Ok - the title is somewhat misleading: I just purchased an HTC Desire HD Android phone via Ebay and by doing so I learned a few lessons - some of them investment related - others just about the way the world works.
This phone is (on specification and in third party reviews) an iPhone 4 equivalent - more powerful and does a few things that Apple restricts its users from but alas not quite as user friendly. But the phone I purchased was truly awful.
The Ebay advert said it was "unlocked" but did not reveal the shortcomings. This phone was from the Middle East (possibly Saudi Arabia) and it came with a restrictive set of applications and no Android Market. A smart-phone without an app-store is useless. I was limited to the thirty apps the phone came with. Ugly. I was missing some apps I consider very important (eg VOIP apps).
The solution was to "root" the phone (ie hack the system) and install a decent operating system (HTC Android 2.3). For someone only mildly geeky this was a little harder than it looked. There was a fine YouTube video series here but it did not cover the nuances of using the Android Developer Kit and nothing seemed to work in my virtual-box Windows so I had to hijack my son's computer.
Two and a bit hours later I have a fine phone - one I would prefer to an iPhone 4 (although probably not to an iPhone 5). It was however much harder than it should be and this process would not appeal to a mass audience.
A few lessons:
(a). Whilst phone companies and governments will fiddle around with phones and their operating systems the attraction of walking down to the Apple Shop and buying an iPhone remains. iPhones all work the same way and its hard to imagine an iPhone without the App Store. The Apple slogan is "it just works". My phone worked in a narrow sense - but Apple's worked better out of the box even though my phone beats the iPhone 4 in many surveys.
(b). The whole experience cheapens the Ebay brand. I thought the Radioshack and other shops selling mobile phones and contracts were not long for this world because phones would come without contracts and be purchased online. I figure that will be right in the end but risk aversion sends me to something explicitly local to my jurisdiction for a little longer.
(c). The modifications made by countries and phone companies to Android phones cheapen the product. Non geeky people - say 99 percent of the population - could not be expected to hack their phone. So they are left with the crappy phone they are sold in the first place. If it is full of bloatware so be it. Android is as sleek as IOS. The things done to Android are not...
(d). Big corporations (especially it seems tech firms) are prepared to play ball with oppressive governments. My phone was hobbled to please the Saudi Government. Google may have said no to participating in Chinese oppression but their partners (such as HTC) happily participate in oppression when they sell Android phones. And as they do it they continue to cheapen the Google/Android brand.
(e). For a small proportion of the population - those that can hack a phone install themselves as super-user and get around government communication restrictions modern technology beats oppressive governments - but we are kidding ourselves if we believe this will be a widespread skill.
For thought and comments...
John
PS. For those that want to know I installed T.B. Fusion 1.1.9 - an Android 2.3.3 system. The complaint on the web about this install is battery life - though I have not (yet) decided that is problematic.
Saturday, June 18, 2011
Wednesday, June 15, 2011
Sino Forest quote of the week
Muddy Waters commenting on Sino Forest's conference call:
TRE [Sino Forest] had some notable blocks / drops of other awkward questions. TRE cut off the Nomura analyst Anissa Lee rather than answering her question asking for more details on where the cash balances are kept.
Management also failed to attempt to answer a question about whether its banks are uncomfortable with extending credit. Instead of answering, there was a death ray type of sound toward the end of the question, and the questioner was no longer there. In true memory hole fashion, management moved onto the next questioner without making any statement in response to the question.
Sunday, June 12, 2011
Sino Forests – some thoughts
A bit over twenty years ago I spent a pleasant afternoon in the lock-up at Eden Police Station on the South Coast of New South Wales.
I was arrested at a protest into logging of native forests, cuffed, put into the paddy-wagon and left in a cell for about six hours, fingerprinted and released. The charges (obstruction) were later dropped. I was not obstructing anything...
What made this pleasant was the company. I was arrested as bystander at an “artists for forests” protest and in the lock-up with me were some of Australia's most famous artists.
The lock-up itself was a brick courtyard open to the sky except for bars that blocked an unlikely escape up the walls. Attached were two austere cells only one of which had a door. There was a toilet (no privacy) and a vinyl mattress and a total absence of hanging points. The other cell was firmly locked but if you peered through the feeding-slot there were a couple of tonnes of marijuana being kept as evidence after a huge local drug bust.
Supporters threw two dozen boxes of coloured chalk through the bars in the roof and for the next four hours I watched artists at work. Given the heady prices of Australian modern art these days the walls of this cell were probably worth seven figures by the end of the day – until the police hosed the work off.
I tell this story only to relate that during my early twenties I was an organiser for several anti-logging protests and I developed amongst other things a reasonable perception of the scale of a million tonne per annum fibre operation.
I never thought I would use that – and then along comes Sino Forests. Oh how I am enjoying this.
You see below – as a blast-from-my-past - an aerial photo of the woodchip mill in Eden. This was and remains a controversial beast. It is also pretty darn large. The docking station is so the bulk-carriers can dock and transport Australia's native forests away. [No doubting which side of the controversy I am on...]
This chip-mill processes almost precisely a million tonnes per annum in wood-chips. Given wood and water are roughly the same density it is roughly a million cubic meters per annum.
I say that so you get a picture of scale.
According to Sino Forest they sold – get this – 17 million cubic meters of wood last year and they expect that number to grow in the foreseeable future. Some of this they processed themselves – other wood they sold as standing timber. Obviously however when you sell it as standing timber someone else has to process it.
So lurking around Sino Forest's land are 17 mills this size (or one mill 17 times this size of some variant thereon). And that is presuming there are no other producers in the area other than Sino Forests. Sino has promised to take analysts and investors to see their operations. I make a suggestion: get them to take you to all the chip-mills that process their timber and stand there with a clicker counting the trucks in. [E&Y - the auditors - should do this pronto. The longer they delay the more their potential liability.]
