NYSE listed cheap fast wow gold Chinese firm New Oriental Education (NYSE:EDU) recently acknowledged a Securities and Exchange Commission investigation that the firm believes is related to its variable interest entity structure. New Oriental and other Chinese ADRs we cover use a VIE structure to effectively be in control of Chinese operations while bypassing restrictions on foreign direct investments in regulated sectors, including Internet, media and private education. New Oriental's share price has fallen 36% since the unexpected announcement in mid July. While there may be other factors at play (such as reduced investor appetite for emerging market exposure and the Muddy Waters Research report accusing New Oriental of improper disclosure and accounting of its franchise business), we think investor panic over the opaque VIE structure was the key driver of the sell off.

It is not yet clear whether the SEC probe was triggered by the recently disclosed change that consolidated control of the VIE with New Oriental founder, chairman, and CEO Michael Yu. (He has a 17.1% stake and is the largest shareholder.) It is also unknown whether the probe will spread to other Chinese ADRs that use a similar structure. In any case, we believe it's helpful for investors to better understand how the VIE structure is set up and what provisions can offer protection to holders of American depositary receipts, should conflicts of interest with the VIE controlling party arise. GAAP compliant VIE structures have been used by publicly listed companies over the past 12 years to tap growth opportunities in China while complying with restrictions of foreign investments in regulated sectors such as Internet services, media, travel, and private education. Major Chinese ADRs, including Baidu (NASDAQ:BIDU) and Sina (NASDAQ:SINA), have VIE agreements in place and consolidate VIEs in their financial reporting.

The structure has served a practical purpose of helping numerous fledgling Chinese firms in the regulated industries to access funding from venture capital firms or multinationals, which then exit via initial public offering on an overseas exchange or a merger or acquisition. Chinese regulators have acknowledged the existence of the VIE structure for quite some time, but remained tolerant and passive for the most part.

This is a gray area through which firms have trod lightly over the years; associated risks and uncertainties are regularly disclosed in SEC filings. And the use of VIE structure is not unique to China based entrepreneurs.

Notable exceptions are Google (NASDAQ:GOOG) and eBay (NASDAQ:EBAY), both of which are known to operate in China, but do not use a VIE structure there, based on information provided in their annual reports. Several years ago, China relaxed the restriction on foreign investments and allowed joint ventures between foreign and local firms to obtain licenses in regulated sectors as well, although the policy insisted that only "strategic" investors, not "financial" investors, were eligible for such ventures. For example, Google's license in China is held by a 50 50 joint venture between Google's Irish subsidiary and an Internet firm in Beijing, whereas eBay's license is held by a joint venture with a local partner in Shanghai.

VIE Structure Can Pose Risks to Investors

Contractual agreements and the absence of direct equity stakes are two key elements of the VIE structure. In the regulated Internet services sector, for example, business licenses are issued only to local companies owned by Chinese nationals. To comply with the restrictions while accepting overseas funding, a company usually creates a shell in the British Virgin Islands or Cayman Islands, sets up wholly owned subsidiaries in China, and establishes contractual relations with VIEs that hold the business licenses, run the operations on the ground, and are in most cases registered under the Chinese founder of the Internet venture (or close business associates). While in theory the VIEs are not owned by the shell company domiciled in BVI or Cayman, contractual agreements are in place to ensure that the latter can direct the major business activities of the VIEs and are entitled to most (if not all) economic profits or losses generated by the VIEs, thus satisfying requirements set by the Financial Accounting Standards Board for consolidating the VIEs in the reported financials of listed firms.

