Friday, December 29, 2006
Bonus America (now AAGH)
The Agreements between UK based Celador International Limited, the show's format owner, and China Media Power Ltd. (CMP), a 60% owned subsidiary of Asia Global Holdings Corp, allow CMP to produce and broadcast a minimum of 104 episodes. The episodes will commence broadcasting on or about May 1st, 2007 for a 12-month period with a mutual option for production and broadcasting to continue for a second year thereafter.The stock has reacted by climbing from about 3 cents per share to over 6 cents. I have no way to evaluate what this is worth, but perhaps others do and maybe they can tell if it's still undervalued and make money on it.
In hindsight, I regret wasting my time following a company that I'm unable to evaluate when something actually does happen.
Some famous person [James Altucher points out that it's Richard Branson] said that it's easy to become a millionaire: start with a billion dollars and buy an airline.
My return for 2005 was pretty much flat. I had maybe a few percent gain. Things went well later in the year, but I had a big loss from bailing out of LVLT at a low price early in the year. But I was very happy at the end of 2005 because I had a lot of great investments.
As 2006 ends, I have big expectations for Strathmore Minerals... and CVU... and perhaps BakBone Software. I figure CEDA is selling for about half of what it's worth. I have some hope for EPLN getting some market share, but their revenue gains have been modest so far.
CXTI is getting close to what I consider as a conservative estimate of full value. I may hold on to some of the shares in a taxable account because I think their future looks very good in the long term. As time goes forward, I'll probably look for places to park single-digit portions of my portfolio and just leave it there.
On to 2007!
UPDATE Dec 30, 2007:
Here's a screen shot from my brokerage. Yeah, it's E*Tarde. They've improved their algorithm for measuring gains/losses (and now they won't show the graph from previous years). I'm not sure how much it was off in the past, but it wouldn't matter much since I don't add or withdraw significant percentages to/from the account. Who would have guessed that the results would be so oddly distributed. You just never know. I try not to be affected by the market rather than the value of the business, but it's a challenge to not let wild price swings like this color my judgement. Was I a bad investor in August and a fabulous investor in December? No.
I've been digging around for old charts for prior years and I have a very interesting one for 2001. This chart is along the lines of the Richard Branson quote in the next post. The figure below answers the question, "How can a 20% gain for a year be absolutely disasterous?" The answer is when you have a 100% gain while doubling down on what turns out to be a total fraud (ACLN aka ASW). That one was painful, especially since I had a 6% loss in the following year 2002. I actually lost a significant amount of money in 2001 because I added a large amount of cash at the worst possible time, having been "downsized" and having added the severance and 401K into my portfolio mid-year.
Sunday, December 24, 2006
Some C companies
Food service management (businesses, schools, nursing homes). Focused in the Northeast (CT, Boston, Muncie IN). Oddly enough, they're also in the "energy management" business (efficient lighting), they're setting up a system in 10 Wal*Mart stores.
Two open letters to shareholders (1, 2) in 2006 explaining why they stopped reporting and what they're doing about it. They're having some cash flow problems due to the accounting and legal work. They placed 440K new shares. Auditors resigned. The new energy management business has new products in beta test.
Dec 21, 2006 press release: Q1 ending Sept 30 had a lower loss because the prior year had bad one-time charges. Big time dilution. The company is now up-to-date with SEC filings.
Based on Q1, they're losing money, but improving. Doubts about going concern. The characteristics of the business look pretty bad.
CAUI, CANAM URANIUM CORP., no website, sec, yahoo, chart, Com ($0.001)
extremely junior uranium explorer, SEC has issues.
UPDATE May 12, 2007: People seem to be searching the web for this company and wondering if it's a fraud. Seems to me, you're asking the wrong question. Really, you should be learning as much as possible about uranium mining and what it takes to be a viable mining company that's worth anything. Lucky for you, I've written a lot of stuff and collected a lot of links about uranium mining. The central location for that is HERE. David Miller of Strathmore and other big experts in the field have a lot of negative things to say about most of the junior uranium mining companies. I have no idea whether CanAm is good or bad, but I'm not the one who's trying to find out. Good luck.
CAXG, CHINA AOXING PHARMACEUTICAL CO., INC., no website, sec, yahoo, chart, Com ($0.001)(New)
Struggling Chinese reverse merger developing painkiller drugs for China. They're one of the first non-government entities to get approval from the "Chinese FDA". But they're in a bad financial state (big loans and they need more) just as they're about to introduce the drugs. Worth following to see what happens.
