Sunday, October 10, 2010

Karratha property boom

I was criticized by some for cherry-picking my houses in the last Australian property post.  I did not cherry pick houses – but chose ordinary houses in fashionable suburbs.  I stated that clearly in the post.  The criticism – if any – was that the suburbs were cherry-picked.

Now I am going cherry-picking.  Karratha is a remote town in Western Australia – near the main port for loading iron-ore for its trip to China.  It is also near the new ($12 billion) Pluto LNG development.  

Land release is limited because the land is owned by the Ngarluma Aboriginal Corporation and this town – more than any other – is the epicenter of the Australian resource boom.  I am just going to pick one house from – but there are many others.  This is a new house on the edge of suburbia  - and you can have it for just over a million dollars.

9 Wedgetail Eagle Ave, Karratha, WA 6714


9 Wedgetail Eagle Ave, Karratha, WA 6714


You get a bathroom too –


9 Wedgetail Eagle Ave, Karratha, WA 6714


This is in – as the Google map shows – a new development in the desert…




And just so you know there is no scarcity value to the real-estate I zoomed out a little:



There is increasing land release by the local aboriginal community.

But there is a bull case.  You can probably rent this out for $1500 per week.  And the iron-ore boom does not looking like stopping rapidly.  However the construction phase of the Pluto project will stop by 2012 and local employment should fall a little then.





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:


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 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).

Thursday, October 7, 2010

Australian bubble pornography

I have a lot of readers who ask me about the Australian bubble and when it will burst.  I am not the person to ask – I have been wrong for ages – and (foolishly) have had much of my asset base either offshore or related to offshore – whereas the easiest thing to do was get long Australian high beta stocks.  The AUD has kept going up and up and the Aussie market has been OK too.

So – as a service to my international readers – and in answer to Business Insider’s insistent real-estate-porn articles – I give you a few photos from (one of the two dominant real estate sites in Australia).  For reference the Australian dollar is now trading at 97 and a bit US cents.  These prices are in Aussie – but you can think of them as US dollars and you are not far wrong.

For 1.65 million you can have this house on the main road down to (fashionable) Clovelly beach – about 25 minutes drive from the CBD.  The main selling point is that the house is about 250 meters from the beach.


clovelly rd a


You get off-street parking (pictured) which is essential that close to the beach (otherwise you can’t find a car park all summer). 

If you like period features you will really love the main entertaining area:

288 period piece


If your taste is to hipper (and younger) Bondi you can have this house for $2.55 million – and its only 300 meters from the beach.




This strikes me as a better deal (!) because you actually get beach views from the front balcony

sandridge front


And from the functional (non-period) living room:

sandridge living


If you don’t want to hang around all the young and beautiful people at Bondi (and the druggies, gangs, and the like) you can buy a house in decidedly conservative Mosman.  This is not waterfront – indeed is quite middle of the road for that suburb and will set you back $3.5 million.



But its nice out the back – your own piece of upper-middle-class and conservative suburbia:

mosman rear


And the main living room looks pretty cool too:



I am cheating a little here by choosing fashionable suburbs about 20 minutes from the city.  But I am choosing ordinary homes in those suburbs. 

It is hard to find the prices for most Sydney homes because they are mostly sold by auction.  What happens is you crowd into the back garden or the living room or (quite often) just hang around on the street and bid in an open auction by winking at the auctioneer.  People in t-shirts and shorts spend $1 million plus on small suburban homes at auction.  Americans think of auctions as something that happens on the courtroom steps.  This is more typical (though it is a real-estate agent’s self-promotion).  In this case a large crowd (typical) squeeze into the back yard and the living room for an auction.



And when you have finished with that real-estate porn I encourage you to look at the Wentworth Courier – the most profitable low circulation free newspaper in the world.  It is owned by News Corp – and is filled with over 200 pages of glossy real estate adverts weekly (billed at over $6000 a page and copied about 70 thousand times).  Look at the online version and start somewhere in the middle.  If you want to really understand the Sydney boom look at the adverts on page 277 and 278.  [The recently reduced size of that section indicates the Sydney boom might be slowing – but I see few other indications.]

For the many readers who asked.





Thursday, September 30, 2010

Travelling through time with the Universal Travel Group

Universal Travel Group just held an investor conference call to answer investor questions about their business.  They answered some and left many unanswered.  However I just want to focus on one thing:  the Chinese language websites.

They said the Chinese website running smoothly and that “we will try our best to maintain and upgrade in the future.” 

That is good – because there are either a few “easter eggs” on the site or they are selling time-travel.  I am going to show you how to book tickets for the 2007 Sinopec Formula 1 Grand Prix. 

