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Wednesday, July 27, 2011

Introducing thetruthisinthedetails.blogspot.com

There is a new blog out there focusing on Chinese companies that have listed in Canada.  I suggest you check it out, the first post has been about (CVE:ZUN) Zungui Haixin. http://thetruthisinthedetails.blogspot.com/

Thursday, July 21, 2011

Update: Ctrip.com, Cogo, BAC & Basel III

Ctrip.com:
This company provides online airline tickets and hotel reservations. It's the Expedia of China and one of the highest rank websites associated with this business. I have been reading the SEC files to see if there has been anything interesting - there has, but nothing crazy. 
(1) The company originally owned all of the Home Inns & Hotel Management but spinned it off when it went public, the company continued to keep very close ties to this business and the company eventually bought back around 20% of this company. Fairly significant related party transaction.
(2) The company has in the past paid a dividend to shareholders, but that dividend has been very small, a fraction of how much capital the company has raised by going public. In 2009 & 2010 the company stopped paying it's dividend
(3) The company used to lease property from the CEO's wife "We lease approximately 1,223 square meters of our premises in Shanghai from a company controlled by the spouse of our Chief Executive Officer, James Jianzhang Liang. Our lease term commenced on May 1, 2003 and will expire on February 1, 2007" 
(4) The company doesn't own equity an the operating subsidiaries that issue airline tickets in China. This is because foreigners aren't allowed to own equity in such companies, but the people who own the equity are the executives of the company. Although there are "contractual agreements" I would be very skeptical to see some 老外  enforce the contract if those executives were fired or couldn't be contacted.  Also most of these executives get pretty nice stock options so if they have the ability to fidget the financials to "improve" the operating performance of the company, than it would make the overall company look better and make their stock options more profitable. 
(5)  Investment in China Lodging Group or Hanting (HTHT), another related party transaction. The director of Ctrip.com is also the CEO of Hanting
(6)  Investments in ezTravel. This is a major Taiwanese online travel agent (I've personally used them.) I don't see anything too interesting about this investment. I actually found their balance sheet & income statement from Q4 2007. I translated it so, it's not a good translation. It doesn't look like Ctrip.com overpaid for ezTravel. Yet I think the data is interesting for anyone looking to investigate it more. According to this report, Ctrip originally had a 20% stake in Eztravel.
(7) Ctrip.com has significantly better profit margins than it's peers. Whereas Ctrip.com's peers have around 10% profit margins, Ctrip.com has 30% profit margins.  Maybe it's because Ctrip is just such a better competitor, but in the past significantly higher profit margins have been a sign of possible financial meddling. 
(8) Qunar.com doesn't seem to have affected the business as greatly. Qunar.com is, at least according to Alexa.com, a more popular travel site than ctrip.com. I would think Qunar.com would impact margins or growth but neither seems to have incurred. 
It would be interesting to get the credit report for the major Chinese subsidiaries and see how well they match up to the SEC files.  Unfortunately that costs money something I don't have a lot of.


If anyone is interested in Ctrip.com I'd love to talk to you. Send me an email at wallis.joshua@gmail.com


COGO
Cogo has been great fun . It's been wonderful talking to all the smart people who have messaged me about COGO.  I don't think the story is over yet, but most of the analysis (I can do) has been done.


BAC & Basel III Tier 1 Capital


Lately I've been interested in Bank of America again. It's such an interesting company. The investment banking side of the business is firing on all cylinders and YOY capital ratios improve and delinquencies become lower. On almost every metric, Bank of America today is a much better bank than it has been for a very long time. It seems like the analyst worry about Bank of America not being able to pay a dividend for a long time or having to raise capital in order shore up tier one capital requirements. The problem they are noticing is due to the tier 1 capital ratio requirements.  By 2019, BAC needs to have Basel III tier 1 capital ratio of 9.5%.  Currently the company has a tier one capital ratio of ~8% and that's a Basel I standard. In Basel II & III standards there is stronger risk weighting associated with assets.  So if a company loans money out to AAA sovereign governments the risk weighting is 0% but it's a dangerous mortgage loan it's 150% - so the more dangerous the asset is in the eyes of  Basel, the lower the tier 1 capital ratios are.


Now, I want to be honest. I really don't understand Basel I, II or III. It doesn't mean I haven't tried to understand it's just it's pretty damn complicated. Personally, I don't think most people understand them either. I'd love to become a Basel risk weighted asset expert. Personally I think this would be a great accounting kong fu trick. I bet the seeds of the next crisis are sown with these Basel requirements and banks will inevitably do their best to play with these rules as much as possible to keep their tier 1 ratio up.