Bamboo juice, Chinese reverse merger, website is "under construction"
UPDATE Dec 28, 2006:
Here's an interesting article by Van Der Berg that's kind of long, but worth it. It starts out looking at stuff like interest rates, inflation, etc. and then dives into investing methodology.
He quotes Karl Menninger, a psychiatrist:
"The voice of intelligence... is drowned out by the roar of fear. It is ignored by the voice of desire. It is contradicted by the voice of shame. It is biased by hate and extinguished by anger. Most of all, it is silenced by ignorance."And then he goes on to offer psychological states of the market that he likes to buy into. Apathy. Fear. Panic. But the ultimate irrational state is anger.
When you get angry in the stock market and therefore lose control of your emotions, you will cause yourself some serious problems. In fact, we have a wonderful bellwether in our operation. Whenever we buy a stock that people are angry with, our switchboard lights up. Clients will say, "What are you doing buying that stock?! I don't want that thing in my portfolio."hat tip to Squidprorow over at Motley Fool
So when people call us up and tell us they're angry about a stock we're buying, we know we've got a winner....
I've been working on going through stocks that I've looked at before. In trying to do this quickly, I haven't been taking any public notes. I'm also looking at a potential investment.
Friday, December 22, 2006
Q. P. Corporation (QPCPY)
I stumbled into this stock when debugging a script problem and noticed the address of the company that was causing a snag was listed as "Shibuya", which is one of those major landmarks in Japan that everyone knows about (busiest intersection in the world, supposedly).
In the "our business" part of their website, they describe what they produce:
- Mayonnaise and Dressings Business
- Canned and Retort Foods Business
- Egg Business
- Healthcare Business (baby foods and nursing home foods)
- Vegetables and Salads Business
- Distribution System Business
Their mascot looks suspiciously like the Tarako kewpie doll. Wait a minute. This is the same Kewpie company that makes Tarako brand pasta sauce! Oddly enough, I covered the whole "tarako" fad on my alternative blog here. While I don't believe in socially responsible investing, I have to draw the line somewhere.
Actually, they seem overpriced based on declining earnings (roughly 53 cents per diluted ADR), a low return-on-equity ratio, and inhumane marketing.
not worth following
I may sell CXTI before too long, but it's a tough call to make. I strongly believe the company will do extremely well over a long time period. Five years from now, earnings could be much higher than they are now. But if I can find an investment that's extremely undervalued, it's likely to beat CXTI. I suppose it will depend on comparing the two. It's tempting to keep some CXTI in a taxable account.
JLF Asset Management (aka Jeffrey L. Feinberg and underlings) just filed a 13G statement with the SEC and it now owns 17.75% of CXTI (see also here and here and here). He also owns Veri-Tek, E Com Ventures, Chardan North China Acquisition Corp, Industrial Enterprises of America, Cost Plus Inc., and a lot of other stuff including True Religion Jeans. He was accused a while back of window dressing. I consider it a total non-issue: at best it might present an opportunity to dump some shares at a premium at the end of next week.
It's taking a lot of work just to prepare for the next pass through the Pink Sheets. I expect to cover about 3 to 4 thousand companies this time. I'm including ADRs and warrants and all the other stuff in the list; hopefully it won't confuse the help and slow down the pipeline. I figure the whole effort will last about six months. I'm hoping CXTI and Strathmore Minerals and maybe another investment reach full value before then.
I need to focus on following a large number of companies more closely in the future. What I've been doing has been clumsy and I can easily miss opportunities. I've got a number of ideas for improvement.
Pink Sheets continues doing good stuff
Ellenoff Grossman & Schole LLP (EGS), a New York City-based law firm that specializes in corporate and securities law, has been accepted as the first Attorney Designed Advisor for Disclosure (DAD) for OTCQX listed companies. As a DAD, EGS will provide general corporate legal advice with respect to a clients' OTCQX listing requirements, as well as securities law compliance, generally.The OTCQX is the premier class of Pink Sheets companies which have "substantial operating businesses and provide credible disclosure to the public". Each of these companies must nominate a DAD to guide them on the OTCQX requirements.
The reason I believe the move to create these new classes is so important is that it shifts some of the regulatory work into the free market. Imagine if you could scale back the role of the SEC by about 75% and then have NYSE, AMEX, NASDAQ, and Pink Sheets take up the responsibility on themselves. Suddenly you have competitive forces instead of an unresponsive bureaucracy determining how to hold public companies accountable. If NYSE is too burdensome and creates useless regulations, the companies would shift to other exchanges. If one of them allows too much fraud or too little corporate transparency, investors will shift to other exchanges and stocks on the problematic exchange will languish (causing the good companies to move).