I have my doubts. I had a number in my head for the size of the global pulp (for paper) industry: something just under 200 million tonnes per annum. 17 million tonnes per annum of fibre seemed large.
Wikipedia cites the global pulp market in 2006 as 160 million cubic meters. Paper is not much of a growth industry these days as anyone looking at newspaper circulation can attest – so I figure that is not far from the current number. There are other uses of fibre (cement form-work being the big one in China) but one bullish article is hoping for growth in total usage to 223 million tonnes per annum by 2015. Whatever – Sino Forest was claiming to be a high-single-digit percentage of global supply – and they were (implausibly) claiming it from 787,700 managed hectares.
When I read the Muddy Waters report something else jarred. Muddy Waters you see was using a different measure of the scale of the industry in China. They were quoting numbers like 420 million cubic meters of wood per annum in 2010 of which 240 million cubic meters was for industrial use (namely paper, cement formwork and packaging etc). China is a big place – but these numbers seemed a bit big to me especially as the majority of feedstock for industrial uses of wood-fibre is recycled material.
So I went looking for the source of the numbers. Here are some graphs from Sino Forest's annual report and they reveal the source of all the Chinese numbers:
The source is listed at the bottom of each graph as BOABC.
BOABC turns out to be an agricultural consultancy in China. They have a website. It offers reports on various industries but put your email in the box and try and get the grains report. It bounced me.
So what is this funny consultancy whose web-site does not do what it is meant to? According to its website is China's leading agriculture and food business consulting company. Also according to its website it is a subsidiary of Xinhua Finance. That is a name that should ring bells. The principal of Xinhua was indicted recently for fraud (and plead not-guilty) and lots of famous investors lost money. Xinhua collapsed. The stories about Loretta Freddy Bush are colourful.
Xinhua may be dead. Its subsidiary (probably not the most reputable source) is alive though and pumping out numbers which do not match generally accepted industry numbers and which are used to bolster Sino Forestry's stock. And Bay Street analysts are blindly using them. Even Carson Block – who is more than passingly cynical about numbers, accounts and Chinese companies used these numbers without question in his report.
The analysts I suspect went to good schools, Harvard, Yale and the like. I wasted my youth organising environmental protests in remote locations and learned that it was stupid to take at face value official statistics about rape-and-pillage forestry operations. The stats were as often as not lies. Learning about how people lie with numbers was – at least for a stock analyst – a darn good education.
To the Wall Street analysts who take these numbers at face value I got a song for you:
John
I was arrested at a protest into logging of native forests, cuffed, put into the paddy-wagon and left in a cell for about six hours, fingerprinted and released. The charges (obstruction) were later dropped. I was not obstructing anything...
What made this pleasant was the company. I was arrested as bystander at an “artists for forests” protest and in the lock-up with me were some of Australia's most famous artists.
The lock-up itself was a brick courtyard open to the sky except for bars that blocked an unlikely escape up the walls. Attached were two austere cells only one of which had a door. There was a toilet (no privacy) and a vinyl mattress and a total absence of hanging points. The other cell was firmly locked but if you peered through the feeding-slot there were a couple of tonnes of marijuana being kept as evidence after a huge local drug bust.
Supporters threw two dozen boxes of coloured chalk through the bars in the roof and for the next four hours I watched artists at work. Given the heady prices of Australian modern art these days the walls of this cell were probably worth seven figures by the end of the day – until the police hosed the work off.
I tell this story only to relate that during my early twenties I was an organiser for several anti-logging protests and I developed amongst other things a reasonable perception of the scale of a million tonne per annum fibre operation.
I never thought I would use that – and then along comes Sino Forests. Oh how I am enjoying this.
You see below – as a blast-from-my-past - an aerial photo of the woodchip mill in Eden. This was and remains a controversial beast. It is also pretty darn large. The docking station is so the bulk-carriers can dock and transport Australia's native forests away. [No doubting which side of the controversy I am on...]
This chip-mill processes almost precisely a million tonnes per annum in wood-chips. Given wood and water are roughly the same density it is roughly a million cubic meters per annum.
I say that so you get a picture of scale.
According to Sino Forest they sold – get this – 17 million cubic meters of wood last year and they expect that number to grow in the foreseeable future. Some of this they processed themselves – other wood they sold as standing timber. Obviously however when you sell it as standing timber someone else has to process it.
So lurking around Sino Forest's land are 17 mills this size (or one mill 17 times this size of some variant thereon). And that is presuming there are no other producers in the area other than Sino Forests. Sino has promised to take analysts and investors to see their operations. I make a suggestion: get them to take you to all the chip-mills that process their timber and stand there with a clicker counting the trucks in. [E&Y - the auditors - should do this pronto. The longer they delay the more their potential liability.]
I have my doubts. I had a number in my head for the size of the global pulp (for paper) industry: something just under 200 million tonnes per annum. 17 million tonnes per annum of fibre seemed large.
Wikipedia cites the global pulp market in 2006 as 160 million cubic meters. Paper is not much of a growth industry these days as anyone looking at newspaper circulation can attest – so I figure that is not far from the current number. There are other uses of fibre (cement form-work being the big one in China) but one bullish article is hoping for growth in total usage to 223 million tonnes per annum by 2015. Whatever – Sino Forest was claiming to be a high-single-digit percentage of global supply – and they were (implausibly) claiming it from 787,700 managed hectares.
When I read the Muddy Waters report something else jarred. Muddy Waters you see was using a different measure of the scale of the industry in China. They were quoting numbers like 420 million cubic meters of wood per annum in 2010 of which 240 million cubic meters was for industrial use (namely paper, cement formwork and packaging etc). China is a big place – but these numbers seemed a bit big to me especially as the majority of feedstock for industrial uses of wood-fibre is recycled material.
So I went looking for the source of the numbers. Here are some graphs from Sino Forest's annual report and they reveal the source of all the Chinese numbers:
The source is listed at the bottom of each graph as BOABC.
