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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.

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