In a sense, this is happening already to some extent as companies are able to get listed on various exchanges around the world. There's a lot of talk about how SOX requirements make listing in the US a real pain, so new IPOs are happening outside the US more and more.
I expect to finish making another pass through the Pink Sheets (looking for new investments) before they implement this new multi-class structure. In a way, the new structure is bad for me because it does a lot of the work that I've been doing, making it easier for other investors to find the good stuff on the Pink Sheets. That's OK, I don't mind.
Thursday, December 21, 2006
Bakbone Software (BKBO) deal with Sun
Today’s announcement enables the worldwide availability and global cooperative support for BakBone’s NetVault®: Backup product suite through Sun’s direct sales force, as well as its network of distributors and value-added resellers (VARs)....and the market went [somewhat] wild. The stock price jumped 15% to close at $1.52. Still no word on the accounting issues.
Wednesday, December 20, 2006
China Expert Technologies (CXTI) yet another two big wins
This time it's two more areas of Fuzhou City (population 6.6 million), capital of Fujian province.
Mawei District: $25 million ($21.7 million after hardware purchases and value added tax), $0.9 million consultant fee.
Yongtai County: $32 million ($28.5 million after hardware purchases and value added tax), $1.5 million consultant fee.
So far for Fuzhou City, here are the districts/counties (see here):
Cangshan District (got it)
Minqing County (got it)
Mawei District (got it)
Yongtai County (got it)
Pingtan County (got it)
Also, CXTI is winning contracts in Quanzhou, also in Fujian province.
Dehua County (got it)
Quangang District (got it)
Nan'an City (got it)
Hui'an County (got it)
Licheng District (got it)
Shishi City (got it)
Jinjiang City (got it)
Ning Bo City, in Zhejiang province
Yinzhou District (got it) local government website in English, map, 750K population
Once again I'll note that the entire province of Fujian has selected CXTI's Jinjiang City e-government system as a model for 82 cities in Fujian, which if I understand correctly, is pretty much the entire province. So far, CXTI has officially landed only 12 of them. 70 more to go. Plus there are other provinces such as Zhejiang.
CXTI stock today went up as high as $6.00 per share. I'm definitely going to need to figure out a closer lower bound on the value of the stock.
Monday, December 18, 2006
China Expert Technology (CXTI) contract
CXTI entering contract with Quangang District of Quanzhou City and Pingtan County of Fuzhou City, both in Fujian province, China.
Construction starts July 2007, ends August 2010. Total fee for Quanggang is $34 million, $30 million after hardware purchases. Total fee for Pingtan is $26 million or $22.4 million after hardware purchases.
Another contract on Dec 11, 2006 with Quanzhou Guo Guang Scientific Technology Development Company Ltd. CXTI pays them $1.9 million comission within 20 days of the main contract being signed.
Also a commission contract signed on Dec 13, 2006 with Pingtan County Shun Wei Information Technology Company Ltd. $1.2 million paid to the consultant within 20 days of the main contract being signed.
Both main contracts provide for:
- Hardware Platform Integration
- Security Platform
- Application Platform
- Portal Website
- Unified Administration Approval System
- Coordinated Office System
- Calling Center
- Geographical Information System
- Emergency Commanding System
- Auxiliary Decision System
- Social Medical Security Information System
- Smart Card System
- Information Database
- E-Commerce System (for Quanzhou City Quangang District only)
Here's the main Quanzhou contract and consultant contract
The project is in phases, like the Shishi contract. 30 day on-site technicians. One year warranty and free maintenance. 5% of the contract price is paid on completion (paid within 1 month of acceptance). 5% is a deposit for warranty and after installation support (paid 10 days after 1 year warranty expires).
HW platform: 17.4 million yen
Application: 5.8 million yen
Portal website: 1.6 million yen
and so forth (much like Shishi). On each phase, 50% is paid within 15 days of starting, 40% is paid within 10 days after testing and acceptance.
Up to 20% breach of contract costs for CXTI. The city also has pretty much the same liabilities as in Shishi.
Contract signed by Bai Yu Hang representing Quangang and Song Feng representing CXTI.
The consultant agreement is signed by Song Feng representing CXTI and Wang Deng representing the consulting company.
Here's the main Pingtan contract and consultant contract
Looks like the same main contract. Signed by Yang Jun Feng representing Pingtan and Song Feng representing CXTI.
The consultant agreement is signed by Song Feng of CXTI and Li Yuan Zhi from the consulting company.
