UTVG.OB

[David Randolph]

(2) There was a pre-public release of the information.

You think the previous fall was because this information was coming out and there was a leak ... I think it was because at the conference call management said "Q3 is our seasonally strongest quarter" and the general market decline and distrust of Chinese stocks, especially smaller ones.

I had little trust in this story before because of Hawk Associates and the PR was the last straw.

Yep, I see what you mean. I also dislike Hawk's "research" in general, but I wouldn't dismiss a stock just because it is covered by them. But it's a red flag.

(1) We cannot trust the accounting;

I agree that the press release out today doesn't help building investors' confidence in the company's accounting practices. But I still prefer to trust the financial statements than the chart.

Did you sell? If you did, I understand your reasons ... I'll keep holding.

[realcoolhead]

David, I have to say that I am amazed by your stubbornness.

Let's think this way, you only want 15 stocks right? I bet there are better companies that fit your bill. Even if UTVG is a good one eventually, is it worth taking so much uncertainty?

I agree that the press release out today doesn't help building investors' confidence in the company's accounting practices. But I still prefer to trust the financial statements than the chart.

Did you sell? If you did, I understand your reasons ... I'll keep holding.

[David Randolph]

David, I have to say that I am amazed by your stubbornness.

hehe, I call it "strong hands".

Even if UTVG is a good one eventually, is it worth taking so much uncertainty?

Yes, UTVG is the fastest growing company I ever saw. If the fundamentals given by the financial statements are true I could see it rising 10 fold or more over the next few years. In my opinion it is worth the risk, but I understand and respect your concerns.

[stocky]

Though I dont like .OBs but at the moment I think anything NON-US would be better. Lets give UTVG try with a small position size then usual. I am in.

[berloga]

I agree that UTVG may be a fast growing company, but who knows what "slight correction" the management can bring forward a couple of months from now!? Perhaps there will be a 90% correction to the income? I think this company is dodgy. The business idea is clear but the source of growth is foggy. Yes, there are 1.5bln of chinese lads and lasses out there, but do they want to travel? Also, perhaps there are 10's if not 100's of travel agencies in China to meet the demand. Chinese are good cooks (my favorite, but not when it comes to books).

At the same time, I am sure there are companies that have a clear business strategy, well defined market, demand and robustness in financial statements. I'd rather bet on a horse, than an ostrich, albeit both run fast.

[David Randolph]

We've been focusing on the following press release:

• Universal Travel Group To Restate Previously Issued Q3 '07 Financial Statements
Business Wire (Mon 9:15am)

But there was also another one out:

• Universal Travel Group Acquires Majority Ownership of Tianjin Golden Dragon
Business Wire (Mon 8:48am)

UTVG isn't reacting all that bad to the "restating" news. It wouldn't surprise me if we closed positive on the day (not that I would read much into it).

[ravenquork]

We've been focusing on the following press release:

• Universal Travel Group To Restate Previously Issued Q3 '07 Financial Statements
Business Wire (Mon 9:15am)

But there was also another one out:

• Universal Travel Group Acquires Majority Ownership of Tianjin Golden Dragon
Business Wire (Mon 8:48am)

UTVG isn't reacting all that bad to the "restating" news. It wouldn't surprise me if we closed positive on the day (not that I would read much into it).

I have a somewhat different take than some on today's "restatement" I am with David on this. My knee jerk reaction to seeing the news was that I should close my position immediately, but I decided to read and think first. (thanks to David's influence on my methodology). 
My conclusion was that, while this might be a factor short term, there is no change in fundamentals. 

Here is my reasoning:
1. Restatements are almost always a red flag, but-

2. "it will restate its previously issued third quarter financial statements to report the revenues of the company's subsidiary, Shanghai Lanbao"  This change was not the result of any errors or ommisions, but a choice ( a good one I think) made by management to recognize revenue from  a newly aquuired subsidiary in a way that better portrays their growth.

3. "Significantly, gross profit and net income are not affected by the change in reporting methodology and remain $4,505,579 and $3,066,475 for the third quarter of 2007." This really takes the sting out of the restatement. At this time, there is nothing to suggest to me that they are cooking the books.

4. "As a result of the change, Universal Travel's gross margin for the third quarter of 2007 is now 35% compared to the 22% previously reported. Similarly, since net income for the third quarter remains as reported, net margin increases to 24% compared to the previously reported 15%."  - Aquasitions almost always create some accounting difficulties. The restatement indicates to me that management is alert and willing to listen to its accounting firm, because the advise to restate surreally came from someone with a sophisticated, broad based accounting background.