So just for the record, I own BAC warrants and I am trying to be as honest as possible about my ignorance about a very important subject.


Yet, what I do know is this. BAC is the strategic investor of the China Construction Bank, where they own about 20B in equities. From what I understand Basel III gives this a pretty high risk weighting (not sure how high, but I am guessing at least 100%)  and BAC will no longer be locked into owning shares of the CBB by the end of August, therefore BAC should be able to sell their shares to shore up capital. I'm praying to the gods BAC sells off their stake entirely, I think there is tremendous credit risk associated with Chinese Banks and the capital raise would go a long way of calming fears of a capital raise.


I had increased by BAC-WTA position by 50% when the warrants were around $4.73 last week.


Please contact me if you have some education material on Basel risk weightings or if you think I'm being stupid with BAC.




 Life
 I haven't been posting the past week.  Turning 27 next Tuesdays and trying to think about where I am going in life.  Most analysts I respect have had a pretty good reaction to the COGO thesis, although it doesn't guarantee the profitability of the trade, it does give me a sense of validation I've been wanting (I'm really too human.) I'm going to write up my CV with my non-existent accomplishments and see if I can try to land a job somewhere...doubt it'll get me very far but gotta go fishing with whatever bait you got.


If anyone knows of an internship or some sort of job in the finance field, I'd love to hear it. Anywhere in the world is fine with me.

Niel Nanpeng Shen - Anyone got some info on him?

In the world of American listed Chinese companies, a few names repeat themselves over and over again. One of those names is Niel Nanpeng Shen. He doesn't seem to be associated with any Chinese RTOs but he definitely seems to have his fingers in a lot of pies. It all might be irrelevant but it's still a little strange. This guy has definitely gotten rich of listing companies he has funded and getting them to list in America.

Once again, it could all be nothing but I did dig up a securities law suit against him about his involvement in Mecox Lane Limited (MCOX), you can read about that lawsuit here.

If anyone has something interesting to say about Niel Nanpeng Shen please send me an e-mail at wallis.joshua@gmail.com

(VIDEO) Michael Burry: Risk Takers, Bloomberg Documentary 25 minutes

Bloomberg did a twenty-five minute documentary on Michael Burry - a fun watch for all the value geeks out there.

Tuesday, July 12, 2011

Two events of the Chinese fraud saga, and what it means.

When people call me up and want to talk about Chinese frauds, I get very excited. It's not just about COGO. Yes, COGO is very interesting and almost a textbook example of fraud. Yet, the reason I get excited, is due to a much larger story. A story about shady lawyers and IR firms; a story about hilarious and secretive investors; and possibly, a much larger story about China itself.

The whole story won't fit in a blog post, so for now I'd like talk about two seminal events in the Chinese fraud saga. 

Event Number One: China Media Express (CCME)
If a year ago, you were interested in US listed Chinese companies and wondered if some of these Chinese companies were frauds, people would point to Chinese Media Express as the poster boy for the great Chinese investment. Not only did CCME have a big four auditor but also had a star investor - the storied ex-CEO of AIG, Hank Greenberg. CCME was growing at break neck speeds and had fifty percent profit margins. For some investors, they perceived this as their meal ticket to riches.

Then reality struck home. Very smart analyst from Muddy Waters, Bronte Capital and Citron Research all smelled something funny. How exactly could this company get such fat profit margins while all their competitors have lower profit margins? Why would CCME go public and sell their stake of such a great company?

On March, 14 2011the rubber met the road: CCME's auditor and CFO resigned.

Now, here is the significance of this event. If CCME could fool Deloitte and Hank Greenberg, how could anyone trust any of the other Chinese RTOs that didn't have a big name auditor or a well regarded investor? All at the same time, doubts were cast on every Chinese RTO.  In the following months Chinese RTOs dropped like flies and even the SEC commissioner was condemning Chinese RTOs

Event Number Two: Longtop Financial Technologies (LFT)
This is the most under appreciated event in the Chinese fraud saga. Longtop wasn't a shady RTO or a recently publicly traded company. Longtop had been around since 2007, the CFO was on the board of hot stock issue RenRen, Deloitte was their auditor and none other than Goldman Sachs was their lead co-underwriter. This was basically knighted by all the holy members of the capital regulatory system.

