In the last few days more than half of the float of Universal Travel Group has turned over. It is clear that the company has made some misleading claims about their website. Some claims are easily falsifiable - in particular the claim (made by press release) that the website offers comprehensive and timely travel information and services, including guaranteed low prices, high visual appeal, map support technology and easy payment functions.
Still – and despite this – people have purchased the stock on mass – perhaps lured by the low single digit stated price to earnings ratio – perhaps lured by the large ($43 million stated) cash balance. These are of course the same lure. If the earnings are not there the cash balances they generated are unlikely to be there (and visa-versa). And if the cash balance is there my short position in the stock is wrong.
So I needed a test of either the earnings or the cash balance. If I could falsify one then any case for owning this stock would evaporate.
I was criticized in the comments for not approaching management with my concerns – so I have asked management (by email) if they have an innocent explanation for what follows. They have not replied.
Interest earned (or the lack thereof)
Cash interest rates in China are between two and three percent. China does not have a zero interest rate policy. [See the amendment at the end of this article for further clarification.]
The company ended the March quarter with a stated cash balance of $37.833 million.
It ended the June quarter with a stated balance of $43.591 million.
It is reasonable to guess an average cash balance of $40 million.
At 2 percent interest yield (a lower bound) the company would be earning $800 thousand per year – or $200 thousand per quarter on that cash.
It reported interest earnings of $17,081.
No, I am not forgetting a zero. The company is reporting less than ten percent of what is a reasonable lower-bound for interest earnings on its cash balance. [It is less than half the interest that would be received using the lowest rate we can find in the official guideline deposit rates – see the post-script.]
I asked management if there was an innocent interpretation of this discrepancy – indeed I gave them a draft copy of this post. I have not received a reply. So I will provide an incomplete list of alternatives.
First guess: It could be that management are so incompetent that they have parked all this cash in a bank account without even asking for a market yield.
Second guess: It could be that someone is stealing the interest by say depositing it somewhere and having the interest shifted to another account.
Third guess: It could be that the accounts are wrong and the interest is being earned – it is just not properly reported by the company.
Fourth guess: It could be that the cash balance does not exist so it is not possible to earn $200 thousand per quarter – and that $17 thousand per quarter in interest is reflective of the real cash balance.
There may be another interpretation – but the company has not helped me. I am again reaching out to the company for help. They can now provide an explanation by press release and/or SEC 8K filing.
If I were forced to guess I would suggest the most likely explanation is that the cash balance is missing. The company has claimed to earn lots of money on what is a non-functional internet travel company. Its a fair guess – faced with this bit of corroborating evidence – that the earnings are not there and hence the cash balance is not there.
Reasons people are buying the stock
It is now absolutely established that this company does not sell travel in the way that they press released to the US capital markets. Even in Chinese there was no mechanism to allow you to finalize travel on the internet. (There have been some minor changes to the website over the weekend and in some instances you are sent to third party credit card clearing companies.)
This post gives you reason to question the rest of the accounts – to question whether the earnings are there (or indeed if there are any earnings) and whether the cash balance is there.
Still the clear thinking on this blog has not stopped people buying over 10 million shares at over $3 and sometimes over $4 each. Someone has a different interpretation. If they share it I will happily allow it in the comments. But my guess is that the cash and the earnings are not there. The company provided no alternative explanation despite repeated attempts to contact them.
First postscript: Official rates in China are above 5 percent. Banks in China are awash in deposits and do not feel compelled in any way to pay official rates.
There are guideline interest rates that one reader pointed me to – which range from 36 bps to a few percent – and are over 1 percent for 7 day call deposits. Large depositors earn more than these rates though how much more is in dispute. (I have looked at several Chinese companies and the 2-3 percent number I used was taken on much advice.)
That said – the company earned $17 thousand in interest in the quarter on average balances likely near $40 million. That is 0.17 percent per annum – or less than half the lowest interest rate in the table. The point is still made – the interest receipts and cash balances appear inconsistent.