Tuesday, September 28, 2010

Questions for the Universal Travel Group conference call

The only communication I have had from Universal Travel Group was a kind email from the acting Chief Financial Officer saying that I needed to provide proof that I was a shareholder to participate in the conference call that they are having on Wednesday, September 29, 2010, to discuss and answer any questions investors may have regarding the Company's business and financial statements.

I have some questions and I forwarded them in advance to the company as requested. 

The purpose of this post is to put the questions on the record in the hope that they are answered and not to entertain my regular readers.  [I will try to entertain in the future – I promise…]

 

John

Questions

Housekeeping questions:‭ ‬business alliances

China Telecom:‭ ‬On‭ ‬3‭ ‬September‭ ‬2009‭ ‬the company announced a‭ “‬strategic alliance‭” ‬with China Telecom.‭ ‬The company did not however announce any contact name or identity at China Telecom who could be asked about the‭ “‬strategic alliance‭” (‬all the contacts were at UTA‭)‬.‭ ‬Can such a contact be provided‭? ‬If not then in what sense is it an alliance‭?

Agoda/Priceline:‭ ‬ On‭ ‬13‭ ‬July‭ ‬2010‭ ‬the company announced a‭ “‬partnership‭” ‬with Agoda/Priceline.‭ ‬The company did not however announce any contact name or identity at Agoda/Priceline who could be asked about the‭ “‬partnership‭”‬.‭ ‬Can such a contact be provided‭? ‬If not then in what sense is it a partnership‭?

Questions concerning telecom costs

The company in‭ ‬2009‭ ‬reported total telecoms cost of‭ ‬75‭ ‬thousand dollars.‭ ‬This is a small amount compared to over‭ ‬600‭ “‬tripeasy kiosks‭” ‬with‭ ‬3g facilities and a‭ ‬300‭ ‬seat phone centre.

What was the telecoms cost per tripeasy kiosk‭?

What is the telecoms cost per phone-seat in the phone centre‭?

What is the total telecoms cost of housing your combined websites‭? ‬How much data is provided over the websites and how much do you pay for it‭?

How can we expect these costs to change over time‭?

Questions regarding hotel relationships

The real kicker in hotel booking is when you have the relationship to lots of hotels and you can source inventory.‭ (‬Expedia for instance sources inventory globally and sells it both online and through travel agents.‭)

You state in your‭ ‬10K that your subsidiaries,‭ ‬YZL and SLB‭ (‬Shanghai Lanbao Travel Service Company Limited‭) ‬have contracted with‭ ‬2,000‭ ‬hotels and‭ ‬7,000‭ ‬hotels,‭ ‬respectively.

How many staff do you have looking after the contracts with all these hotels‭? ‬How many are in Shenzen and/or your call centers and how many are on the road (that is travelling buyers of hotel inventory)‭? ‬How much‭ does your IT department do to integrate their IT‭ (‬ie booking systems‭) ‬with your booking engine‭? ‬How many IT staff are required to maintain the relationships with‭ ‬9000‭ ‬hotels regarding things like integrating into hotel-reservation systems and other similar functions‭?

What proportion of your hotel sales does hotels you directly contract cover‭? ‬How many hotel sales do you make from third party inventory‭? ‬Who are your main third party inventory suppliers‭? [‬You mentioned a deal with Agoda.‭ ‬Before the Agoda deal which third parties did you source your hotel inventory from?‭ ‬Is there a conflict between multiple sources of inventory and your promise to customers of “lowest price”?]

When you buy inventories from third parties‭ ‬how much commission do you pay those third parties‭? ‬Can you go through the economics of selling rooms that you source yourself versus rooms you sourced from third parties‭?

If you have direct hotel relationships are there people at hotel chains with whom we can verify the nature of the relationships‭? ‬A contact at any major chain will do.

Relationships with airlines

The company claims on its website to be corporate partners with a wide range of airlines.

image

Could you please describe the nature of this‭ “‬partnership‭”‬.‭ ‬Do your computers hook into their servers and booking system hence allowing you to guarantee the lowest price‭? ‬Do you have‭ “‬most favored nation clauses‭” ‬which allow you to meet the promise you make on your website of “guaranteed lowest price”‭?

