The following investigation of NYSE-listed Universal Travel Group (UTA) was written by John Hempton, a fund-manager at Bronte Capital. The investigation was first published at Bronte’s web site.
Bronte and Hempton have shorted the stock of UTA based on their conclusion that the company as described in UTA’s SEC filings is mostly a fiction. They will therefore benefit if the stock drops.
Business Insider has not independently verified any of the information or assertions made below. We welcome comment from UTA and will update this analysis if we get any.
UPDATE: UTA has published a press release in which it “categorically denies all the allegations in the blog.”
I am close friends with the major investor in a small but well placed online travel business.
If you ever need a modestly priced hotel in Australia by far the best site is www.checkin.com.au. It does not have the best range – but it fulfils the function of the discounter – running on the thinnest margin and being a place where hotels can (quietly) shift their excess inventory. If you want a business hotel in Sydney don’t bother with anything else – checkin.com.au is the best deal. If you want a romantic getaway in the Blue Mountains there are plenty of other suggestions though you might get lucky with the discounter.
Travel booking companies have – for the reasons stated above – interested me. And – being in my business – I like a cheap stock.
So a fast growing online hotel and airline booking company in China trading at a PE ratio of about 5 caught my eye. I can’t resist a bargain. Here is the company description from the footer of their press releases.
Universal Travel Group is a leading travel services provider in China offering package tours, air ticketing, and hotel reservation services via the Internet and customer service representatives. The Company also operates TRIPEASY Kiosks, which are placed in shopping malls, office buildings, residential apartment buildings, and tourist sites. These kiosks are designed for travel booking with credit and bank cards, and serve as an advertising platform for Universal Travel Group. The Company’s headquarters and main base of operations is in Shenzhen in the Pearl River Delta region of China. More recently, Universal Travel Group has expanded its business into Western China, opening a second home base in the Chongqing Delta region, and other attractive, under-penetrated tier-two travel markets throughout the country. For more information on the Company, please visit http://us.cnutg.com .
But we at Bronte insist on at least some due-diligence and so we spent some time fiddling about in their website. I will cut to the chase. We will not be buying the stock. Too Jabberwocky for us.
The website has a maps tab. This is a really useful feature for a travel booking company because you can make a lot of money booking travel at short notice to people on the road. I wanted to fiddle with that. Alas it did not work -- it mapped a small area around Shenzen -- which is not much use picking a hotel in Yichang.
But it was far worse than that -- the website was far-from-optimised for use on a mobile phone (running on an iPhone it produced two error codes in presentation which the iPhone asked if I wanted to ignore). This is serious for a travel website which people often want to refer to on the road. It is doubly serious for a travel website in China because in China more than most places people interact with the internet through their phone.
The NYSE is supposed to be the last bastion of blue-chipness. Will they defend UTA? Or launch an investigation...
I would not be surprised if this stock were listed on the Pink Sheets or even the AMEX. This sort of stuff you can find on the UK's AIM board -- but the New York Stock Exchange is special. They have higher standards! To date the SEC has only forcedly delisted a single NYSE listed company for fraud -- and that was ACLN.
The NYSE must be pretty sure of itself. UTA has received one of the highest honours in capitalism... they opened the floor of the NYSE. It is an honour I doubt will ever be bestowed on me.
I want to head this one off at the pass. It is pretty clear from this analysis that the main reason for owning the stock of Universal Travel Group is dubious. The online booking engine is dysfunctional -- and the massive margins that it claims (84 per cent for plane tickets) are thus also dubious.
All the profits that the company claimed it made out of the travel booking business (by far the bulk of its claimed profits) are similarly dubious -- though there is a real travel company which might be making some profits.
The company claims in its most recent quarterly balance sheet to be carrying 43 million in cash and accounts receivable of almost 20 million. If the airline and hotel business are dubious then the profits generated that cash are dubious. In that case the cash itself is dubious.
I know people will buy this as Ben Graham net-net stock if it collapses. Unless this company can get a big four audit firm to sign-off for them I think you can -- at least for the moment question the entire balance sheet. They have however just appointed a new auditor. I quote the press release: the Board of Directors, in consultation with its Audit Committee, has appointed Goldman Kurland Mohidin ('GKM') as the Company's independent auditor to replace Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, effective September 1, 2010. I don't know who GKM are -- and I will be thrilled if any of my readers can -- off the top of their head -- name three other companies they audit. Whatever: I think that GKM can take it as read that this is a higher-than-normal-risk audit assignment. And the first thing to do -- confirm the existence of that $43 million cash stash.
The company is not behaving as if this is a cash rich company. The company has one real business -- 1523 travel kiosks which appear in company promotional literature as electronic booths. I think this was (at least at one stage) a real travel booking business and remains one albeit off the internet. The kiosks were places that people without a computer or phone could book travel online using a touch screen. I have not seen any of these kiosks but have spoken to people who have. They just sold them for 40 million CNY -- or about $5 million. They proudly note however that they get to keep the travel-related revenue from these kiosks for the next two years. As this was the foundation business for the company it seems unlikely they would sell it especially as the accounts suggest they are awash with cash.
They did not announce whether they had a gain or loss on the sale of that business -- but someone I know was told (last year) by the company that the cost base of these kiosks was about $6000 each. On those figures they are taking a largish loss. This is not the behaviour of a company with a strong business swimming in cash.
The company has however been buying other businesses -- such as a hotel booking business in Chonquing. But the other company websites including this one http://www.cba-hotel.com/ have -- when worked on -- a similar Alice-in-Wonderland character. That site produces similar errors when it gets around to payment time. It is however browser sensitive. If you use Firefox or Microsoft Internet Explorer you wind up at pages which are gibberish -- not even recognisable Chinese. (I relied on Chinese friends to tell me that though -- I can't tell the real Chinese from the gibberish Chinese.) Whatever browser you use you wind up with the strange inability to book anything.
The CBA-hotels.com site however does have a forgotten password option -- they will text your password to your mobile phone. If someone has a Chinese mobile phone I would love them to test that.
Still -- other people have a different impression of this website. One broker (Emissary Capital) report described this website as follows:
In August 8, 2007, UTG acquired Shanghai Lanbao Travel Service Company Limited, a centralized real-time booking system that provides consumers and travel related businesses with hotel booking services via the internet and mobile phone text-messages. The company owns and manages the award winning China Booking Association website, http://www.cba-hotel.com/, which receives approximately 200,000 visitors daily. The network is open to more than 200,000 hotels, 5,000 booking centres and 8,000 travel agencies and tourist companies throughout China. Its intra-hotel network includes more than 3,000 franchise hotels and 800 hotel booking businesses and agencies across China. The company's China Booking Association website, http://www.cba-hotel.com, receives about 200,000 visitors daily and, in 2006, made about 500,000 hotel reservations.
Maybe the good analyst at Emissary had a different experience on the website to us. They paid cash and stock for that business. The stock I presume has found its way to the NYSE and hence to retail and institutional investors in America.
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