5.  "As a result of the restatement, management is adjusting its fiscal 2007 guidance, which now reflects the recent closing of both the Foshan and Tianjin acquisitions in the fourth quarter. Fiscal 2007 revenue is expected to come in between $44 million and $45 million, an increase of 340% to 350% from $10.01 million reported in fiscal 2006. " - One of the problems any small company faces is that of getting noticed in the markets. 340% revenue growth is very good news and likely to be noticed.

All in all, UTVG continues to look like a young, rapidly growing company in a growing sector.

Cooked books can occur in any industry, in any country, or in any size company. I don't see any particular evidence yet of anyone in the UTVG's kitchen 

Some concerns to watch :
The CFO was reassigned. This could mean that he had strong objections to this restatement on ethical grounds. Or, it may mean he is an incompetent boob that was removed because he never saw this accounting choice until the outside accounting firm suggested it to the Board. take your pick.
Long term:
The company is undergoing rapid growth going into the Olympics. How will they do after they are over?
Right now the industry is in its infancy, but some consolidation is already occurring. Is UTVG going to end up being a little fish or a big fish? Currently, I do not know enough about travel in China to have any notion about this, but they have already acquired two companies.

[buddjas1]

Revenues fall by $7.5 million, but the income remains unchanged?  That makes no sense--profit margin of 0% on that revenue???  Fishy to me, unless someone can explain it away.

[tokyopua]

http://www.businesswire.com/portal/site/home/index.jsp?epi-content=NEWS_VIEW_POPUP_TYPE&newsId=20071203005730&ndmHsc=v2*A1196686800000*B1196720803000*DgroupByDate*J1*N1000837&newsLang=en&beanID=202776713&viewID=news_view_popup

Universal Travel Group To Restate Previously Issued Q3 '07 Financial Statements

"Revenues for Shanghai Lanbao in the quarter ended September 30, 2007 as restated were $916,467 compared to the $8,453,949 previously reported for the period. Restated revenues of Universal Travel Group for the period were $12,813,942 compared to the $20,351,424 previously reported. Significantly, gross profit and net income are not affected by the change in reporting methodology and remain $4,505,579 and $3,066,475 for the third quarter of 2007."

They were only wrong by about 90%.  Now we know the reason for the retrace.  I hate being the last to know.

Yeah, that is wierd that they change that much and yet dont even change the other figures at all.  I dont get it.

I didnt pull the trigger to buy yet and now am a bit more unsure.  I just moved to LA, looks like I live about 100 blocks away from their office on the 10000 block of Wilshire Blvd.  If it wasnt such a long drive (that could take like an hour one way) I would go check out their offices lol. 

[terainvestment]

may be you can go there during week end

[David Randolph]

I just moved to LA, looks like I live about 100 blocks away from their office on the 10000 block of Wilshire Blvd.  If it wasnt such a long drive (that could take like an hour one way) I would go check out their offices lol.

You would go there, find an empty space and probably conclude the business is a fraud

From the latest earnings release:

«"Furthermore, with the rapid expansion of our company we have relocated our U.S. headquarters from Los Angeles to New York City and we look forward to forging a close relationship with our investor base there."

The company's new address is 1330 Avenue of the Americas, 21st floor, New York, NY 10019. The company has also changed its telephone number, which is now (646) 200-6314.»

Revenues fall by $7.5 million, but the income remains unchanged?  That makes no sense--profit margin of 0% on that revenue???  Fishy to me, unless someone can explain it away.

I love that expression, "fishy". Ok, let's check out what management said on the subject:

«Universal Travel Group (OTCBB:UTVG), a fast growing travel services provider in China, announced today that it will restate its previously issued third quarter financial statements to report the revenues of the company's subsidiary, Shanghai Lanbao, on a commission based revenue recognition method as opposed to the transaction-based method originally used in preparing the third quarter financials. The decision to restate the revenues on a commission based as opposed to a revenue based methodology was approved by the company's board of directors based on discussion with senior management, outside counsel and the company's current public accounting firm.

Revenues for Shanghai Lanbao in the quarter ended September 30, 2007 as restated were $916,467 compared to the $8,453,949 previously reported for the period.»

The issue is with Shangai Lanbao only. Let's study just a bit more about this subsidiary:

Shanghai Lanbao Travel Service Co., Ltd.

Only realcoolhead could say something about the subsidiary's website, since it is in Chinese: http://www.cba-hotel.com/ (but I guess he's got other stuff to do, since he doesn't like this pick in the first place, so let's skip it).

Shangai Lanbao is an hotel booking service. It earns a commission for its services. The hotels get more demand and travelers make more informed choices. Initially UTVG booked Shangai Lanbao's revenues using a "transaction-based method". This means probably consumers pay in http://www.cba-hotel.com/ and then Lanbao transfers the money to the hotels, retaining its commission. Initially UTVG booked all the money passing through as revenue. Now it opted to book just its commission part as revenue, using a "commission based revenue recognition method". I think this is a better way to reflect the company's operations. 