BOABC turns out to be an agricultural consultancy in China. They have a website. It offers reports on various industries but put your email in the box and try and get the grains report. It bounced me.
So what is this funny consultancy whose web-site does not do what it is meant to? According to its website is China's leading agriculture and food business consulting company. Also according to its website it is a subsidiary of Xinhua Finance. That is a name that should ring bells. The principal of Xinhua was indicted recently for fraud (and plead not-guilty) and lots of famous investors lost money. Xinhua collapsed. The stories about Loretta Freddy Bush are colourful.
Xinhua may be dead. Its subsidiary (probably not the most reputable source) is alive though and pumping out numbers which do not match generally accepted industry numbers and which are used to bolster Sino Forestry's stock. And Bay Street analysts are blindly using them. Even Carson Block – who is more than passingly cynical about numbers, accounts and Chinese companies used these numbers without question in his report.
The analysts I suspect went to good schools, Harvard, Yale and the like. I wasted my youth organising environmental protests in remote locations and learned that it was stupid to take at face value official statistics about rape-and-pillage forestry operations. The stats were as often as not lies. Learning about how people lie with numbers was – at least for a stock analyst – a darn good education.
To the Wall Street analysts who take these numbers at face value I got a song for you:
John
Tuesday, June 7, 2011
Who owns ashwoodresources.com? Light and mystery...
Northern Oil and Gas (NOG:AMEX) has divested small interests in ninety wells to Ashwood Resources. Ashwood is a company controlled by a realtor and founded by a hairdresser and its entire business is - as far as I can tell - to acquire and manage interests in wells sold by Northern Oil and Gas.
Brittany Reger - the wife Michael Reger - was an employee and the contact officer for Ashwood.
Michael Reger is the CEO of Northern Oil.
So Northern Oil sold leases to a company where the contact officer was the CEO's wife.
The story was originally told in a blockbuster blog post by The Street Sweeper.
The appearance is not great.
However in Northern Oil's defense the interests sold to Ashwood were tiny (typically 0.5 percent interest in any individual well bore).
Moreover Northern Oil has announced via SEC filing that "our management has concluded, and has confirmed with our outside legal counsel, that our agreement with this private company is not material to us and does not involve any related-party transaction".
Testing Northern Oil's claim that these are not related party transactions
I am a great fan of Ronald Reagan. His slogan when dealing with the Bolshys was "trust but verify". Channeling my inner Ronald Reagan I went about verifying.
I found the domain name ashwoodresources.com. The website is dead - but it was (a) first registered about the time Ashwood Resources (the company) was formed and (b) was originally registered to Tyler Cross of Billings Montana.
Billings is the home town of the Regers and 840 miles from the hairdresser or estate agent.
The domain name was later re-registered to "domains by proxy" a standard way of hiding domain ownership. The change in domain name registration happened about the time The StreetSweeper started looking at Ashwood Resources.
I told the story in this blog post.
I tried contacting Tyler Cross to find out who really owned the site ashwoodresources.com. No luck. Several readers tried the same thing with the same "no comment" answer.
But my readers are resourceful. For instance one reader found that Tyler Cross's parents and Michael Reger's parents made donations to the same church in the name of the same person. The Reger and Cross families go to the same church and donate at the same funerals.
But that still does not prove that Ashwood Resources (the company) is associated with the Regers.
One reader went better. Using Domain Tools he found every website ever registered by Tyler Cross (tcash11@gmail.com). There were 58 of them - mostly local businesses like yellowstonedrifterboats.com. But a few stood out, notably voyager-oil.com, voyageroil.info, voyageroil.mobi, voyageroil.net.
These are web domains for Voyager Oil - a company controlled by Michael Reger's brother JR Reger.
Also all of these domain names for Voyager Oil have been re-registered. They are now registered to Domains by Proxy.
Again this does not prove that Ashwood Resources is related to the Regers but that hypothesis is looking pretty good. Brittany Reger was Ashwood's contact officer. Ashwood's web services (domain registration at least) was provided by the same person as Voyager Oil's web service (Tyler Cross). Cross's family probably knows the Reger family through their church and through attendance at the same funerals.
Tyler Cross can provide the definitive answer as to whether Ashwood and the Regers are related parties. Alas his answer is a firm "no comment". He has done nothing obviously wrong. All he did was register domain ownership and then shift those registrations to Domains by Proxy.
Tyler Cross has the definitive answer.
I have again asked for Tyler's help. But really it is not my business any more. The SEC has the power to subpoena him and find the truth.
They should use that power.
John
Monday, June 6, 2011
Reminding Peter Johnston what he once thought about Astarra
Some people are just too precious.
Longtime followers of this blog will remember that I was instrumental in the exposure the biggest funds management theft in Australian history - Trio/Astarra.
Most of the victims of Astarra were clients of financial planners where the planner was a member of the Association of Independently Owned Financial Planners (the AIOFP). Astarra and its principals were regular attendees at AIOFP conferences and AIOFP members received kick-backs from Astarra - some disclosed, some not disclosed.
Peter Johnston is the executive director of the AIOFP and a regular apologist for AIOFP members. He is quoted today in Investor Daily - an Australian industry newsletter:
Well Peter, I differ. Financial Planners market themselves as having expertise and are required under law to understand the products they sell. Moreover Peter clearly thinks he has this expertise. I have an email he sent to two financial planners who put their clients into Astarra. It says:
Peter Johnston agreed to a $100 thousand bet with me on the innocence/guilt of Shawn Richard and whether the money would be found where Peter thought it was. He later backed out which is a pity because I would otherwise be $100k richer. (You can read the story here.)
Peter accused me in the press of being motivated by "professional jealousy" re Astarra. I told him that was defamatory: I am a hedge fund manager - I am motivated by money.
Finally Peter thought that I would get sued over Astarra. To quote an email to me:
And now he revises history to absolve himself and his members.