First you go to the site.  Here is a screen shot.


I have used Google Translate to change this page to English.



At the top of the page are the key tabs – things you can do on this website – things like book hotels or tickets.

The sixth tab – in a fairly prominent place – is for F1 tickets.  I pressed it – and translated to English.  Here is a screenshot. 


This is precisely as it seems – you can still buy tickets to the 2007 Sinopec Formula 1 Grand Prix.  (I hope they let me bet on the race because I know the winner!)

This is from a site they maintain – and it is not deep in the site – it is a click on the main tabs on the front page.   I made a Youtube video as well.



Still the company wishes to maintain the site in future – and 20 percent of their business comes from these sites according to the conference call we just heard.  So maybe we will soon be able to rent a really fast car to help us get to the race on time.

I report – you decide.





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…]




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.


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 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?

How do I reconcile these numbers to 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:


‬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

Friday, September 24, 2010

Mr Bean declares the European debt crisis over

The WSJ has a piece where Mt Bean (ahem: Spanish Prime Minister José Luis Rodríguez Zapatero) declares the European debt crisis over.

I just want to leave you with the photographs.  Here is Mr Bean...

And here is the Spanish Prime Minister.


Postscript: several people have complained that I should not mock people for their appearance.  Accepted.  Now lets look at what he is saying: "European debt crisis over".  Response:  looked at Ireland lately?

 Mr Bean would have done better.   He would have said nothing.


Thursday, September 23, 2010

Further down the rabbit hole with Universal Travel Group: related party transactions edition

I don’t spend nearly enough time reading SEC Proxy Statements.  Proxies are the bread-and-butter of serious readers of SEC Statements (such as Michelle Leder’s excellent Footnoted).  But in the Universal Travel case I have had some fun with proxies.

The proxy is supposed to detail all the ways in which executives are remunerated and all the related party transactions.  Here is a link to the latest proxy from UTA.  This was filed on the 3rd of September and contained the following statement per related party transactions:


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.

That is as you would expect to see it.  There are no related party transactions of any size which is kind of important because the company recently raised $20 million in cold-hard-cash (in a secondary offering) to do acquisitions. 

Alas the latest quarterly filing (10Q) which was filed  on the 24th of August (that is 10 days earlier) lists in the balance sheet as an asset $6,986,717 which is “due from a related party”.  Obviously I wanted to know which related party owed the company nearly $7 million and for what purpose.  This is the main disclosure in the 10Q as to what that related transaction is for:


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.

This leaves lots unanswered and I do not feel happy to speculate as to why these transactions exist.  However here are a bunch of questions for management.  I have forwarded these questions and have received no reply. 

1.  What acquisition is this balance for?

2.  Was this one of the acquisitions for which capital was raised by a secondary offer earlier this year?

3.  Why did a related party receive a cash advance for this acquisition?  Was this acquisition made from a related party?

4.  Why was this relationship not disclosed in either the proxy or the documents for raising the above-mentioned $20 million?

5.  Was there any consideration of charging interest on the cash owed by the related party?

6.  Was any collateral taken from the related party?

7.  Were there also shares paid to a related party?

8.  If so have those shares been registered?  Are they being sold into the market?

If they answer I promise to report on the blog.




Wednesday, September 22, 2010

Gratuitous advert time... go see the Nick Hempton band

Much cooler than reading a finance blog (or poking around on Chinese websites):  Go see The Nick Hempton Band at the Zinc Bar (Greenwich Village) tonight...  

Wish I could be there.





A123 – or how to lose money on YouTube…

One of the things I promised with this blog was to explore ideas rather than talk my book. I also promised to explore my failures (of which there have been a few). So here goes.

To make real money in tech your company must do three things. Two out these three and the results will be (at best) inadequate.

  • You need to have an idea that effectively changes the world in some way (even small ideas are OK as there are surprising profits if you can pull the next two tricks).

  • You need to execute – that is you need to bring the idea to reality.

    And you need to keep the competition out.

Of these normally number 3 is the thing that trips up tech companies – they work really hard to get the idea implemented and then someone with less expense – and with the benefit of watching your failures, trials and tribulations – copies the idea (usually slightly better or less clunky) and the margins go to zip. Microsoft is such a fantastic company not because they have the technology right – but because people build on them proprietary software (developers, developers, developers) and that makes people reluctant to change even if the new product is superior.

But a tech company can easily be tripped up on the execution phase as well. (Anyone remember Friendster? Remember when their site took 2 minutes to load a page because they couldn’t get the IT implemented properly? And look how valuable the position they lost is…)

At Bronte we normally don’t own tech stocks unless all the ducks are lined up – that is we want demonstration of execution and we want to understand how they keep the competition out.

