A China Travel Stock That's Going Places: UTA

By Eric Jackson
RealMoney Contributor
4/5/2010 3:00 PM EDT
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Two weeks ago, I met with Universal Travel Group (UTA - commentary - Trade Now) at its corporate offices in Shenzhen, China. The company is a relatively small player in the fast-growing China travel sector, and it is seemingly undervalued compared with larger rivals such as Ctrip (CTRP - commentary - Trade Now) and eLong (which trades in Hong Kong).

With a price around $9.65, Universal sports a price-to-earnings ratio of 7.9 times and a market capitalization of $140 million. We believe in Universal and believe it will do well in the next couple of years, but investors should be clear on what this company is and what it is not.

When most people think of Chinese-related travel, they think of Ctrip. Ctrip has the look and feel of any large U.S. travel site, like Expedia (EXPD -commentary - Trade Now). It spends an enormous amount on marketing its brand in China. We saw it in virtually every airport we traveled to during a recent two-week trip. Ctrip's market cap is $5 billion, with a lofty P/E ratio of 54. It makes the majority of its revenue from broker fees on hotel reservations (45%) and air-ticketing services (41%).

Many investors look at Universal as a smaller, undervalued version of Ctrip. If Universal had only half the valuation of Ctrip, this type of thinking goes, there would be an immediate tripling in the stock price. However, this is not a proper way to think about Universal's business or its potential as a stock.

When we met with Universal's managers, they didn't deny that they try to piggyback on Ctrip's well-known brand with U.S. investors. Universal points to its Web site as a means to do travel bookings, with additional call-center support. The company points out its valuation relative to Ctrip. Yet what Western investors need to understand is that Universal, at its core, is a packaged-tour company, not a smaller version of Ctrip.

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The Top Pick From Our China Trip: $ONP

By Eric Jackson
RealMoney Contributor
4/1/2010 1:40 PM EDT
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Over the last two weeks, I have traveled through China, meeting with the management teams of eight companies that my proprietary model at Ironfire Capital has flagged as having the potential to double or triple in the next two years. No model is perfect, and they all require additional due diligence. As the saying goes, trust but verify.

Chinese companies in particular draw Western investors because we hear stories of stocks shooting up in value over a relatively short period of time. However, many people are still justifiably afraid of holding these stocks. One hedge-fund manager asked me to tell him, when I returned, which of the companies were frauds. He suspected many firms in China of cooking the books.

That's why I'm here for the trip with my colleagues from Hong Kong and Shenzhen: We want to separate the real undiscovered gems from the names built on hype.

My top long pick of all the companies I met with is Orient Paper (ONP - commentary - Trade Now) which trades on the New York Stock Exchange. The company sells fine writing paper and corrugated paper for boxes, and three weeks ago it started production of paper for digital photographs. Earlier this week, Orient Paper released its full-year 2009 numbers. Revenue grew 57% to $102 million for the year and 98% for the fourth quarter to $31 million.

Investors did not like the decrease in gross margins from 22% to 18% in the recent quarter and the increase in SG&A expenses by over $1 million from last year. However, the margins were affected by increased coal costs in the fourth quarter that were due to the colder winter near Beijing. The company uplisted to the NYSE in December and was required to take on more consultant costs in preparing for that. It also announced yesterday that it was selling 3 million shares at $8.25, taking the stock down 13%. My firm was a big buyer on the news, and ONP is now one of our top long positions.

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Jim Chanos Is Wrong on China

By Eric Jackson, Senior Contributor

03/31/10 - 06:02 AM EDT

Stock quotes in this article: BACHY.PK , CICHY.PK

BEIJING (TheStreet) -- Short-seller Jim Chanos correctly saw Enron'sproblems before they engulfed the company. He's now making media appearances identifying China as his next short idea, specifically the Chinese commercial and residential property markets.

Chanos famously referred to these markets as "Dubai times 1,000," foreseeing a cascading effect of property developers defaults, non-performing bank loans, bank losses and reduced lending, a pullback in further development and jobs, and a sharp drop in demand for commodities.

Jim Chanos, founder and managing partner of Kynikos Associates.

In short, according to Chanos, China's property market -- supporting the Chinese economy, which is the last engine powering the global economy -- is about to melt down.

He's put his money where his investment thesis is by shorting internationally traded commodity and infrastructure companies and Hong Kong property developers with exposure to China.

According to a New York Times article from January, Chanos only started studying the China market last summer. He has apparently never visited the country and has joked on TV appearances that he will never be able to visit the country now that he's made such bearish pronouncements.

Instead, Chanos -- like a lot of other Western commentators -- bases his views on statistics and the opinions of other Western talking heads, many of whom also haven't been to China lately, if ever.

