Sunday, November 21, 2010

Hell is empty: A review of Bethany McLean and Joe Nocera on the financial crisis

There are lots of books on the financial crisis and some are very good.  Bethany McLean and Joe Nocera have entered a crowded market - but they have done what nobody else has yet done.  They have produced a book (All the Devils are Here) in which I have yet to find a single factual error.  And they have produced a book which did not start with an ideologically driven conclusion.   This is a big achievement making this book - above others - worthy of your time.

Just to make it more joyous though they have made a book that looks like it was effortless to write and it is a fun read.  The book is thought provoking not because it badgers you but because the story is laid out with nuance - all the devils, ranging from naivety to delusion to criminality are present within realistic characters sketches of many of the key players.  This was a human crisis with human causes - not a whirlwind caused by some deity.

If I have a criticism it is that the book is too narrow.  The bond insurers are barely mentioned.  (Ambac and MBIA are names that do not appear in the index.)  The crisis is placed in an American context - and it was a global crisis.  (At a minimum it was a North Atlantic crisis.)  The role of the British banks (huge players) was not explored.  You could read this book and not have an inkling of the crisis now engulfing Ireland.  That is a tough criticism though - because if the book were broadened to that it would have either been 800 pages or lost the depth of character displayed.

But my guess is that if someone wrote that book they would find all the devils of the American crisis lurking in the European crisis.  Hell may well be empty.  Human failings are found amongst the living.  All the devils would be there too!

Monday, November 15, 2010

China Media Express: A Wall Street drama

Sorry I have not been blogging for a while.  There are a few reasons.  Firstly I have been travelling to raise money for my funds management business (now in NYC).  Also I have been working on shorts - and whenever I talk shorts I get hate mail and sometimes threats of litigation.  My experience is that the bigger the slime-bag the faster they are to call lawyers... but being on the receiving end of threats from sleazy lawyers makes blogging less fun.

Further - writing about shorts is surprisingly unprofitable.  My experience is that shorts that are widely discussed become riskier (they get crowded) and sometimes go up - whatever - they stop falling in response to bad news.  Universal Travel Group for instance is now trading above when I first blogged about it and the only substantial news has been that their fourth auditor resigned and their fifth auditor accepted the appointment.  They also got a new shareholder - an elderly retired car dealer from California’s Central Valley - who I suppose is also an expert on dot-com travel companies in China.

And so that brings me to the subject of short squeezes and one stock - China Media Express Holdings (CCME).  This is not a stock in which we have a meaningful position but which for a small-cap company seems to get more-than-its-share of attention.  When I wrote the Universal Travel post I got more than ten inquiries about this stock - another China stock listed in New York.  Why this one?  Well it is sort of attractive - indeed outrageously attractive - and unlike all the other US listed China stocks it has a reputable auditor (Deloittes) and a major shareholder with some credibility (Starr International of AIG/Hank Greenberg fame).  

CCME has a simple business model.  It places TV screens on buses in China and bombard captive passengers with adverts.  There are a lot of buses in China because China has the largest internal migration in the world.  Chinese consumers are bombarded with adverts but the really captive bus passengers are a good market.

The company is - at least according to its accounts - frightfully profitable.  In the last quarter the company had $57 million in revenue and only $13 million cost of goods sold.  Selling and administrative expenses were less than $3 million. Head office is obviously tiny.  After tax it is making $31 million per quarter.  This is the fattest margin and fastest growth media company I have ever seen.  It is pretty darn attractive.  And plenty of my smart readers own it despite rumors that it is fraudulent.  One of my smartest correspondents was long.

And a very few of my readers argued to me that it must be a fraud and were short.  Some of them were short six or more percentage points of the funds they manage.  And all wanted my opinion.

Whatever - this was a dangerous stock.  Any stock that normal non-stock-market people have never heard of but which garners this much passion is dangerous.  And at the time it was trading at a low single-digit price earnings ratio - it was either a flat fraud or the stock was going to trade up a very long way.  Indeed it was possible that it was both a fraud and going to trade up a very long way.  I had - as I stated - no opinion.  

But at least a dozen people asked me for one.  So I had a look and was left with the ambivalence which says “don’t touch this stock - long or short”.  There were only two negatives that stood out.  One was that the company once used a stock promoter that has previously been associated with some frauds.  They don’t use them any more.  The second was that the CFO was under 30 years of age, operated from a serviced office in Hong Kong and his only qualifications were a degree from a distinctly second tier Australian university.  [See correction below.  This description does not apply to the CFO but does apply to one external director.  The facts of the serviced office are however correct - the company's registered office is that serviced office in Hong Kong.]

Against this there were real positives.  Many Chinese companies listed in the US have auditors even relatively sophisticated investors have never heard of.  These guys used Deloittes.  And the major shareholder (Starr) supposedly did several weeks due diligence before they invested.  And who am I to question that?  Again I decided to leave it alone.