But that is not my problem with Peter Johnston. Peter Johnston is a coward who does not have the courage of his convictions. He bet 100 thousand dollars on the Astarra outcome. And then - when he realized that I was serious - he backed down.
Coward.
John
Longtime followers of this blog will remember that I was instrumental in the exposure the biggest funds management theft in Australian history - Trio/Astarra.
Most of the victims of Astarra were clients of financial planners where the planner was a member of the Association of Independently Owned Financial Planners (the AIOFP). Astarra and its principals were regular attendees at AIOFP conferences and AIOFP members received kick-backs from Astarra - some disclosed, some not disclosed.
Peter Johnston is the executive director of the AIOFP and a regular apologist for AIOFP members. He is quoted today in Investor Daily - an Australian industry newsletter:
Association of Independently Owned Financial Planners (AIOFP) executive director Peter Johnston said it was a comfort that Trio and Astarra Asset Management were deemed "a blatant fraud".
"The advisers are tired of being blamed for product failure, these products should not have been in the market in the first place and the ultimate responsibility lays with the successive politicians over the years who have failed to understand the industry," Johnston said.
Well Peter, I differ. Financial Planners market themselves as having expertise and are required under law to understand the products they sell. Moreover Peter clearly thinks he has this expertise. I have an email he sent to two financial planners who put their clients into Astarra. It says:
Peter/Steve, met with Shawn [the guy who ran Astarra] today. I am still of the opinion that he is innocent of any fraudulent behaviour with Astarra, I will back my 30 years of being in business and dealing with all sorts of characters with my assessment. He no doubt can be accused of sloppy paperwork but that is a far cry from the hell he has been through.It is funny how Peter conveniently forgets that he vouched for Shawn Richard. He did so repeatedly (although not publicly since Shawn admitted guilt).
Peter Johnston agreed to a $100 thousand bet with me on the innocence/guilt of Shawn Richard and whether the money would be found where Peter thought it was. He later backed out which is a pity because I would otherwise be $100k richer. (You can read the story here.)
Peter accused me in the press of being motivated by "professional jealousy" re Astarra. I told him that was defamatory: I am a hedge fund manager - I am motivated by money.
Finally Peter thought that I would get sued over Astarra. To quote an email to me:
I suggest you read below and start amending your views or check your sources as you ‘can never believe what you read in the paper.’ I checked with the asset consultant then Shawn himself, this is now been confirmed by the Administrator, ALL of the non hedge fund monies are exactly where they were supposed to be. You will also now find that the ASF cash and 3 of the 5 Hedge Funds are now accounted for. We are awaiting the final 2 which is going to put the spot light and legal proceedings in a different direction, you can be assured of that.Bluntly, Peter Johnston threatened to sue me. He defamed me in the press.
Peter Johnston
Executive Director
ASSOCIATION OF INDEPENDENTLY OWNED FINANCIAL PLANNERS
And now he revises history to absolve himself and his members.
But that is not my problem with Peter Johnston. Peter Johnston is a coward who does not have the courage of his convictions. He bet 100 thousand dollars on the Astarra outcome. And then - when he realized that I was serious - he backed down.
Coward.
John
Friday, June 3, 2011
Muddy Waters: the finest take on a Chinese fraud yet
Carson Block and his team at Muddy Waters Research have just released a report on Sino Forest - a huge Canadian listed company - or is that a huge Canadian listed fraud?
There is a cottage industry in doing forensic analysis of Chinese frauds. I have analysed many and put only a smattering on the blog.
But I have never seen anything this big or this amazing.
Read the report. I am in awe.
John
There is a cottage industry in doing forensic analysis of Chinese frauds. I have analysed many and put only a smattering on the blog.
But I have never seen anything this big or this amazing.
Read the report. I am in awe.
John
Wednesday, June 1, 2011
Who is Ashwood Resources? And who owns ashwoodresources.com?
Northern Oil and Gas (NOG:AMEX) and its sister company Voyager Oil and Gas (VOG) are a minor obsession of mine.
Not only are the management straight from central casting but Northern Oil sold interests in approximately 90 wells (a quarter of the wells they were ever involved in) to a mysterious company called Ashwood Resources.
Ashwood it appears has no other function that to buy properties from Northern Oil and to manage those properties.
So it was a surprise to me and to others when Brittany Reger - wife of Northern Oil CEO Michael Reger - was the contact officer for Ashwood Resources.
Can you say conflict of interest?
Anyway Michael Reger offered two defenses. First whilst the lease interests sold to Ashwood were numerous they were tiny - sometimes as small as half a percent interest in individual wells. The second defense was that Ashwood was not a related party and his wife's job was appropriate. He even said the company sought the advice of outside counsel on that matter.
Ashwood may have been founded by a hairdresser - but was - it seems - controlled by Jacob Schaffer - a realtor in Minneapolis. It was not - according to Michael Reger - related in any way (other than by his wife's employment) to Northern Oil or the Reger family.
Which leads me to the website www.ashwoodresources.com. The site is dead - but the registration lives on.
When I first started looking at Northern Oil here were the registration details for Ashwood:
Not only are the management straight from central casting but Northern Oil sold interests in approximately 90 wells (a quarter of the wells they were ever involved in) to a mysterious company called Ashwood Resources.
Ashwood it appears has no other function that to buy properties from Northern Oil and to manage those properties.
So it was a surprise to me and to others when Brittany Reger - wife of Northern Oil CEO Michael Reger - was the contact officer for Ashwood Resources.
Can you say conflict of interest?
Anyway Michael Reger offered two defenses. First whilst the lease interests sold to Ashwood were numerous they were tiny - sometimes as small as half a percent interest in individual wells. The second defense was that Ashwood was not a related party and his wife's job was appropriate. He even said the company sought the advice of outside counsel on that matter.
Ashwood may have been founded by a hairdresser - but was - it seems - controlled by Jacob Schaffer - a realtor in Minneapolis. It was not - according to Michael Reger - related in any way (other than by his wife's employment) to Northern Oil or the Reger family.