Sunday, December 17, 2006
going back into search mode
So once again, I'm dusting off the automated scripts, hiring child laborers, and preparing to make another pass through the Pink Sheets. I've had people ask me a lot of questions about the process I use and the most misunderstood thing is something fairly subtle. I don't care if I miss some good investments. I have fairly simple rules for selecting things to look at in detail and those rules are guaranteed to miss things. "If you throw out all banks and all mines, how do you know all banks and mines are bad investments?" Obviously they aren't since I own stock in a uranium mining company and I was briefly invested in two different community banks in 2005.
This time I've signed up 50% more laborers; that's counting Russians. Some of the work has started already.
Last time I initially didn't post the companies which passed the first level filter but not the second level filter. I'm thinking this time I'll post them after I sift through them. Otherwise it gets hard to track what's going on.
Saturday, December 16, 2006
uranium feeding frenzy spotted
Bids were due December 15 to a US producer auctioning 260 thousand pounds U3O8. Other sellers, in anticipation of future price increases, have grown increasingly reluctant to release material into the market, and thus competition for the auction material was expected to be aggressive. Meeting this expectation, competition was indeed fierce, as buyers exhibited a willingness to pay a strong premium in order to purchase material at a fixed price. The producer received multiple bids with the winning bid at, or very near, the December 15 Uranium Spot Price Indicator of $72.00 per pound U3O8.As far as I can tell, this is one auction only and not any other deals. The spot market is very thin with sometimes just a single transaction, if that.
It will be very interesting to see what UxC reports on Tuesday of next week. Their last report showed a price of $65.50, up $2.50 from the prior week. If they do report a $72 spot price, I wouldn't be surprised if the price actually drops a bit afterward. I mean, it's like, overdue.
UPDATE Tuesday 12/19/06:
Yep, UxC is showing a $72 spot price.
Looking at New Oriental Education & Technology Group (EDU)
Yahoo, Google, SEC, English website
Largest education services provider in China. 3 million enrollments since 1993. 872K in 2006. 375K are in test preparation courses. 25 schools and 111 learning centers. 1,700 teachers. 2 million registered online users. Recent CAGR growth is 32%.
The schools stretch from Shenzhen in the south all the way to Harbin in the north and out to Chengdu, Sichuan in the west (Chengdu and apparently Chongqing as well, buried in the notes). Nothing in Fujian or Jiangxi in the south.
They also cover test preparation courses (which is CEDA's line of business). Also online education.
Classes for kids age 5 up to adults.
The total available market was about $72 billion in 2004 (English language training was only $1.9 billion of that). EDU's total revenues for 2006 were only $96 million. So it's apparently very fragmented, which is good for CEDA. 2/3 of EDU's revenues are in four cities: Beijing, Shanghai, Guangzhou, and Wuhan (each has more than 4 million people).
The private education sector in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify. We face competition in each major program we offer and each geographic market in which we operate. None of our competitors focuses on as broad a spectrum of programs, products and services as we provide. Instead, our competitors focus on targeted markets, both in terms of the particular segments of students they aim to attract and the local markets in which they operate.EDU's goals are to establish more schools and training centers, increase enrollment, expand offerings, and do misc strategic stuff.
For example, we face nationwide competition for our IELTS preparation courses from Global IELTS School, which offers IELTS preparation courses in many cities in China. We face regional competition for our English for children program from several competitors that focus on children’s English language training in specific regions, including English First. We face competition for our “Elite English” program primarily from Wall Street Institute and English First, both of which offer English language training courses for adults in many cities in China. Wall Street Institute began providing high-end English language training courses to adults in major cities several years before we entered this market and enjoys a first-mover advantage. We also face limited competition from many competitors that focus on providing international and/or PRC test preparation courses in specific geographic markets in China.
Financial results for year ending May 31, 2005: (2006 results are skewed by a giant share compensation expense)
Operating margin: 17% (CEDA is 54%)
Net margin: 22% (CEDA is 54%, no tax)
Net return on assets: roughly 13% (CEDA is 44%)
Language training and test preparation revenues increased by 16% in 2006 and 39%. in 2005.
1 school, 1 training center, and 1 bookstore in Harbin.
2 schools, 28 learning centers, and 1 bookstore in Beijing.
They offer courses in thse PRC admissions tests: CET 4, CET 6, National English Test for Entrance into Master’s Degree Programs, National Math Test for Entrance of Master’s Degree Programs, Professional Title English Test and Public English Test System
They offer courses in overseas exams: TOEFL, TSE, SAT, ACT, IELTS, GRE, GMAT, LSAT, BEC and TOEIC
Class sizes are 50 to 500 students. 20 to 160 hour programs. Classes meet 1 to 4 times per week, typically 2.5 hours per class.