But the stock went up - and up - and up.  In the last three months the stock has traded between $7.58 and $22.30.  When I looked it was about $8.  

If you were six percent short at $8 - which some were - it was diabolical.  At $20 you were down 9 percent of your fund.  Moreover your position had increased by 2.5 times and your fund had reduced - so now the position would be over 16 percent of your fund.  At that point the position is threatening the existence of your funds management business.  After all it is now possible to lose 20 plus percent of your fund on a single obscure short.   This is a major drama for someone...

The big short has to cover.  At the same time the stock is attracting momentum (mo-mo) investors.  To add fuel to the fire the company throws out yet another series of perfect looking financial results.  This is deeply ugly and you are forced to buy the stock back to save your business.  If you don’t eventually your prime broker will buy it back for you - because they will protect their own.  That buying fuels the upward rise - putting more pressure on shorts and attracting more mo-mo investors.  

If you are a small holder you should - of course - sell some stock into short squeezes.  After all the buying is often artificial (forced covering, mo-mo guys) and when the squeeze ends the buying pressure ends.  The mo-mo investors often become sellers.  We have a guideline at Bronte that we will short 10-15bps of the fund into short squeezes where possible.  You shouldn’t do any more than that because you run the risk of becoming a victim of the squeeze yourself.  And it may not be possible because a borrow is not always possible.  (In the case of CCME borrow is possible but the stock rents for a double-digit percent per year.)  So we are short a little CCME - but way less than half a percent of the fund - and we are hardly committed.  For those that are interested - we are losing money.

Some of my readers however can talk about little else.  It is either the best or the worst stock in their portfolio.  Short squeezes are one of many dramas of Wall Street.  This one - repeated in a few other Chinese stocks like China New Borun - is particularly dramatic for those that are involved - and totally irrelevant for everyone else.

Thinking aloud about CCME’s business

Outdoor advertising is much bigger business in Europe than in America.  Europeans watch much less TV than Americans.  Americans drive home from work (and get bombarded by radio).  Europeans take public transport.  And that is one of the best times to advertise to them.  

Jean-Claude Decaux was the pioneer of street furniture for advertising - and you can guess how the negotiation went.  He goes to a local government (I remember when it was done in Sydney) and tells them that they will install, maintain and clean bus stops and other street furniture and they will pay the local government (or bus authority or whatever) millions of dollars for the privilege.  The cash-strapped local government swoons at the sales pitch.  And JCDecaux gets a few thousand more bus stops to display their adverts at.  

You can imagine this deal was amazingly profitable for Monsieur JCDecaux. It was a naive cash-strapped local government versus sophisticated advertising executives.  And lets face it - TV advertising requires huge numbers of people including some very highly paid creative people.  Street furniture (even if you have to scrub off graffiti) looks like a relatively cheap platform to display adverts on.  Of course it is fat margin.

Fat margins do not last forever.  People - even people that run bus companies - don’t remain stupid forever.  Every time a contract renews the bus company gets a little wiser and the margin goes down.  The long dated contracts are all eventually renew - and they renew at lower spreads for JCDecaux.  And looking at the expiry of the old fat margin contracts you can guess what Mr JCDecaux did.  He listed his company.  

Ok - China Media Express is more profitable than JCDecaux ever was.  The little upstart China Media Express is now as profitable in aggregate as the global leader.  At this rate of growth they will be far more profitable than the global leader.  But what has me really perplexed is that CCME is growing fast at increasing margins.  Last year gross profits for the third quarter were 17 million on 26 million in revenue.  This year they are 44 million on 57 million of revenue.  Margin is exploding...

JC Decaux do street furniture in Chicago (as pictured in their 2002 annual report) - and even in places like Chicago the bus companies and the local governments get smarter over time.  In China they seem to get more stupid or more corrupt.  After all the Chicago local authorities are doing better at extracting the margin from advertisers than Chinese bus operators.  Unusual.

But who am I to question this?  Delloites is the auditor and there is 170 million on the balance sheet (representing past-profits) and that is a pretty easy thing for an auditor to check.  So I am just going to conclude that the people who run Chinese bus companies are stupid.

Really stupid.  Or really corrupt.


Post script:  For the avoidance of doubt the fund I know that was heavily short CCME was covering the whole way up.  They are no longer heavily short CCME.  They did however lose meaningful money.  

They would have been only a small part of the volume.  There are probably more than one party caught in this squeeze.  Whether the squeeze is over?  Who knows.

Correction:  Several people have observed that the CFO is not sub 30 and not educated at an Australian university.  I stand corrected.  There is a young director of CCME who is also the financial controller of another listed company that fits that description.  I wrote this from memory and confused my directors.  The registered office of the company however is a serviced office in Hong Kong - the same serviced office as that young director operates out of.

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

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, 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.