Which leads me to the website www.ashwoodresources.com. The site is dead - but the registration lives on.
When I first started looking at Northern Oil here were the registration details for Ashwood:
Registered through: GoDaddy.com, Inc. (http://www.godaddy.com)
Domain Name: ASHWOODRESOURCES.COM
Created on: 01-Mar-10
Expires on: 01-Mar-12
Last Updated on: 02-Mar-11
Administrative Contact:
Cross, Tyler tcash11@gmail.com
1821 Poly Dr.
Billings, Montana 59102
United States
(406) 749-1911
Technical Contact:
Cross, Tyler tcash11@gmail.com
1821 Poly Dr.
Billings, Montana 59102
United States
(406) 749-1911
Domain Name: ASHWOODRESOURCES.COM
Created on: 01-Mar-10
Expires on: 01-Mar-12
Last Updated on: 02-Mar-11
Administrative Contact:
Cross, Tyler tcash11@gmail.com
1821 Poly Dr.
Billings, Montana 59102
United States
(406) 749-1911
Technical Contact:
Cross, Tyler tcash11@gmail.com
1821 Poly Dr.
Billings, Montana 59102
United States
(406) 749-1911
Billings Montana is 840 miles from Minneapolis and from the Realtor who owns Ashwood. But strangely enough it is the Reger's home town.
Coincidence? Maybe.
Then a few weeks ago the registration for the domain name changed.
Registrant:
Domains by Proxy, Inc.
DomainsByProxy.com
15111 N. Hayden Rd., Ste
Scottsdale, Arizona 85260
United States
Domain Name: ASHWOODRESOURC
Created on: 01-Mar-10
Expires on: 01-Mar-12
Last Updated on: 02-Mar-
Administrative Contact:
Private, Registration
Domains by Proxy, Inc.
DomainsByProxy.com
15111 N. Hayden Rd.,
Scottsdale, Arizona
United States
(480) 624-2599 Fax
Technical Contact:
Private, Registration
Domains by Proxy, Inc.
DomainsByProxy.com
15111 N. Hayden Rd.,
Scottsdale, Arizona
United States
(480) 624-2599 Fax
Domains by Proxy, Inc.
DomainsByProxy.com
15111 N. Hayden Rd., Ste
Scottsdale, Arizona 85260
United States
Domain Name: ASHWOODRESOURC
Created on: 01-Mar-10
Expires on: 01-Mar-12
Last Updated on: 02-Mar-
Administrative Contact:
Private, Registration
Domains by Proxy, Inc.
DomainsByProxy.com
15111 N. Hayden Rd.,
Scottsdale, Arizona
United States
(480) 624-2599 Fax
Technical Contact:
Private, Registration
Domains by Proxy, Inc.
DomainsByProxy.com
15111 N. Hayden Rd.,
Scottsdale, Arizona
United States
(480) 624-2599 Fax
Tyler Cross - the original contact on the registration for Ashwood Resources almost certainly knows who the underlying owner of Ashwood is. I have tried contacting him.
I got no response.
Anyone got any other ideas for getting to the bottom of this?
Help requested.
John
Sunday, May 29, 2011
Letter to a client
Mike*, our foundation client and a dear friend, sent us a really bearish broker note as if John Hempton - a shortseller by inclination - needed to get more bearish. He was adjusting his portfolio accordingly. We won't be.
Here - with a few corrections and expansions - is my reply:
*Mike is not his real name.
PS. I want to stress again that my cheap mega-cap equities are relative to other things a rich guy might own - such as small cap equities, bonds, cash, commercial property or gold. There are ways cash could be a better investment - hard deflation. Long bonds are probably the best investment in that environment. I do not see that happening (though I did think it a possibility 18 months ago). Equities were generationally cheap in absolute terms March 2009. I was buying but nowhere near enough - and indeed we carried some losing shorts through the second six months of 2009.
Here - with a few corrections and expansions - is my reply:
Dear Mike
The bear case always sounds intellectually more convincing than the bull case. And it is in this broker note too. Intellectual sounding and convincing.
But America is still an amazingly innovative country, humans are ingenious and most of the imbalances will sort themselves out. Big cap equities are cheap relative to almost all other assets (especially relative to small cap equities, cash and bonds and to many assets such as commercial property that require leverage). Cash yields almost minus 3 percent after inflation and less post tax. Bonds are scary as hell and yield minus 1% after tax and inflation.
Big though difficult-to-run companies are at low teens multiples. Great franchises are at mid-teens multiples. Tesco (UK) which is a truly great franchise - is at a 14 PE ratio. And the Pound is historically cheap. WalMart and Target - both slightly less good franchises - are at 12 times. The difficult parts of Silicon Valley (eg HP) are well under 10 times PE ratios (and we feel no need to own that one). The less difficult parts of Silicon Valley (Google for instance) are at a high teens PE ratio once you take out the excess cash. We own that.
Own equities. Don't kid yourself. Mega-cap equities are generationally cheap compared to other assets - and certainly compared to the cash/bond/levered asset complex.
Just don't be blind about it. The places that there have been high returns (Asia, small caps, smaller resource companies) are riddled with fraud. Twenty five years of deregulation and the high levels of innovation mean we have high and rising levels of stock fraud. Fortunately there is much less fraud risk in mega-caps.
Don't own Australia or the iron-ore-coal-steel complex. It has run too far and has been too easy to make money. Too many stupid/aggressive/greedy people are doing too much expansion. Some of these people are stupid - but they have made much more money than you or me so they must be right!
I can find dozens of reasons to be bearish - but I look at it dispassionately and I am bullish on big caps, and bullish on America. The problems will sort themselves out and the American exceptionalism (decent institutions, free enough markets and a willingness to take risks) will work their magic again.
Anything that takes you out of real assets (businesses and property that generate real cash flow) and puts you into nominal assets is - with a ten year time-frame - a bad idea. (And why is your personal account any shorter dated than that?)