If so‭ – ‬can we have a contact at a single airline‭ (‬let's pick Qantas‭) ‬with which we can confirm the nature of this partnership‭?

Oneworld versus Star Alliance

This list of airlines includes some OneWorld airlines‭ (‬eg British Airways,‭ ‬Quantas‭) ‬and some‭ ‬Star Alliance airlines‭ (‬eg Swiss Air – but strangely not Lufthansa which owns Swiss Air‭)‬.

What is the secret to maintaining‭ “‬partnerships‭” ‬with both of these groups‭? ‬Under what conditions does say Star Alliance allow you to deal with OneWorld?‭ ‬It is very unusual to have‭ “‬partnerships‭” ‬with both groups that allow you to maintain a “lowest price guarantee” with both groups.‭ ‬In what way does that partnership restrict your business?

Questions regarding internet traffic

The company has stated in several SEC filings that www.cba-hotel.com received‭ ‬200‭ ‬thousand visitors per day in‭ ‬2006 and you have repeated the claim in more recent filings.‭

What is the visitor traffic per day in‭ ‬2009‭ ‬and so far in‭ ‬2010‭ ‬for that site‭? ‬Have you managed the merger of this traffic with your CNUTG site‭?

What is the visitor traffic per day for www.cnutg.com‭?

How do I reconcile these numbers to ChinaRank.org.cn which suggests that total users of these sites are about‭ ‬1-2‭ ‬per million of population‭?

Questions regarding cookies on the website‭?

Do you have a process on the website to identify repeat visitors when they turn up‭ (‬ie cookies‭)‬.‭ ‬What information do the cookies contain‭? ‬How do you manage privacy issues‭? [‬A typical privacy issue is that a woman books a hotel room for her affair‭ (‬or a guy for his‭)‬.‭ ‬The website remembers her‭ (‬or him‭)‬.‭ ‬Spouse later books something and finds out.‭ ‬Someone will be unhappy.‭]

Do you have decent counts of the number of unique visitors to the website‭ – and if so what cookies process do you use to maintain that count? ‬Do you have data on how many convert to sales‭? ‬Have you experimented in changing parts of the interface to see if you can capture more of the‭ “‬lookers‭”?

Could you explain processes for cross selling on the website.‭ (‬i.e. how good are you at selling the hotel after you have sold the flight‭?)

Payments on the website

When I looked I found very few payment options compared to your competition.‭ ‬Have you considered paypal‭ (‬used by CTrip‭)?

What proportion of your payments are online versus a telephone ring back to the number provided‭? ‬If you handle payments via a telephone ring back how do you deal with foreigners‭? ‬Why not internet,‭ ‬credit card,‭ ‬paypal‭? ‬Are there payment issues for foreigners that differ from Chinese‭? ‬If so what are they‭ – ‬and how do the leaders‭ (‬CTrip especially‭) ‬deal with them‭?

Intersegment costs

The‭ ‬10K gave no intersegment eliminations for the business.‭ ‬How much air travel booking or hotel-reservation does the tour business buy from rest of the company‭? ‬If these businesses are not related then why own them under one umbrella‭? ‬If the businesses are related‭ (‬as I would expect‭) ‬then can you please provide reasonable segment elimination accounts‭?

Staff costs

The‭ ‬10K reveals‭ ‬780‭ ‬staff and staff costs of just over‭ ‬500‭ ‬thousand.‭ ‬Can you indicate how many technology staff you have and roughly their average staff costs‭? ‬Can you indicate how many staff are in Shenzen.‭ ‬Can you indicate how many staff are involved in maintaining your relationships with‭ ‬7000‭ ‬hotels‭ (and hence do not earn sales commission). How many are IT staff and other professional staff (accountants and the like) who do not earn sales commissions?

Can you tell us how you reconcile the high staff numbers and low wage bill with minimum wage laws‭?

Internet site development

You have‭ – ‬in the‭ ‬10K‭ – ‬told us website maintenance cost‭ ‬$40‭ ‬thousand per year.‭ ‬This seemed to be a very low number compared to sites with traffic volumes as high as you cite and with as many options as you cite.‭

Could you explain how this cost of the internet site is arrived at and what costs of the internet site are not included‭ (‬ie costs of employing technical staff‭)‬.‭

Do you own or outsource your core servers‭?