Course fees range from roughly $20 to $3,000.
The margins and return on assets for CEDA and EDU are very different. For one thing, it's fairly clear that CEDA is running cheap. They don't have a lot of assets and they have a long depreciation schedule. EDU seems to me to be like a typical western business with expensive assets (more than a building with 10 home theater units depreciating over 10 years).
And it's not like CEDA has a low growth rate. I get the sense that if fancy big-city education companies like EDU make big inroads into the Harbin area, that CEDA will probably get their margins squeezed somewhat, either forcing them to upgrade their assets or lower their prices to compete. But there's lots of room for that when the time comes.
Thursday, December 14, 2006
China Expert Technologies (CXTI) two more big wins
See this list for all the county level divisions in Fujian
Quanzhou City, Quangang District
Fuzhou City, Pingtan County
Other projects are listed in the 10-K and press releases:
Jinjiang City (Fujian, Quanzhou)
Dehua (Fujian, Quanzhou)
Nan'an (Fujian, Quanzhou)
Hui'an (Fujian, Quanzhou)
Quanzhou (Fujian, Quanzhou)
Licheng (Fujian, Quanzhou)
Ning Bo City, Yinzhou District (Zhejiang province)
Cangshan District, Fuzhou City (Fujian)
Minqing County of Fuzhou City (Fujian)
It's worth noting that the Fujian Provincial Government has selected the e-government system of Jinjiang City as a model for 82 cities in Fujian.
Map of Fujian also here
Fuzhou is the capital city on the Minjiang River in the upper-center right side. Minqing is upstream a ways. Dehua is south-by-southwest of Minqing. Jinjiang and Shishi are due south of Minqing on the coast. Hui'an is due south of Fuzhou near the coast. Quanzhou is a larger city in the same area.
CXTI keeps winning these contracts and there are a lot more potential contracts waiting to be won. I'm thinking they're going to be limited by both the up-front cash needed to finance this stuff as well as the technical people to carry it out. I recall one of the press releases saying they had won something like 6 out of 7 (or 7 out of 8) contracts in the area. I don't recall which press release said that, or maybe it was the 10-K.
Anyway, I'm thinking CXTI is worth a lot. I don't know exactly how much, but I'm thinking it's still undervalued even with the stock price soaring today as high as $4.54. I'll worry more about it at $8 or so.
Eternal Technologies (ETLT) Sold it all
At some point, I'd like to do a sort of post-mortem on the five investment decisions I've made with ETLT (buy, sell, buy, sell some, sell the rest).
Tuesday, December 12, 2006
US Government uranium
The government controls the equivalent of about 135 million pounds of uranium fuel. The world consumes about 180 million pounds per year. The government won't sell off its entire nuclear arsenal, considering that a lot of unstable countries are working on nuclear weapons, with more nuclear wannabes waiting in the wings. So if we figure the US might downblend and sell off 80 million pounds, that corresponds to roughly 1 year's worth of shortfall between what the world consumes and what uranium miners produce, not to mention the rapidly increasing demand with the 27 nuclear reactors being built and even more being planned.
Even the US government admits that it doesn't want to disrupt the uranium producers. In fact, one of the reasons why there's such a large imbalance right now is because of all the downblending of nuclear weapons into reactor fuel over the past 10 or so years. The Wall St Journal reports:
The Nuclear Energy Institute, which represents both nuclear-power-plant operators and uranium producers, has yet to take a position on the DOE's proposal but plans to do so, Felix Killar, the group's senior director of fuel supply, said. "Right now there's a lot of concern about assurance of uranium supply," he said. "We've had a 10-year hiatus of anyone even thinking about putting production on-line."The US DOE wants to sell 5.5 million pounds of uranium per year, which isn't even close to the 18 million pounds per year that Cigar Lake was going to bring online (Cigar Lake will eventually produce uranium, but probably years later and will it produce the same expected amount?).
The producers want the department to limit its annual sales to 2.6 million pounds in 2007-2009, 3.9 million pounds in 2010-2013 and 5.3 million pounds in 2014 to 2016. They also say the department should sell the material through long-term contracts to avoid driving down spot market prices, while reserving some supplies for new reactors that will need uranium for their cores.This actually makes a lot of sense: allow prices to remain high to encourage worldwide mining and then gradually increase the amount as new reactors go online. Oddly enough, it might be in Strathmore's best interests for the government to dump large amounts of uranium into the market in the near-term to keep production down while Strathmore quietly brings mines into production. The supply/demand imbalance won't go away and forestalling it would only make it worse. The uranium prices would go even higher in the long term than they would without the government sales because the 10 year drought in production would be extended for perhaps another 5 years.