Just don't get greedy by buying things you do not understand: you will be ripped off. The underlying fraud level is as high as I have ever seen it.
Oh, and we are also bullish on France and Germany. Old Europe has manufacturing and production power of enormous levels. (Remember what they produced to fight wars? Their productive capacity is very high and Americans have forgotten that. They do engineering as well as anybody. And Germany no longer has a restrictive monetary policy to crush its consumer market.)
Also the French are in that lovely position of having convinced newly rich Asians that they are the arbiters of good taste. There are few higher ROE businesses. France has played Asia better than America.
We can see plenty of reasons to be bearish - but just the frauds makes our portfolio short enough. Indeed we are plenty short and likely to remain so until I can't find frauds with ease.
Beyond that, there is a lot of pessimism around. It has got to be time to be bullish. We certainly do not desire being 125 percent net long or hyper-aggressive like that - but we will take steps to become incrementally longer. We are if anything too short.
J
*Mike is not his real name.
PS. I want to stress again that my cheap mega-cap equities are relative to other things a rich guy might own - such as small cap equities, bonds, cash, commercial property or gold. There are ways cash could be a better investment - hard deflation. Long bonds are probably the best investment in that environment. I do not see that happening (though I did think it a possibility 18 months ago). Equities were generationally cheap in absolute terms March 2009. I was buying but nowhere near enough - and indeed we carried some losing shorts through the second six months of 2009.
Saturday, May 28, 2011
Those clever people at China Fire and Security and Bain
I have read the accounts of several dozen Chinese reverse takeover stocks and many traditional IPOs, mostly looking for fraud but also looking for stocks to go long to offset my naturally large short position. And I am annoyed. China Fire and Security (CFSG:Nasdaq) was on my list to look at but I never got around to it.
So I took the recent news of a "definitive agreement" to buy CFSG by Bain (a large and reputable private equity shop) very badly. After all it was a profit opportunity wasted because I never got around to reading the accounts.
And it is a deal with quality advisors too. According to the press release:
Barclays Capital is serving as the exclusive financial advisor to the Special Committee [that is CFSG on behalf of non management shareholders]. Shearman & Sterling LLP is serving as U.S. legal advisor to the Special Committee and Bilzin Sumberg Baena Price & Axelrod LLP is serving as Florida legal advisor to the Special Committee. Bank of America Merrill Lynch, The Hongkong and Shanghai Banking Corporation Limited and Citigroup Global Markets Asia Limited are serving (themselves or through their affiliates) as financial advisors to Bain Capital as well as underwriters, bookrunners and mandated lead arrangers of the debt facilities. Kirkland & Ellis International LLP is serving as U.S. and U.K. legal advisor to Bain Capital. Davis Polk & Wardwell LLP is serving as U.S. legal advisor to Barclays Capital. Allen & Overy is serving as U.S. and U.K. legal advisor to the underwriters, bookrunners and mandated lead arrangers. DLA Piper and Han Kun Law Offices are serving as international and PRC counsel to Mr. Weigang Li [the Chairman of CFSG].
This is by far the best team of big name lawyers and advisers ever assembled to do a deal with a sub-$300 million market cap reverse takeover Chinese stock. There must be quality here to assemble such a big name team. And I want to be able to pick these transactions in advance so I went looking for the quality. I read the 10K cover to cover (all 87 pages) just to see what they saw. After all Bain are clever people and the advisors assembled are not stupid.
What I found was a strange company – one that I did not understand – in fact one that made me think I don't understand very much at all. The clever people at Bain want to buy this company with a value of almost $300 million – and – for the life of me I could not have picked it.
Lets start at the beginning...
My run through the 10K
Here is the business description:
We are engaged primarily in the design, development, manufacture and sale of a variety of fire safety products for the industrial and special purpose infrastructure industries and the design and installation of industrial fire safety systems in which we primarily use our own fire safety products. To a minor extent, we provide maintenance services on our industrial fire safety systems for our customers. Our business is primarily in China, where we operate sales and liaison offices in more than 20 cities; we are also expanding our business overseas by providing integrated fire safety systems to industrial clients globally.
We market our industrial fire safety products and systems primarily to major companies in the iron and steel, traditional power generation, nuclear power generation and petrochemical industries in China. In the last two years, we also secured several contracts with power generation plants in India. We are further developing our business in the transportation sector, which includes projects involving subways, highway tunnels, high speed trains and marine transportation, and telecommunications.
We have internal research and development facilities engaged primarily in furthering fire safety technologies. We believe that our technologies allow us to offer cost-effective and high-quality fire safety products and systems. We have developed products for industrial fire detecting and extinguishing. We believe that we are the leading manufacturer in China of such systems having successfully developed a comprehensive line of linear heat detectors.
...Our key products include linear heat detectors and water mist extinguishers.
In other words they are a manufacturer and installer of fire detection and extinguishing kit. The kit they install is primarily the kit they manufacture. There is a small maintenance sideline.
The products did not sound very technical. Water mist extinguishers are just devices (usually pressurized cannisters) that spray out a water mist for putting out Class A fires. You can find lots of suppliers on Alibaba.
Linear heat detectors were a little newer to me. They are wires that can detect raised heat anywhere along their length - usually two wires with a heat-sensitive polymer core. Here is an example - and you can find many of them (with their control boxes) on Alibaba.
Bluntly then - at the core of this business is a manufacturer. I was thus expecting a balance sheet and profit and loss account typical of a manufacturer. A manufacturing business is usually concerned with managing working capital (inventory turns, work in progress, billings), has a fair bit of plant and equipment and margins which are typically high single digit percentage, though higher if the level of R&D is high or lots of capital is employed in the manufacturing process. Fatter margins come from market structure (monopolies or government protection) or lots of capital employed (which has to be recovered) or from being innovative (and keeping competition out by know-how advantages).
Alas the accounts are nothing like that. The balance sheet left me gob-smacked: I have puzzled and puzzled over this.