Yet, it went under. Now what's under appreciated about Longtop is how it went under. Read this statement from the auditor:

Background and significant issues encountered by Deloitte Touche Tohmatsu CPA Ltd. (China) (“Deloitte”)
As part of the process for auditing the Company’s financial statements for the year ended 31 March 2011, we determined that, in regard to bank confirmations, it was appropriate to perform follow up visits to certain banks. These audit steps were recently performed and identified a number of very serious defects including: statements by bank staff that their bank had no record of certain transactions; confirmation replies previously received were said to be false; significant differences in deposit balances reported by the bank staff compared with the amounts identified in previously received confirmations (and in the books and records of the Group); and significant bank borrowings reported by bank staff not identified in previously received confirmations (and not recorded in the books and records of the Group).
In the light of this, a formal second round of bank confirmation was initiated on 17 May. Within hours however, as a result of intervention by the Company’s officials including the Chief Operating Officer, the confirmation process was stopped amid serious and troubling new developments including: calls to banks by the Company asserting that Deloitte was not their auditor; seizure by the Company’s staff of second round bank confirmation documentation on bank premises; threats to stop our staff leaving the Company premises unless they allowed the Company to retain our audit files then on the premises; and then seizure by the Company of certain of our working papers.
In that connection, we must insist that you promptly return our documents.
Then on 20 May the Chairman of the Company, Mr. Jia Xiao Gong called our Eastern Region Managing Partner, Mr. Paul Sin, and informed him in the course of their conversation that “there were fake revenue in the past so there were fake cash recorded on the books”. Mr. Jia did not answer when questioned as to the extent and duration of the discrepancies. When asked who was involved, Mr. Jia answered: “senior management”.
This is the most shocking letter I have ever read from an auditor, and if you aren't shocked, you need to read it again.

There are two under appreciated consequences of Longtop and they are both very significant. The first deals with the cash flow statement. If Longtop was defrauding their auditor with pocketed bankers, then that means, there might be more companies using bankers to defraud their investors. As a consequence, sharp investors can no longer look at the disparities in the cash flow statement for signs of fraud. A company could look just peachy perfect when looking at their financials, but that might just be a bag of hot air.

The second consequence is far more startling and my keen readers need to stake a step back. Normally banks act as the staid law enforcer of the capital markets. They dot their 'i' and cross their 't's, they make sure their client isn't overburden with debt and is honest enough to repay the loan. Above all bankers worry about being defrauded, so they definitely don't defraud other people.

If Chinese bankers are not to be trusted, and the capital system depends on honest bankers to keep the system in check then China could very well be facing a financial crisis of epic proportions. These Chinese RTO scandals might be the subprime mortgage crisis to the US financial crisis. 

I hope I am just being hyperbolic.

Friday, July 8, 2011

SumZero: No English Teachers Allowed

(diary post, I suggest ignoring) 

SumZero is an online community for equity analysts.  It's kind of like Seeking Alpha but you are required to provide a write up, yet less rigorous than the Value Investor Club where getting a membership is very competitive. I had applied to the Value Investor Club a couple of months ago but I got rejected. I had filled out my information for SumZero about a year ago but never finished my application.

Being a part of a larger and more professional financial community appealed to me. I got a great group of friends I e-mail with and a nice message board I follow, yet I wanted to try my hand in a more professional arena. Working as an English teacher in Taiwan, your day job is easy but intellectually unfulfilling, at least if I join SumZero I could constantly have new ideas to read about.

So I applied.

One of the odd things about SumZero is, you need to include an employer. Originally, I had put down "private investor" but since they updated the system, that was no longer an option unless you listed your previous employer. Thinking that "Follow Me English School" or "Giraffe English School" was just going to push my idea right into the ignore-basket or eventually cause my account to be deleted, I decided to write "Wallis Capital" as the name of my employer. No harm, no foul I reckoned.

Since I had already written up about COGO I used that as my application idea. Once you've completed this part, your idea needs to be graded by other members of the community. So during the follow week I started to get graded: 7, 7, 10, 9, 5, 10, 10, 9, 7, 9, 10...all pretty high marks and it felt pretty good to be recognized.  After spending your day throwing sticky balls at white boards and asking eleven year old Taiwanese students to correctly use the phrase "Yes, she does. Mary likes to eat ice cream." You start to wonder if you are just a bit crazy spending your nights reading 10Ks.  