UPDATE same day:
It's worth noting that the spot price of uranium jumped another $2.50 to $65.50 this week.
Monday, December 11, 2006
China Education Alliance (CEDA) combined links
Right now, this is a small investment. The CEO is the controlling shareholder, which makes me nervous. Also, much of the business is fairly new.
sec, chart, website (in Chinese)
2004 10-K (old post)
other SEC filings
looking at New Oriental Education (EDU), Dec 16, 2006
press releases, Jan 8, 2007
2006 10K with gigantic SG&A increase, April 10, 2007
Q1 2007, May 19, 2007
Q2 2007, August 14, 2007
sold about half, Oct 11, 2007
interesting Harbin satellite photo from NASA
the amazing Harbin snow and ice festival
China Education Alliance (CEDA) other SEC documents
8-K on Nov 1, 2006 and Amended 8-K on Nov 2, 2006:
Q2 10-Q was late.
The registrant was unable without unreasonable effort and expense to prepare its accounting records and schedules in sufficient time to allow its accountants to complete its review of the registrant for the period ending June 30, 2006, before the required filing date for its Form 10-QSB.Registration of securities on June 30, 2006
Amended 8-K for the auditor switch on June 27, 2006, response to the SEC letter below.
SEC nasty-gram telling CEDA to list any disagreements with prior auditors. June 23, 2006.
CEDA writes a letter to the SEC, April 27, 2006. This talks about the revenue recognition issue I mentioned a long time ago. Since the prior auditor agreed with the fix, there were no issues with the prior auditor when they left.
Letter from the SEC telling CEDA to amend their March 24, 2006 8-K regarding the resignation of the prior auditor.
The 10-K was late.
The registrant was unable without unreasonable effort and expense to prepare its accounting records and schedules in sufficient time to allow its accountants to complete its review of the registrant for the period ending December 31, 2005, before the required filing date for its Form 10-KSB.E-Fang's letter to CEDA about how they plan to conduct an audit.
e-Fang Accountancy Corp. is a PCAOB registered public accounting firm located in City of Industry, California. We conduct audit following all the requirements set forth by regulatory agencies. The audit of the international operations of China Educational Alliance Inc. will be conducted by auditors from our firm only. There will not be any foreign audit firm’s participation in any part of the audit procedures. All the auditors involved in the audit of China Educational Alliance Inc. are fluent in both English and Chinese languages, and have good understanding of the accounting operations in China. We are in full control at all stages, engagement, planning, field work, etc. of the audit procedures.Don't worry, it works both ways: English speakers have all sorts of silly idioms when speaking East Asian languages.
We appreciate your concerns and hope we have provided you a clear picture of out plan.
March 6, 2006: The SEC doesn't have any issues.
Feb 28, 2006: The SEC wants to know how e-Fang will do the audit, in particular will any unqualified international groups be doing any of the work.
Amended 10-K for 2004. Contains only certifications and SOX stuff.
Prior auditor ok with everything. e-Fang appointed on Jan 18, 2006.
Q3-2005 amended 10-Q. Only added certifications.
The SEC wants certifications and some more details about accountants.
CEDA realizes their revenue recognition was wrong.
SEC says CEDA's revenue recognition was wrong.
CEDA says 15 employees were only paid a grand total of $11,346 compensation because 1) it only covered two months, 2) hey, this is China and people don't make the big bucks here. They also addressed the SEC's request to get a real auditor. They also explained how the debit cards work (getting the revenue recognition wrong).
In Q1 and Q2 of 2005, CEDA had mentioned that they have other sources of revenue: software and educational books media. The SEC wanted to know the revenue recognition for these. CEDA said they hadn't sold any of that stuff at that point in time.
Our revenue presentation in the Forms 10-KSB/A and 10-QSB/A as included a description of self developed educational software and education books media as well as the provision of other services such as text book downloading and electronic storage management. At this point in time, we have not booked any revenue for the sale of these items, although they are part of our business plan. Further, we did not recognize any revenues for these items in our Statement of Operations for the fiscal period ending December 31, 2004 or the interim quarterly periods that followed. Nonetheless, in order to be conservative in our disclosure, we have amended the annual and interim reports to delete any reference to revenue or sales being derived from self developed educational software and educational books media as well as the provision of other services such as text book downloading and electronic storage management.And then they present a price list.