The VIE structure can pose risks to investors, chief among which is inadequate control of the VIE assets, given the lack of direct ownership. This concern is often compounded by worries of an opaque legal system and currently weak law enforcement in China. A case in point was the 2011 "stealth" ownership transfer of popular online payment system Alipay (similar to PayPal) by Jack Ma from the VIE of privately held Alibaba Group to an entity under his own control, without a formal agreement with Alibaba Group's other major owners, SoftBank of Japan and Yahoo. The parties involved subsequently reached an agreement to compensate SoftBank and Yahoo on their losses stemming from the Alipay asset transfer, but the incident nevertheless left a bad taste in the mouths of international investors, whose enthusiasm for Chinese names has been increasingly tempered by concerns of lack effective internal control and shareholder protection. These doubts, coupled with rumors of Chinese regulators mulling a ban on VIEs, set off an indiscriminate sell off of major Chinese ADRs in fall 2011, though the lost ground was almost entirely recovered within a month.

The most recent VIE controversy erupted in mid July and involved New Oriental Education, which acknowledged an SEC investigation that it believes is related to its VIE structure. The investigation was probably triggered by the firm's announcement that it had changed the shareholder structure of New Oriental's VIE in China, which essentially has consolidated control of the VIE into the hands of its founder, CEO, and chairman from its 11 original shareholders. In our view, regulators and investors were rightfully cautious after being kept in the dark about the very important restructuring of the VIE ownership, which went on for about six months. The lack of transparency during the process probably prompted the question of how much New Oriental shareholders are really allowed to know about the firm's underlying operations, or if the shareholders actually have any control of the VIE assets. In addition, with Yu now having exclusive control over the VIE that holds the license and the critical school assets of New Oriental, it's not unreasonable for shareholders to feel a bit insecure should there be conflicts of interest with Yu.

Regulatory uncertainties are another major risk for the VIE structure, as the structure essentially enables firms to bypass official restrictions on foreign investments. In 2006, the Ministry of Information Industry announced its plans to closely monitor the use of VIEs in the value added telecom industry, signaling a toughening of stance, although it did not follow up with concrete measures to police the sector or with detailed guidelines as to what is allowed and what is not. The absence of crackdown on the practice has been construed as tacit approval from regulators, and we think the large number of companies using this structure may force government agencies to carefully weigh the outcomes of different policy options, which may take quite some time. That said, we'd consider it prudent for investors interested in Chinese ADRs to carefully read through the regulatory risk factors involving the VIE structure as disclosed in the SEC filings.

As one of the few services that Chinese Internet users are willing to pay for, online gaming grew rapidly during the past decade into a $6.5 billion business by 2011, generating solid cash flows for top operators such as NetEase (NASDAQ:NTES) that consistently deliver the excitement that gamers demand. As the number two in online gaming (after Tencent), NetEase generates 88% of its revenue from gaming and is known for strong in house games, including some of the longest running ones in the market. Adding to its arsenal are the hit World of Warcraft games under exclusive licensing from Activision Blizzard. We believe the game developer is attracted by the well run platform, skillful marketing, and financial strength of NetEase. We think NetEase is poised to continue posting strong growth in the coming years, but it remains vulnerable to intense competition in the no moat online gaming industry. investors than Baidu, but it is among the most influential and profitable Internet firms in China, with dominant positions in instant messaging, online gaming, and social networking. Thanks to a massive and loyal user base of several hundred million subscribers, the firm benefits from strong network effects that give it a narrow economic moat. By successfully converting users into paying customers for gaming and other premium services, Tencent has increased revenue and free cash flow by 73% and 113% annually in recent years. And we see plenty of upside ahead, as paying accounts make up only 10% of the user base. New strategies of opening up its platform for third party applications should provide further growth for Tencent, but we expect intensifying competition in China's Internet market to weigh on investment returns in the coming years.

Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including BlackRock, Invesco, Merrill Lynch, Northern Trust, and Scottrade for use in exchange traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.
Welcome to use 5% discount code "WOW7L" buying WOW GOLD US/EU on safewow.com safely with fast delivery now!
Meantime,Safewow new member systerm is also online now:Don't forget being a safewow member and get extral 2%-10% discount for buying any Products.
Safewow WOW GOLD link:https://www.safewow.com/wow-gold-us