This year we broke the rules and paid for it. Our largest losers (cumulatively about 5 percent) are two tech stocks that are having trouble at the execution phase.

One of them is small cap and too painful to mention – the other has some hope – and it is a well known company – possibly the hottest float of 2009. The company is A123 systems and it has one of the first viable nano-batteries. It has yet to scale production to a level which demonstrates execution and even if it can execute we are not sure how well it will keep the competition out.

What is a nano-battery?

A battery works by chemical reactions which liberate electrons which have to travel through circuits (delivering power) to complete the reaction. The chemical reactions work on the surfaces inside the battery (eg the lead plates inside the lead-acid battery in your car).

One of the limits to how much power a battery can produce and how fast it can recharge and the like is the amount of surface area that the reaction can take place on and how much of the chemical can be stored on that surface area. More surface area is good and your car battery has lots of plates to increase surface area to volume ratios.

A nano-battery makes the contact area very large relative to volumes by making all the contacts at a “nano-scale”. Obviously the smaller you make such stuff the larger the surface area to volume ratio.

A123 have produced the first commercially viable nano battery. It is no longer the only one – Toshiba for instance has demonstrated one. The specifications for this battery are a step increase from the past. If the battery can be made cheaply enough (and that is a big if) then it will change the world because it will make mass storage of electricity viable for lots of applications. The obvious applications are cars but also storage of solar energy and management of peak load electricity would come into play. If A123 executes it changes the world.

When we saw the specs – well – frankly we had our doubts. So we wanted to find people who used them. And remember in the early stage these batteries were frighteningly expensive. So we went to a group that we thought would use these batteries to their full potential and be insensitive to the cost. Besides it gave us a chance to pretend we are kids again – because the real enthusiasts never grew up (they still fly model planes). This little demonstration on YouTube translates raw battery specification into something visual.

The video is astonishing but we wish we never saw it because after seeing it we would have crawled over broken glass to buy the stock. This video cost us a lot of money!

Anyway – the demonstration is a 17 pound remote control plane powered by A123 batteries. The owner will enthuse endlessly – and indeed does.

When this film was taken the batteries were so expensive that only a nutcase enthusiast would pay for them. But who cares, or so we thought! Mass production makes everything cheap and this company had a technological edge and patents we thought might keep the competition out for a while.

There was an implicit assumption here – which is that, provided the battery did not contain super expensive materials (ie rare metals at thousands of dollars per kilogram), then mass production would make anything cheap… in other words we assumed away the risk and difficulty of execution.

And alas execution is really difficult – and whilst A123 is struggling to get a product to market at a price low enough to change the world – other competitors are turning up.  And they continue to burn cash in the hope of reaching some manufacturing promised land. 

Linked is recent article on a new nano-battery technology (and that alas is one of many, many of which look superior to A123). What got us was just how complicated the manufacturing process seems when you read this article. The company talks about “nano-wires” taking in lithium without breaking but the process not being sufficiently mechanically stable. After all things heat up and flex. So the nano-wires are built on thin metal cores that the company likens to steel rebar. Picture this: how small is this rebar? How do you manufacture it? Who builds the machines to make the machines?

The point is that we lost money because the company just can’t get manufacturing costs low enough fast enough to produce the rosy future we saw. We assumed away execution risk and paid the price.

A123 might get there in the end – and the stock is almost certainly a better buy now than when we purchased it – in that they are further developed and the stock is half the price. But we are hardly in a position to judge whether they will execute in the end. And we are already seeing competitive products in development.

The other tech stock where we assumed away execution risk – well that was an even worse outcome. And the pain of loss makes me not even want to talk about it.




We should note some informed comment on just how much battery technology has moved in the remote control plane space.  A123 might yet get to a desirable cost structure – but it is highly likely there will be lots of competition (at least nearby) when it gets there.

Tuesday, September 21, 2010

The internet travel company that sells far more tickets than it has page views: another trip down the rabbit hole with Universal Travel Group

Numerous people have suggested that it doesn’t really matter that you can’t buy tickets on the Universal Travel Group’s website. After all, all you need to do is give a valid Chinese mobile phone number and they will ring you back to conclude the payment. In that view it hardly matters that the company advised the US capital markets that they had an online payment ability.* People even reference this by pointing to Alexa traffic numbers. So I will do so before revealing the fault in that analysis.