We do offer downloadable materials which are paid for by our debit cards in the following manner. The Company's revenue from downloadable materials is recognized at the time of sale of the debit card, as mentioned above. However, if a debit card user has insufficient points left on his card, downloadable services will not be available until the client makes a payment to our sales center in cash or by wire transfer in order to purchase additional points. Revenue would be recognized for such additional purchases at the time that the funds were provided.
Simulative Exam for College Entry
Simulative Exam for High School Entry
Enhanced Exam for High School Entry
Enhance Exam for College Entry
Exam Database from Named School
Simulative Exam for College Entry
Simulative Exam for High School Entry
Enhanced Exam for High School Entry
Enhance Exam for College Entry
Exam Database from Named Teachers
Simulative Exam for College Entry
Simulative Exam for High School Entry
Study / Notes from Named Teachers
Hardly anything on that list is more than a dollar.
And they also go into detail about the communication equipment: 10 sets of DVD home theaters used for presentations, two sets of servers to run the website, one set of satellite receivers. Installed Oct 2004. The board of directors says that this stuff should last 10 years with proper care and maintenance. So they used a 10 year depreciation schedule.
The SEC asks:
We note your disclosure that your officers and directors do not presently receive compensation. Please tell us what accounting literature you considered in determining whether the value of the services provided by these persons should be recorded as an expense with a corresponding contribution to equity.I've read about this issue in a GAAP book. Basically if an insider gives something to the company (including their time), it is essentially a donation of equity or something like that.
CEDA basically tap dances around it fairly effectively, in my opinion (and it's not an expert opinion).
Here's the SEC's letter which generated the above response.
I've said it before: Chinese reverse merger companies are so often terrible at accounting. But they typically figure things out and get with the program. It's very good to see the details of CEDA's business.
10 years for that equipment seems too long, especially the website servers.
It's somewhat troubling to see that they had listed business models for which no revenue had been generated.
17800 Castleton St., #208 , City Of Industry, CA (626) 810-8827
Eva Yi-Fang Tsai, CPA
just became a "certified valuation analyst"
They audited Great China International Holdings.
10-K/A for 2005. Unqualified opinion, only for 2004. Balance sheet is very weak but they made money in 2005 and generated operating cash in 2004 and 2005. The SEC had an issue with the company not explaining whether some prior auditors quit or were dismissed. Non-issue. Also here. e-Fang consent in a later registration for securities. The public company seems to screw up a lot.
The Public Company Accounting Oversight Board approved e-Fang's registration application here, on Nov 28, 2006.
e-Fang also seems to handle Spanish accounts?
They audited Harbin Tian Di Ren Medical Science and Technology (now part of China Sky One Medical).
We did not make a count of its physical inventory in December 31, 2004, stated in the accompanying financial statements at $651,641. The Company records did not permit the application of other auditing procedures to inventories.Nothing wrong whatsoever with disclosing this information.
Since we did not take physical inventories and we were not able to apply other auditing procedures to satisfy ourselves as to inventory quantities, the scope of our work was not sufficient to enable us to express, an opinion on these financial statements.
e-Fang Accountancy Corp., & CPA
Certified Public Accountants
/s/ Eva Fang Tsai
City of Industry, USA
February 25, 2006
There's not much info on e-Fang, unfortunately.
China Education Alliance (CEDA) English website
This talks about what they're doing overall and matches up with the SEC documents, except that it de-emphasises how new this stuff is (for good reason).
The real emphasis is on helping students "to pass their life-turning exams" which would be like our SAT tests, except that they probably have one for younger students as well.
Address: 58, Hengshan Road, Nangang District, Heilongjiang Province Harbin, People's Republic of China
Zip code: 150090
Fax (01186) 451 8233 5794
Beijing Office (01186) 10 8724 0586 (01186) 138 0450 6008
Harbin Office (01186) 451 8700 0662
Contact Ms. Bai or Ms. Zhang
1. The Membership System of the Test Questions from "The Big Classroom of the Elite Instructors"
Sounds like something out of Lord of the Rings. This consists of study cards and a database of over 200,000 test questions going back to the 1980s. Elementary school, middle school, and up to college.
I'm not sure why this is distributed via video-on-demand.
Each year CEDA organizes a team of education experts to produce new examination papers targeting at middle school examinations. Customers of CEDA will be able to download these resources on CEDA's website (www.edu-chn.com). As the papers are accessible through download verses print-copy, they are 50% cheaper in budget compared with traditional printed papers. CEDA also provides download of e-books, thesis papers, softwares and other resources.They also provide the same info through the mail for those without computers.
