Friday, October 8, 2010

Universal Travel Group: the auditor resigns edition

On September 29th Universal Travel Group held a conference call to discuss their business model. They took no questions on the phone but instead answered a bunch of pre-prepared questions which included some but by no means all of the questions I asked on this blog.

In the call they specifically indicated that they had no problems with their auditor – but noted that their auditor had only been appointed recently and had not yet affirmed their accounts.

A week later, all that had changed. To quote from their press release:

On September 29, 2010, we received a letter dated September 28, 2010 from our current independent registered public accounting firm, Goldman Kurland Mohidin, LLP (“GKM”), informing us that they had resigned as our independent registered public accounting firm effective with the commencement of business on September 27, 2010. No reason was given as to the cause for their resignation. GKM was only recently appointed as our independent registered public accounting firm on September 1, 2010, and had not yet commenced providing any accounting services to us. Accordingly, GKM had not provided any opinions, qualification or modification to our financial statements for each of the past two fiscal years nor do we have any disagreements with GKM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of GKM, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such periods.

And later in the same release:

Our Audit Committee of our Board of Directors approved the appointment of Windes & McClaughry Accountancy Corporation ("Windes") as our new independent registered public accounting firm effective as of September 30, 2010 and Windes has agreed to act as our new independent registered public accounting firm, subject to the Company clearing Windes’ client acceptance procedures.

Deriving a timeline is difficult here. If the company received the letter on the 29th was that before or after the conference call? If it were before the conference call (or if the company had any indication that the auditor was about to resign) then the statements made on the conference call were actively misleading. The call was held at 9am in New York on the 29th of September which is 9pm in Shenzen (where the company has its head office). It would be deeply problematic if the letter were received in business hours on the 29th at head office.

Also problematic is that they took a full week of trading days to report this to the SEC. I am not a US securities lawyer – so I do not know what the time-frame under which a company is required to report the resignation of an auditor – however – given what was said in the conference call the auditor resignation was market-sensitive – I think the default reporting requirement is rapid. (If someone is familiar with the legal requirements can they please detail in the comments.)

But this is not the first problem that Universal Travel has had with its auditors. The accounting industry publication Going Concern surprised me by going through all their filings for audit changes. I quote:

Auditors

First we went back to the 10-K filed on March 31, 2008 and discovered that on June 23, 2006, the company dismissed Moore & Associates, Chartered:

On June 23, 2006, we dismissed the firm of Moore & Associates, Chartered (“Former Auditor”), which had served as our independent auditor until that date. The Former Auditor was our auditor prior to the acquisition of control of our Company by Xiao Jun.

On June 23, 2006, we retained Morgenstern, Svoboda & Baer, CPA’s, P.C. to serve as our principal independent accountant.

This seemed to be a pretty good call on UTA’s part since it turned out that Moore & Associates was issuing bogus audit reports. No cause for concern at this point.

The relationship with Morgenstern, Svoboda & Baer appeared to be going on swimmingly but ultimately, for reasons unbeknownst to all, it didn’t work out. MS&B resigned on June 30, 2009 to make way for Acqavella, Chiarelli, Shuster, Berkower & Co., LLP:

On June 30, 2009, our prior independent registered public accounting firm, Morgenstern, Svoboda & Baer CPA (“Morgenstern”) resigned and on the same day, we appointed Acqavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”) as our new independent registered public accounting firm.

Similar to their predecessors, ACSB & Co. was humming along just fine, getting ratified in the recent preliminary proxy statement filing until they were up and fired on September 1st…

End quote. Going Concern continues through a total of five auditors and a smaller handful of CFOs and note that this run compares unfavorably to Overstock. I had no hand in this article and I encourage you to read the whole thing as a beautiful example of accounting due diligence.

But there are questions beyond audit. The conference call downplayed the importance of the websites indicating that about 80 percent of the business came through a traditional (and telephone based) travel agency. It also dismissed my staff-salary concerns by indicating that most the staff were taken on late in 2009 to staff their new 300 person phone center.

This left me puzzled. Somehow this company suddenly had enough extra business to staff a 300 person phone center – but the company had effectively zero marketing expense in 2009. How did potential customers suddenly know the phone number? How is it that anyone can open a phone center that large and without advertising get enough people to ring? There must be some really special marketing tricks here… I just wish the company would explain what they were…

Alas – they do not answer questions I send to them by email so I encourage speculation (especially informed speculation) in the comments. I thank my readers for that.