Then one day I got this message:


Dear Josh-

My name is XXXXXXXX XXXXX and I am a PM/Analyst at XXXXXXXXXX Capital. I've been on the buyside for the last 9 years and a member of SumZero for 2 years. I have found the site to be extremely helpful in further developing my ideas, sourcing new ones and meeting like-minded investors. I am such a fan of the site and feel there is so much potential from its growth, I have volunteered my time to lead the new SumZero Contributor Program.
With that introduction, I would like to say Congratulations! The founders of SumZero and I would like to invite you to join the Contributor Program. Contributors are members that have been selected (through both a quantitative as well as qualitative process) and identified as being within the top 5% of the entire community. As an active member of the site, you realize the power of this community from both an idea generation standpoint as well as networking tool. The Contributor Program is one of the ways we can assure a constant flow of new ideas while maintaining top notch quality.
Benefits of the Program
* Recognition on the site as being a member of the SumZero Contributor Program. 
* A great resume/CV differentiator. Given how competitive the investment community is, being able to say that you have been selected as being in the top 5% of the 4,500+ analysts/PMs on the site could be the difference in getting your next interview, job or investor. 
* CNBC partnership. Once a month, one of the Contributor ideas will be featured on a CNBC program. Nice way to gain addition exposure for you, your firm, and your idea. 
* Yahoo Finance partnership. All contributor write-ups (NYSE and NASDAQ listed names) will be submitted to be featured on Yahoo Finance. The investment idea and analysis will show up as an article whenever anyone does a ticker search for company you have written about. Once again a nice way to gain exposure for yourself, your firm, and your idea. 
* Free 3 month trial to Value Investors Insight (not available to current subscribers).
* An annual idea dinner and networking event with other contributors and high profile portfolio managers 
* More to come...we will be adding additional benefits as partnerships develop. 
What we need from you
The requirements for the program are fairly simple. First we need a solid commitment from you. Second is a minimum of 4 well thought-out ideas per year. Considering you have been selected to be part of the program you likely are already fulfilling the requirements so isn't it a no-brainer to join? 
If you are interested please let me know and we'll schedule a time to talk a little more about it and we can get started. I look forward to hearing from you. 
XXXXXXXX XXXXX

Needless to say I was thrilled. I kind of had that feeling you get when you get your first job or you find out some girl you like, likes you too. Yet, then realized I am an English teacher in Taiwan. As much as I wanted to join this program, I thought it was better they know who I am.

Hi XXXXXXXX,

Seems interesting and I'd like to talk about it. One thing I want to be up front about. I don't work for a fund or have my own fund. I wanted to post on SumZero but I had no fund name, so I just made up one. I understand if that disqualifies from the contributors club or even SumZero altogether. I am actually just an English teacher in Taiwan.
If you want to talk that's great, if this disqualifies me I understand.
-
wallis.joshua@gmail.com , skype: XXXXXXXXXXXX or call me at +866XXXXXXXXX

Who knows, maybe they won't care who I am. They said they liked my write up, right? It definitely wasn't like I worked at some prestigious fund or I was someone well known in the investment world. It was my idea that got me the e-mail. I was pretty hopeful and I felt good about being honest with them.

I got my reply back today.


yeah can't have you in the program but really nice writeup

thanks
XX

sigh...

Monday, July 4, 2011

(VIDEO) Brits Get Rich In China .... Highly Recommend

Around 2007, the BBC did this great documentary called "Brits Get Rich In China." It follows three British entrepreneurs on their way to doing business in China. It's absolutely hilarious. I highly recommend watching this. Especially for anyone doing research in the Chinese space.

Part 1/7




Part 2/7



Part 3/7



Part 4/7



Part 5/7



Part 6/7



Part 7/7

Shorting Chinese RTOs is a crowded trade: time to move up the ladder. Carson Block Bloomberg Interview

Shorting Chinese RTOs has been a crowded trade. There aren't many RTOs left where the lend rate isn't usurious. So for anyone still interested in finding possible frauds in this area, it's now time to climb up the ladder. Recently I have been investigating some Chinese IPOs and I think there will be a number of interesting candidates for short sellers.  I don't think the level of fraud in these IPOs will be as toxic as the RTOs but there is definitely room for financial malfeasance.  Carson Block makes a good point that these companies have to compete for capital and sometimes that competition causes problems. Some of the companies I am currently looking at, have definitely been participants in the capital markets and that might be why their financials don't look so good to me.

Still got plenty of research to do before I publish anything, and maybe after my research I'll realize there was nothing wrong with the financials. We will see.

Here is the Carson Block interview.



If anyone knows how to contact this guy. I would love to meet/talk to him.