Here is the Alexa page for CNUTG. It reveals that CNUTG is the 17,563rd site in the Alexa database and the 2,492nd site in China. If I compare it to (a real, albeit minor, travel company in Australia) it checks out quite nicely. Check-in is the 1,893rd site in Australia. In other words – the bulls argue – is a real travel company albeit with a clunky website and lack of a payment mechanism.

There are fallacies in this argument. The main one is about the relevance of the Alexa database. Alexa provides data on global internet use by people using Alexa toolbars (or similar). This makes CNUTG the 2,492nd site in China of people whose Alexa toolbars are reporting data back. Alas Alexa data is notoriously inaccurate in China as the Chinese internet police block data from Alexa toolbars.  Alexa toolbars thus bias Chinese sites to Chinese sites visited by non-residents of China. After all it is the Chinese authorities who monitor website usage in China – and they don’t much like other people doing it.

And that gives the game away… we are not tracking Chinese travel visitors. And it is not surprising that, of China sites, CNUTG is popular amongst non-Chinese. The stock is – after all – listed on the NYSE.

The Chinese Alexa

We can do much better – there is a Chinese version of Alexa which produces far more accurate data for China. That site is China Rank. It is in Chinese only – but it allows us to check out the web traffic per million internet users in China for the various travel companies.

Here is a comparison for Elong, CTrip, MangoCity, Qunar and the two main Universal Travel sites CBA-Hotel and CNUTG. Here is the link .

And here is a snapshot of the page in the original Chinese


And after the Google translator -



You are reading this right – the pages get 1 to 2 users per million internet users in China.

There are 420 million internet users in China – so these sites get about a thousand users in total (and presumably far less users daily).

The only problem is that the company has said in conference calls that it gets about 7 thousand to 10 thousand bookings per day. (They have implied but not confirmed that these are primarily through the website.  They might be able to do this by not using the internet - but that is not how it sold the stock and is not consistent with the traffic numbers that the company claims for its website.)

The company claims to have taken 2.4 million flight bookings last year and sold 2.3 million hotel room nights. (Those claims were made by the former CFO at the March 2010 China Rising conference.) Presuming this was on the internet (as the company has implied many times) this is an unusual travel business – in that it sells approximately 1000 users 4.5 million individual bookings per year. That – if true – would be a lot of revenue per unique user!

[For reference: the company has stated in SEC filings that in 2006 the site booked 500 thousand rooms on the internet. They have also stated several times that internet bookings have grown substantially since then. They are thus categorical that a large number of these hotel rooms are booked on the internet.]

Alternative explanations

I am racking my brain about alternative explanations. Again I asked the management if they could explain (but without response). The obvious explanation is that the bookings never happened (and hence the revenue of Universal Travel Group is fake).

That would of course be consistent with the other problems. For instance very limited sales is consistent with the dysfunctional website (making it hard to book), the lack of reasonable cookies on the website (which is not supportive of return business), the lack of customer acquisition cost (typically a major cost for such a business) and the lack of interest earned (which is supportive of the notion that the cash balances the company claims are not existent and hence the earnings are not existent).

A top 100 travel companies in China

China Rank also – conveniently – gives us the top 100 travel companies in China. The source is linked and the list is below. None of the Universal Travel Groups sites rank in the top 100.


Stating the obvious: if you can’t rank in the top-100 sites you are not a leading online travel company as per the stock promotion.








Postscript: The company has irregularly given different traffic numbers in SEC filings. Here is an example (from the last annual filing).

In August 8, 2007, we acquired Shanghai Lanbao Travel Service Company Limited ("SLB") in exchange for 200,000 shares of our Common Stock and interest-free promissory notes in the aggregate principal amount of $2,828,000, payable no later than August 8, 2008. The note has been repaid in full.

SLB was established in 2002 and its core business focus is a centralized real-time booking system providing consumers and travel related businesses with hotel bookings, air ticket and tourism information via the internet and mobile phone text-messaging technology. It owns and manages the award winning China Booking Association website,, which receives approximately 200,000 visitors daily.

These numbers are about 100 times the Alexa traffic estimate and maybe 200 to 400 times the China Rank estimate of total users for the site.



*I should note that the company has provided some online payment ability since I wrote my initial post. This ability is limited and clunky. Other major problems with the sites remain – for instance the lack of cookies to appropriately manage return customers.



First postscript quantification:  China Rank as far as I understand measures users.  Alexa measures viewers in a particular day.  In both cases however the usage is way too low to sell that many tickets.  The distinction here is second order – but if I have glossed over it then I apologize.  Whatever – I noted the visitors per day claimed by UTA for CBA-HOTEL (200 thousand) are 100 times Alexa estimates and 200-400 times China Rank estimates.  The nuances in definitions of visitor numbers are small compared to these multiples.

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