Housekeeping questions regarding related party transactions

In your last proxy you said this about related party transactions:

TRANSACTIONS WITH RELATED PERSONS,‭ ‬PROMOTERS AND CERTAIN CONTROL PERSONS‭

‬Related parties can include any of our directors or executive officers,‭ ‬certain of our stockholders and their immediate family members.‭ ‬A conflict of interest occurs when an individual’s private interest interferes,‭ ‬or appears to interfere,‭ ‬in any way with the interests of the company as a whole.‭ ‬Our code of ethics establishes requirements of our officers regarding conflicts of interest.‭ ‬Any violation of our code of ethics must be reported to the Company’s chief operating officer or any member of the Company’s Board.

Except for the ownership of our securities,‭ ‬none of the directors,‭ ‬executive officers,‭ ‬holders of more than five percent of the Company’s outstanding common stock,‭ ‬or any member of the immediate family of any such person have,‭ ‬to our knowledge,‭ ‬had a material interest,‭ ‬direct or indirect,‭ ‬in any transaction or proposed transaction,‭ ‬since the beginning of‭ ‬2009,‭ ‬in which the Company was or is to be a participant and the amount involved exceeds‭ ‬$120,000.

In the last‭ ‬10Q‭ (‬which pre-dated the proxy‭) ‬you stated that‭

As of June‭ ‬30,‭ ‬2010,‭ ‬Due from related party account has balance of‭ ‬$6.99‭ ‬million,‭ ‬which was an advance for cash payment of two acquisitions in June.‭ ‬The payments were paid by corporate account on June‭ ‬28,‭ ‬2010‭ ‬and the related party returned the same amount on August‭ ‬10,‭ ‬2010.

What were the acquisitions? ‬Why was almost‭ ‬7‭ ‬million advanced to a related party for it‭? ‬Which related party‭? Were both acquisitions from the same related party as implied in the above paragraph?

Are there any other acquisitions you have done involving related parties that have not been spelt out in the various proxies.

Remuneration of the CEO

Whilst on the subject of proxies‭ – ‬what does the CEO live on‭?

The proxies reveal the CEO receiving approximately‭ ‬$9,230‭ ‬in salary,‭ ‬$1,411‭ ‬in bonus and‭ ‬$796,048‭ ‬in stock compensation.‭ ‬Cash receipts are roughly‭ ‬$10‭ ‬thousand per year.‭

Similar cash receipts applied the previous year.‭ (‬There was of course stock compensation then too.‭)

Jiangping Jiang however has not disclosed the sale of any shares which indicates that her only cash income is the approximately‭ ‬$10‭ ‬thousand per year in salary and bonus.‭

I understand that living in China is somewhat cheaper than Sydney or New York‭ – ‬but this seems unusually frugal for a CEO whose net worth at times has been nearly‭ ‬$100‭ ‬million.‭

What is the source of funds for the CEO’s living expense‭? ‬I would appreciate at least some guidance as to how this makes sense from Ms Jiang's perspective.

Thanks in advance.

John Hempton

12 comments:

Anonymous said...

John, I can only say the questions you asked are so funny and ticklish to me. You seem to be drilling down on the operational and technical aspects where auditors don't even really drill down in a standard ISO audit. You may want to consider becoming part of UTA executive to get those questions answered. No wonder you are being brushed aside. I guess it's you are really desperate at driving the prices down seeing the stock going back up and your losses for your clients ballooning.

John Hempton said...

There are no client losses. I admit however that I wish I had covered entirely on the first trading day after my post.

John

Anonymous said...

Hi John,

any idea why a lot of US-listed China firms do not have a Big 4 audit firm as their auditor?

Most China firms listed on Hong Kong and Singapore have used Big 4 audit form as their auditor.

Anonymous said...

Dear John,

Yes ur right, maybe u should of covered the first day.

You might still get a chance to after the CC.

I think u have driven the price low enough, you should long UTA.