 

 

John Hempton

PS. This blog is having an effect. The 2007-dated “Easter eggs” on the www.cba-hotel.com site are being removed. For instance they have removed the link allowing you to purchase tickets to the 2007 Sinopec Formula 1 Grand Prix. They also removed (my as yet unreported) link to their “latest” air-flights mileage plan (a plan that was abolished when Lufthansa purchased Swiss Air in 2007).

17 comments:

Anonymous said...

John, you should charge them for your "IT Consulting".

Nick said...

Not sure it would be worth it - John has detailed exactly how little they pay their staff.

Anonymous said...

nobody care about you anymore......

first you dont like the last auditor.....you attack the last auditor.....and now they hire a good auditor and you dont loke either....lol

did you hear the priceline conference call?? oh yeah they mentioned universal travel group as their partners....so you are wrong again....

hope you close your short.....you will loose money

Anonymous said...

Amazingly, UTA stock is up since then

Brian Maloney said...

The next time Jim Cramer or one of the other Happy Bulls on CNBC is denouncing evil shorts, your work should be cited as a case study as to why they are dead wrong.

Where is the SEC? How could this train wreck possibly be listed on the NYSE?

Are they asleep or simply indifferent?

It's so much like 1999, except the fake dot.coms are based in China this time rather than the US.

Anonymous said...

the problem is that you believe this guy hempton....

he is so wrong....the company is real, the bussiness is real....thats why the share price is up and will continue to go up..

he just make an article because he is short in the stock...all his lies has been answered....so keep losing this stock is going to 7usd

Mike said...

I can't help but read the first sentence of "Anonymous" comments with a Chinese accent!

Quince said...

Mike,
I was a little sheepish to admit it, but I take it a little step further. I use hand crafted puppets to act out the dialogue between blog commentors, with accents and everything. My kids have really been enjoying the UTG episodes, it sure beats reality TV these days :)

John Sampson said...

Hi John,

Great blog. What has happened to the Bronte Capital website (it states "It works" - which is encouraging!), but nothing else. I have a question regarding if you have a minimum amount for prospective investors? Where can I find that out?

Cheers.

JBS

Anonymous said...

I just can't see why this share price isn't tanking it seems like madness given the proliferation of red flags

Anonymous said...

UTA stock is up because while John Hempton is busy detailing why you should sell, he is secretly covering his large short position.

When the SEC checks into his trading activity and the timing of his blog postings, it will all be revealed.

So there's your answer as to why UTA stock has been going up.

Anonymous said...

Bad thoughts Mr Hempton!

You western man no understand very different ways of glorious China business world.

Anonymous said...

John - I've learned quite a bit from your blog. Few people take the trouble to do first-hand investigation and analysis.

As a techie, I was pleasantly surprised at the way you covered virtualization and operating systems by actually getting your hands dirty, and the high quality of your conclusions. Unlike industry analysts, who wouldn't be caught dead actually trying out a product.

Do you have an RSS feed? I couldn't find one, and I much prefer that to email subscription.

Anonymous said...

This is totally off topic, but I would love to read your thoughts on the mortgage documentation mess we are having in the U.S., particularly since you have spoken favorably (and also unfavorably at times) about BAC.

Anonymous said...

well looks like someon buy 7% of UTA.....

shorties keep losing money...

UTA is being a take over victim....big players gettin in...

look at the sec filings....7%

Anonymous said...

For my shorties:

send a bill pay to hempton.....you are going to lose so much money here in short that you cant imagine...

The big buyer....is just begginig to buy....

this is a take over....

see you shorties in a month at 5.5 and then at 7usd----

have a nice trip....next time buy in UTA

Peter Bermel said...

Hi John, your research on UTA is quite intriguing, and it seems like you have multiple lines of evidence to support your overall thesis at this point. I thought the accrued interest argument was particularly interesting. Now, I recently saw an article that applied your mode of analysis across a large number of small caps, by Ben Strubel. See: http://seekingalpha.com/article/231699-warning-signs-for-chinese-small-caps?source=dashboard_global-markets

It looks like UTA is a company that obtains the third-lowest interest rate of all the Chinese small caps analyzed at 0.18% -- well below the sector average of 1.53%, by more than a factor of 8. Certainly it's worth considering whether management is being completely straightforward there. However, there are also other companies with extraordinarily low implied interest rates, such as 0.06% at Biostar Pharmaceuticals and 0.13% at Deer Consumer Products. Let us know if you have any thoughts on them... thanks!

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.