There's a Chinese saying: "If you visit my village in three months, you'll notice small changes; if you visit my village in six months, you'll notice big changes; if you visit my village in a year, you won't recognize my village." Chanos and other bears haven't even visited the village yet to kick the tires.

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China Trip: Universal Travel Group

By Eric Jackson
RealMoney Contributor
3/22/2010 12:00 PM EDT
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I just landed in Hong Kong for the start of a two-week tour of China, meeting with management teams of emerging Chinese growth companies. During the trip, I'll be meeting with China Agritech (CAGC -commentary - Trade Now), Origin Agritech (SEED - commentary - Trade Now), China Mass Media (CMM- commentary - Trade Now), Shengkai Innovations (SHE - commentary - Trade Now), Oriental Paper(ONP - commentary - Trade Now), Puda Coal (PUDA - commentary - Trade Now), China Wind Systems(CWS - commentary - Trade Now), China-Biotics (CHBT - commentary - Trade Now) and -- just confirmed --Fuqi International (FUQI - commentary - Trade Now) (see my article from last week). I'll be reporting on my meetings and my impressions of the companies in the coming weeks here on RealMoney. However, my first meeting this week will be with Universal Travel Group (UTA - commentary - Trade Now).

UTA books travel reservations, trips and junkets, and sells online travel tickets to the mainland Chinese. It is aiming to be the leading travel services provider in the country. It was founded as Shenzhen Yu Zhi Aviation Services in 1998 and went public on the OTC market in the US in 2006. Last year, it upgraded its listing in the US to the NYSE.

It has had an assortment of businesses under its roof over the years. It has owned and operated an air-cargo business (which it sold off last year) and has run an online e-commerce website and call center-oriented tour-package reservation service. Even its home base has been a bit split. Its main headquarters since foundation has been in Shenzhen, a short hop to the mainland from Hong Kong. However, last year, the company decided to open a second headquarters inland in the town of Chongqing, where it has also invested in a larger call-center operation.

The main reason for any casual investor to be interested in UTA is that the company is relatively under-valued in the booming Chinese tourism sector. China's tourism industry is one of the fastest-growing industries in the country. Most travel agencies are domestically owned. Only 10-15% of the country's travel agencies are international. The market in China is highly fragmented, with the largest player having only an 8% market share. By 2020, China will become the single largest source of international tourism and will be the largest domestic tourism market in the world.

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FUQI: Fool's Gold

By Eric Jackson

RealMoney Contributor

3/17/2010 12:30 PM EDT

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Fuqi International (FUQI - commentary - Trade Now) announced last night a major restatement of its 2009 numbers and other accounting irregularities, which will delay the filing of its 10-K with the SEC. The stock dropped 35% in early trading today. Some have asked me if this is a buying opportunity. My verdict: I'd steer clear for now. It's just too risky.

I wrote a positive piece about FUQI in early January, saying that the stock was undervalued and that the growing market for jewelry in China would aid the stock. While I'm still convinced about the Chinese jewelry market, my valuation was based on the assumption that the company's numbers were correct. We know now that they weren't.

And this is one of the great risks of investing in smaller, growth-oriented Chinese companies: governance standards are not the same as for smaller American companies. When I talk about governance standards, I mean the composition and conduct of the board of directors, as well as the implementation of proper accounting standards -- and a curbing of related-party transactions.

Related-party transactions seem to have been part of the problem here with Fuqi, as well as with another high-flying Chinese growth stock,Yuhe International (YUII - commentary -Trade Now), which saw its stock take a haircut a week ago.

I sold my Fuqi long position and calls last week. I had been a believer in the stock and expected the company to do well this year. I'll be going to China in a few days for two weeks to meet with several management teams of companies I believe have a chance of seeing their stock prices double this year. Fuqi was one of the companies I had looked forward to meeting.

Several weeks ago, Chinese-speaking employees of my firm, based in Hong Kong and within China, started to reach out to the companies of interest to us. We introduced our firm and expressed our interest in their companies. We disclosed our stock position in them (usually long) and said we wanted to meet with them to better understand their business and potentially increase our position in their company.

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Ask Your Questions for Chinese Growth Companies

I am going to be in China for 2 weeks at the end of this month to meet with management of several Chinese companies. I'm now working to confirm the final list of meetings, but it appears likely as though I'll meet with the majority of the following companies:

- Origin Agritech SEED

- China Agritech CAGC

- China Mass Media CMM

- China Wind Systems CWS

- Puda Coal PUDA

- FUQI FUQI

- Universal Travel UTA

- Shengkai Innovations SHE

If you have any specific questions, please send them along. If I ask, and they answer, I will post the responses once I get back.

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