We believe the fraud issue at Oriental Century is isolated and the drop in REC’s market cap has more than reflected this. P&L impact is minimal at 2%. Worst-case potential write-off is $34.6m (1.5cents/share). Fundamentals of REC remains firm and valuation is attractive, being close to the 5.5x PER, a level not seen since its listing.

Cash misappropriation in Oriental Century. The CEO of Oriental Century (ORIC), 29.9% owned by Raffles Ed, has allegedly misappropriated cash. He is said to have also inflated sales and cash balances over the years and diverted unspecified sums to an interested party.

P&L impact on Raffles Ed minimal (2%). Raffles Ed (REC) has no management control and board seat. The profit impact is minimal at c.2% on our forecasts. The worst-case scenario is the impairment of this investment ($34.6m or 1.5cents/share) if ORIC ceases to be a going concern.

REC’s operations unaffected. Management maintained that its own operations are still robust. Except for ORIC, they have management control in their recently acquired entities (Oriental University City, Shanghai Zhongfa, Tianjin Boustead, Shaanxi Electronic Information Institute and Wanbo College).

Drop in market cap > potential write-off. REC’s market cap has eroded by over $200m arising from this, far exceeding the potential $34.6m write-off. We think it has more than compensated for the investment.

Maintain recommendation. There is no doubt that sentiment is affected by the recent spate of governance issues on S-shares. But, we believe the current situation is confined to ORIC and the market has priced that in. Management has, so far, delivered growth and valuation is at a significant discount to peers trading at an average pe of 22x. TP: S$0.78.