Here are the current assets (for reference you should compare this to total revenue of just shy of $80 million):
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 28,151,689 | $ | 34,976,880 | ||||
Restricted cash | 1,935,979 | 1,837,134 | ||||||
Notes receivable | 14,428,802 | 4,274,268 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $8,153,727 and | ||||||||
$6,539,787 as of December 31, 2010 and 2009, respectively | 41,895,129 | 30,989,569 | ||||||
Receivables from and prepayments to related parties | 2,448,066 | 551,792 | ||||||
Other receivables | 792,386 | 368,679 | ||||||
Refundable bidding and system contracting project deposits | 1,667,437 | 1,774,330 | ||||||
Inventories | 6,713,448 | 5,360,520 | ||||||
Costs and estimated earnings in excess of billings | 40,660,013 | 36,562,573 | ||||||
Employee advances | 1,114,080 | 953,625 | ||||||
Prepayments and deferred expenses | 10,281,292 | 3,397,358 | ||||||
Total current assets | 150,088,321 | 121,046,728 | ||||||
This is amazing. The company has $41.9 million in accounts receivable: over 6 months of revenue employed in working just there. Then it has $40.7 million in costs in excess of billing. Another 6 months revenue employed there. And another $10.3 million in prepayments and deferred expenses, $1.1 million in employee advances, $1.7 million bidding deposits, and a relatively trivial $6.7 million in inventories. The company has deployed over 100 million dollars in working capital on behalf of their customers and they count all that as current assets. This company looks like it is in the business of financing their customers.
Three are also 14.4 million in notes receivable and that looks like explicit customer financing.
I am an accounting geek - and I can't resist an accounting geek's aside here. Current assets are - by definition - assets that the company can reasonably expect to turn to cash within a year. (If they take longer to turn to cash they are not current.) This company has more than a year's revenue locked up in working capital. Can someone explain to me how it is possible to consistently have more than a year's revenue locked up in working assets and have them all counted as "current"?
So the company is thin on inventory but very strong on financing their customers through receivables and through costs in excess of billings and even through notes receivable.
They are however very thin on actual plant and equipment. Here is the plant and equipment line:
PLANT AND EQUIPMENT, net | 9,641,119 | 8,617,521 |
They have 9.6 million dollars of plant and equipment - less than 10 percent of their working capital provision. If you look at the balance sheet this is not a manufacturing company (there are very few actual manufacturing assets). This is a finance company financing its customers (conventional and nuclear power stations, petrochemical plants, railways etc) through working without billing and by being slow to collect. They also explicitly provide finance through notes.
Very strange. Especially as the customers almost certainly have better access to funding that what is really just a little fire-and-security company.
Fortunately for us the plant and equipment line is further broken down in the 10K.
December 31, 2010 | December 31, 2009 | |||||||
Buildings and improvements | $ | 7,258,465 | $ | 6,439,015 | ||||
Transportation equipment | 3,963,302 | 3,307,236 | ||||||
Machinery | 901,655 | 900,781 | ||||||
Office equipment | 1,083,512 | 1,348,261 | ||||||
Furniture | 126,032 | 165,736 | ||||||
Total depreciable assets | 13,332,966 | 12,161,029 | ||||||
Less accumulated depreciation | (3,988,332 | ) | (3,875,487 | ) | ||||
Construction in progress | 296,485 | 331,979 | ||||||
Plant and equipment, net | $ | 9,641,119 | $ | 8,617,521 | ||||
Now I am really puzzled. Before depreciation they only have 900 thousand dollars of machinery.
They have three times more "transportation equipment" (trucks and cars) than machinery. They even have more "office equipment" (computers, desks) than machinery.
This is a very peculiar manufacturer indeed. It operates almost without machinery. I assure you 900 thousand dollars - pre-depreciation - does not buy you very much manufacturing kit - even in China. (If you do not believe me start looking up prices for things like wire-drawing equipment equipment on Alibaba.)
Come to think of it - there is not much in in these accounts for buildings either: $7.5 million before depreciation. Even in China that buys a single large building. It hardly buys a campus.
Whilst the company is extremely willing to finance its customers (by extending credit through large receivables or by work in excess of billing) it does not draw much funding from their suppliers.
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 7,666,967 | $ | 6,903,961 | ||||
Accounts payable to related party | - | 272,994 | ||||||
Customer deposits | 3,023,329 | 2,182,790 | ||||||
Billings in excess of costs and estimated earnings | 2,872,706 | 1,429,999 | ||||||
Other payables | 838,413 | 333,121 | ||||||
Accrued liabilities | 19,737,906 | 13,841,300 | ||||||
Taxes payable | 9,416,829 | 9,002,470 | ||||||
Total current liabilities | 43,556,150 | 33,966,635 |
The main thing to note here is that the "working capital liabilities" are much smaller than the "working capital assets". They only have 7.7 million in accounts payable for instance versus over 40 million in accounts receivable.
There is no debt - but there are 19.7 million in accrued liabilities - all subcontractor expenses.
Summary thus far
This is a really strange company: its a manufacturing company whose balance sheet contains next to no manufacturing equipment but vast extensions of credit to the customers. It is certainly not the business described in the "business description" part of the accounts.