This is why obviously gross and net income weren't affected. Just profit margins grew, since revenues recognized naturally fell from $8,453,949 to $916,467.

I'm not all that surprised by this change because in prior press releases the company always used the commission based revenue recognition method:

• Universal Travel Group Newly-Acquired Subsidiary Shanghai Lanbao Reports $1.3M Revenue for the First Six Months of FY '07
PR Newswire (Wed, Sep 19)

Just one more note on yesterday's press release:

«Fiscal 2007 revenue is expected to come in between $44 million and $45 million, an increase of 340% to 350% from $10.01 million reported in fiscal 2006. This guidance is up from the previously issued range of $35 million to $36 million reported in August 2007 for FY'07. Net income for fiscal 2007 is now expected to be in the range of $8.5 million to $8.8 million, or $0.23 to $0.24 earnings per share, an increase of 233% to 245% from $2.55 million reported in fiscal year 2006. This is an increase from the range of $8.2 million and $8.5 million previously announced for FY'07 in August 2007.»

UTVG's trailing earnings multiple is 14.7 while it is growing them by about 240% from the year ago levels. I continue to see $0.5 EPS and at least $7.5 price per share in 2008. Much more over the long term if everything goes right, I'm a big fan of the tourism sector in China.

I understand realcoolhead's and other's concerns, I mean, should we trust a Chinese and OTCBB company in the first place? Maybe not, but until I get complete evidence that the company is a fraud or is cooking books I'll be a believer. The potential upside if the story is real is 1,000% or more, the potential loss is 100% (currently on 4.8% of total capital, of course).

I don't think we should put stocks in bags with etiquettes. Each stock is unique and has its own story. UTVG.OB doesn't have anything to do with ETLT.OB, for example (I was wrong on that one - not because it was a fraud, but because fundamentals deteriorated a lot - there wasn't any growth to begin with). UTVG.OB is a strong growth story, in fact, it is the fastest growing company I've ever studied.

I'll keep holding UTVG.OB for the long term. 

[terainvestment]

David: standing ovation for the perfect analysis on commission based vs. revenue based!
great insight!

[tokyopua]

Thanks for the heads up lol, that would have been quite a wasted trip had I decided to go!

--------------------
You would go there, find an empty space and probably conclude the business is a fraud

From the latest earnings release:

«"Furthermore, with the rapid expansion of our company we have relocated our U.S. headquarters from Los Angeles to New York City and we look forward to forging a close relationship with our investor base there."

The company's new address is 1330 Avenue of the Americas, 21st floor, New York, NY 10019. The company has also changed its telephone number, which is now (646) 200-6314.»
------------------------

[David Randolph]

David: standing ovation for the perfect analysis on commission based vs. revenue based!
great insight!

Thanks terainvestment, you're very nice

Thanks for the heads up lol, that would have been quite a wasted trip had I decided to go!

Well, you can always make a trip to New York

Nice volume for UTVG yesterday. I guess investors are seeing that the restatement wasn't a negative news.

Just checking out the 4th quarter:

«Fiscal 2007 revenue is expected to come in between $44 million and $45 million, an increase of 340% to 350% from $10.01 million reported in fiscal 2006. This guidance is up from the previously issued range of $35 million to $36 million reported in August 2007 for FY'07. Net income for fiscal 2007 is now expected to be in the range of $8.5 million to $8.8 million, or $0.23 to $0.24 earnings per share, an increase of 233% to 245% from $2.55 million reported in fiscal year 2006. This is an increase from the range of $8.2 million and $8.5 million previously announced for FY'07 in August 2007.»

They say revenue for the full year will be about $44.5 M. In the first 9 months of the year revenue was $26.8 M, so we're looking at about $17.7 M in Q4, up from $12.8 M in Q3 (this is essentially due to two acquisitions).

As for EPS, they gave guidance of $0.235. In the first 9 months of the year it was $0.0188+$0.047+$0.086 = $0.152, so we'll get something like 8 or 9 cents EPS, or about the same as in Q3, which is seasonally the strongest, don't forget that.

I see that it hasn't been any significant dilution over the quarters, at least not shown in the financial statements.

I'll continue holding UTVG.OB for the long term.

[David Randolph]

UTVG.OB rose 1.8% yesterday and it stands basically at the same price it was before the restatement news. I believe the market is interpreting the news the same way I did, that is, nothing changed.

I think UTVG.OB is undervalued at this point and I'll continue holding the stock.