007, China had 14,832 secondary vocational and technical institutions. About 19.9 million students were studying in secondary and post-secondary vocational institutions. (Source Wikipedia)
   
   Additionally, with the increased importance of becoming multi-lingual, CEUA has taken the appropriate steps to expand their business to offer English language programs through their recently acquired subsidiary, World Exchange Inc.
   
   
4. The Company uses a model of "vertical integration" that potentially guides students to use China Education Alliance resources throughout different stages of the learning process.  This gives the Company the potential to receive a consistent long-term revenue stream.
   
   
5. The Company is becoming more proactive in disseminating information about their story.  They recently hired a qualified Investor Relations firm, a move that the GeoTeam has always maintained to be a required step to increase shareholder value.   In fact, they just participated in the Red Chip Companies 2009 Small-cap Investor Conference Live Webcast event on June 16, 2009.

 Potential Valuation Scenarios if the Company can achieve its EPS growth goals

Short-Term Potential value based on fully taxed adjusted trailing EPS

P/E 20 * $0.31 = $6.20
P/E 25 * $0.31 = $7.75

Short-term Potential value based on 2009 fully taxed adjusted Estimates or Guidance

P/E 15 * $0.60 = $9.00

^a CEUA is not paying a full U.S. tax rate. Therefore, all EPS numbers have been adjusted by the GeoTeam to reflect a U.S. tax rate of 36%.  Figures also exclude non-cash and non-operating items.  Ratios and growth rates reflect these adjustments.

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.