Margins and the P&L
The P&L shows a fat margin business - albeit one with declining profitability:
2010 | 2009 | 2008 | ||||||||||
REVENUES | ||||||||||||
System contracting projects | $ | 59,544,090 | $ | 62,514,475 | $ | 57,101,984 | ||||||
Products | 16,834,582 | 15,718,815 | 9,673,922 | |||||||||
Maintenance services | 3,598,010 | 2,947,908 | 2,303,213 | |||||||||
Total revenues | 79,976,682 | 81,181,198 | 69,079,119 | |||||||||
COST OF REVENUES | ||||||||||||
System contracting projects | 28,897,445 | 26,769,508 | 25,805,086 | |||||||||
Products | 7,342,962 | 5,589,310 | 2,558,844 | |||||||||
Maintenance services | 2,457,833 | 1,769,104 | 1,217,316 | |||||||||
Total cost of revenues | 38,698,240 | 34,127,922 | 29,581,246 | |||||||||
GROSS PROFIT | 41,278,442 | 47,053,276 | 39,497,873 | |||||||||
OPERATING EXPENSES | ||||||||||||
Selling and marketing | 10,135,884 | 8,908,697 | 6,434,887 | |||||||||
General and administrative | 10,822,596 | 8,154,801 | 6,680,992 | |||||||||
Depreciation and amortization | 851,036 | 773,907 | 712,269 | |||||||||
Research and development | 1,966,557 | 1,631,435 | 2,102,976 | |||||||||
Total operating expenses | 23,776,073 | 19,468,840 | 15,931,124 | |||||||||
INCOME FROM OPERATIONS | 17,502,369 | 27,584,436 | 23,566,749 | |||||||||
Gross margins are over 50 percent of sales. Net margins (even in the relatively poor 2010 year) were 17.5 million/80.0 million or almost 22 percent.
I like to break this margin down into the two things the company does. The company seemingly provides credit to all its customers (I think we demonstrated that above), and it does manufacturing and installation.
It provides roughly 15-18 months credit to its customers (look at the working capital provision). It should make about 7 percent margin on that (just reconfigure as a loan). The rest of the business makes about a 15 percent operating margin. That is down sharply from prior years - but is still a quite nice manufacturing margin.
It is a staggering manufacturing margin for a business which has almost no capital employed in manufacturing equipment. All that margin on only $900 thousand of machinery in a manufacturing business is really strange.
So what manufacturing equipment do you get for $900 thousand?
The key to this is working this out is going to be what sort of equipment they use and whether they really do anything special on it (deserving fat margins) - and how on earth do you run a large manufacturing company with only $900 thousand of machinery.
So I went looking at their website for pictures of the plant and machinery and (thankfully) the company obliged. Here is a sampling. Alas some of the pictures are very low resolution. I did not take them: they came from the company's website.
The caption on the above photo is "Production Line of automatic fire protection electronic products".
The captions on these are "Full-scale fire Test Center" (both above ground and underground section).
This photo was captioned "The photoelectron workshop".
And here is their Design Center though the eagle-eyed will notice that it is also the fire-test center photographed above:
The whole campus is shown on their web-page with the main manufacturing subsidiary (Sureland) in the background and the two main other buildings in the foreground. There is a little wide-angle to exaggerate the size of the campus - but there are still three substantial buildings plus the underground testing center. These are not the only buildings the company uses.
These are a pretty impressive set of buildings. It is surprising that they can be purchased for $7.7 million (pre-depreciation) as per the accounts. I thought they might be leased but the words rent or lease do not appear anywhere in the annual accounts (except where they lease a house for one of their executives). So we can presume these buildings are owned.
A fire testing facility (especially an underground one) would have some equipment in it - but probably not much as it gets burnt every now and again (which is presumably what "testing" is about).
I have absolutely no idea what they do in a large "photoelectron workshop" but I figure it must be full of equipment.
Whatever - there is a lot of building here for $7.7 million and (presumably) a very large amount of equipment filling those buildings (with a cost of only $900 thousand).
I am startled. By this time I confess: I don't understand.
The Auditor
China frauds seem to be blowing up when the company fails to get an audit report. That is what happened to Longtop Financial Technologies, Unversal Travel Group, China Media Express, and China Agritech (just to mention the ones covered on this blog).
But China Fire and Security had a clean, unqualified annual report. There was no auditor resignation.
I presume Bain and the other people backing this takeover are perfectly happy with the audit they received. I presume they have done their own due diligence - after all the auditor is Frazer Frost. Frazer Frost is (to my knowledge) the only American audit firm thus far sanctioned by the SEC over China frauds. (Eagle-eyed observers will notice that the firm sanctioned by the SEC is named Moore, Stephens, Wurth, Frazer & Torbett. The firm has been through a few name changes and restructures.)
Frazer Frost's website is now dead and has been for a few weeks.
Still - Bain are taking this company private. I hope they have double-checked the obvious audit problems. The most obvious problem is determining whether the current assets (most notably receivables and work done but not billed) are real. Bain are competent people - I presume they have done that.
If Bain need help in checking receivables may I suggest Ernst & Young. E&Y have uncovered several receivable frauds in the syphilitic puss bowl (Singapore Stock Exchange) including China Hongxing Sports.
But Bain are clever people so I presume they have that covered.
Why this deal must be real
As I said repeatedly, I do not understand these accounts, but I have only spent a day looking over them. Lots of prestigious organizations and people are involved in this deal. They must all be cleverer than a two-bit hedge-fund manager sitting at a desk near the beach in Australia. Even if individually they are not as clever as me they must collectively be cleverer than me. Here is a partial list of people working on this deal:
That is a pretty remarkable lot. Whilst I usually dislike appeals to authority I have to cede to such an overwhelming collection of intellect.
So what does Bain see in the deal?
Once you work through all this - and you accept the accounts as the gospel truth - you realize that Bain has a true bargain.
This is possibly the most efficient purchaser/constructor of buildings in China if not the world. They purchased all those buildings for $7.7 million.
They are without question the most efficient purchaser or constructor of machinery in the world. They equipped this entire company with machines for $900 thousand before depreciation.
They also have a huge and presumably easy to collect lot of current assets outstanding. There is $150 million in current assets here - and they should - with better management - be able to turn $100 million into cash without impacting the business. After all, the customers are solvent parties that do not need all that credit extended to them. $100 million additional cash plus the $28 million cash on the balance sheet will offset more than a third of the purchase price for the business. It should pay off the bulk of the bank debt so Bank of America should be fine.
This deal is a work of genius. Unfortunately as a stockholder I will not be around to enjoy it. CFSG is going private.
John
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