Ur smart, u know what to do. make sure u disclose it here after u have taken full long position.

Cheers!

Anonymous said...

John,

Why no questions regarding the cash balance, and the unusual lack of interest payments related to it?

David

Anonymous said...

good luck tomorrow mr hempton! keep up the good work. probably goes without saying, but looks like most negative posts are driven by a distorted sense of national chinese pride. kind of admire it in some ways, until it becomes destructive when shareholders trust companies just because management share citizenship with them. find it perplexing people view your questions as "too technical" when looking at the facts show either 1) fraud or 2) poor presentation of financials. If the company is legitimate, then it is its obligation to properly disclose appropriate material information that prospective or current investors need to use to analyze equity value.

I was wondering whether you saw this: http://caps.fool.com/blogs/a-quotrealquot-visit-to/447974

I don't know how this in any way constitutes a defense. No one questioned whether the company has offices - didn't enron have offices? yep...

Also, are you surprised there has been no public announcement of fraud investigation? Perhaps the NYSE and related govt agencies wont announce anything until an investigation is complete...
http://finance.yahoo.com/news/NYSE-Has-No-Comment-On-siliconalley-2313409050.html?x=0&.v=4

Anonymous said...

Seeing the first response to this post—-which sounds like a teenager saying “I know you are but what am I”—-makes me excited for tomorrow’s call. I can’t wait for what I expect will be a giant side step by UTA. I imagine pithy answers to a list of questions management may have even drafted itself. How could we ever know since no questions will be taken on the call?

Now, I’m just wondering when the investigation will start. Thanks John for holding their feet to the fire.

Kenneth said...

John,

You have said previously in your posts that you welcome both positive and negative posts about your blog entries. So here is mine.

- Can you enlighten us on your past involvement, with regards to your investing activities, with insurer Fairfax Financial and Overstock.com?

- Did you or did you not post anonymously, using various Yahoo msg board identities, to drive down the stock?

- Have you posted anonymously (using various identities) on UTA's Yahoo msg board?

- Did you short UTA prior to or after your first blog entry on UTA?

- Do you have any comments about DeepCapture's article about your past "questionable" trading behavior and tactics related to shorting? See article below:

http://www.deepcapture.com/introducing-john-hempton-the-plunderer-from-down-under/

- Were you involved in any conspiracies to collectively short stocks with other traders/groups in companies such as UTA, OSTK or FFH?

I would appreciate honest and clear answers to my questions as proper disclosures for your investment advice on UTA.

Please allow this post to appear on the comment section of your Blog. It is not accusatory nor offensive -- these are fair questions and if you have nothing to hide, I don't see a reason to hide this comment from your blog.

-Kenneth

Anonymous said...

Thank you for the good service you do for these markets.

Anonymous said...

Dear Kenneth

I am not sure I get the point of your antics. The last time I checked, Mr John Hempton is not a public listed company whose shares I can short. If you dont get my message, I am afraid you really have no business being in the market, and I say this will all good intentions before you lose your shirt. Stick to an index fund.

Slave Wages said...

UTA's CEO should go on strike until Crocker Coulson gives her a raise!

CEU's CEO makes twice as much as she does. He happens to be male. Is Crocker a sexist pig?

Time for UTA's female CEO to file a complaint with the EEOC!

testtubewasher said...

Hi Jonh,

Very interesting read.

This type of "capitalistic market operations" had been going on for years with Singapore listed China companies (funnily called S-chips). From outright fraud of disappearing owners/CEO to missing cash that auditors cannot find to off-shore/on-shore convertible bonds redemption issues to lack of risk manangement strategies on futures trading. These are just specific companies I can recall off my head. Big 4 auditors or not...

As someone said "fooling some people all the time"

Go to this page count the number of "SUSP" SGX listed china companies
http://www.shareinvestor.com/prices/stock_prices.html#/?filter=CC03&page=1

More horror stories at
http://www.asiaone.com/Business/News/My%2BMoney/Story/A1Story20090330-132057.html

http://singaporeuncletrader.wordpress.com/tag/s-chip/

http://singaporemind.blogspot.com/2009/04/s-chips-from-red-hot-chips-to-rotten.html

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.