2. Tutoring Services & Services--the On-Line/On-Campus Big Classrooms of the Elite Instructors
This is the core operation with both an online classroom (video on demand, other downloaded resources, and something like IM for Q and A) and a bricks-and-mortar "after-class" classroom and vocational courses. These are both targeted to junior and senior high school students. They intend to create more on-campus centers in other cities in the future, initially in the Heilongjiang province.
They mention the subjects covered by the online services: Chinese, English, physics, chemistry, history, and others. Online lectures, tutoring, explanations, etc. This doesn't yet cover real-time broadcast.
3. Talent Crossroads
New line of business. Student placement service, matching students and employers.
4. Wealth Island
Online competitive game involving answering "intellectual questions". The three top users "are rewarded materially". 251,893 registered users as of April 2006.
Some of these news items are not very important and difficult to map into what is actually happening. At some time after Aug 2005, CEDA's website had about 20,000 user visits per day and 70,000 page views.
CEDA was chosen by a vocational association in China to form a partnership of some sort. The association dates back to 1917. CEDA was chosen from "among tens domestic and foreign strong company by strong technology strength, market development ability and national market channel in network education area."
This partnership intends to form a company involved in business in the following fields:
- National vocational certification of fresh vocation
- Network education of hot vocation
- Undergraduate employment guide and training
- Unemployed worker training and employment joint
- Farmer worker skill training demand market joint
- Teacher training of vocational education item
- International labor force input and output
The Chinese vocational education has a large-scale market, we will get large market advantage and generous profits in vocational education area through cooperating with each other and sharing resources.Yeah, that's the stuff.
They started the "Wealth Island Game" on March 1, 2006 for kids 6-18.
They introduced the first sex education electronic magazine in China.
Youth sex health condition has attracted the widespread attention all over the world. Youth sex education has many problems need to be solved urgently: firstly, the poor sex educating materials has not meet youth growing need; secondly, the channel for youth get sex knowledge is narrow, sex education is secret because of the Chinese traditional culture. Under this circumstance, China Education Alliance made full use of network characteristic of coverage widespread, rapid, etc., organized youth sex educators and scholars introduced the electronic education magazine—Youth Garden of Eden [so the girl bites an apple and gives it to the boy and that's how it all works?] which is suitable for youth psychology characteristic, this magazine can be downloaded online. The publication of this electronic teaching material is popular to youth readers and teachers as a result of it represents the coming of middle school and elementary school students’ electronic popular scientific reading materials, Founds the beginning of Chinese education electronic popular scientific magazine popularization method.Yeah, I'll bet it increases the visit rate.
It enhances the reputation of China Education Alliance, and enhances visit rate by click and on-line time.
They opened "Education square of China Education Alliance" cooperating with business website "Dangdang", established 1999, largest Chinese online bookstore in the world, funded by various well-known groups such as SoftBank. CEDA will sell materials online through Dangdang (well, I'll be danged).
They formed a business partnership with the largest welding technology training base in Asia: Harbin Welding Technology Training Center (established 1984 by China and Germany). Many of the teachers studied in Germany.
The use and demand on welding talent of northeast old industrial base is the first rank in China, Heilongjiang anticipate that there will lack for about 60000 welding talents in the next five years. So the welding talent training will be a potential market. The average training fees of each person will be about 5000 RMB [about $640].This ain't no mango farm.
InvestorsInvestor relations is Big Apple Consulting USA, Inc.
407-884-0444 or 1-866-THE-APPLE
58, Hengshan Road, Nangang District, Harbin, People's Republic of China 150090
(01186) 451 82289115
(01186) 451 82335792---8801(8807)
(01186) 451 82335793---8801(8807)
(01186) 451 87000663---8801(8807)
I'm impressed with what they're doing, especially the partnerships with well-established players.
China Education Alliance (CEDA) 2006 Q3
Here's the 10-Q for Q3 (comparing to the 2005 10-K):
Haha, cut and paste error right up front. The title says it's "For the quarterly period ended June 30, 2006", when it's really for Sept 30.
Still 58 million shares on Nov 13, 2006 (20K new shares added since 10-K).
Ten times as much cash, $5.6 million, the cash flow statement should be interesting.
Ridiculously low inventory (debit cards).
PP&E is huge (as I noted before) and slowly depreciating.
On the liability side, AP is down to almost nothing.
Advances on accounts (that's the debit card prepayments) is $477K, up from around $300K at year end. If revenues have greatly increased, then this is fine.
The loan from shareholder has actually increased.
There's a $1.5 million notes payable which wasn't on the year end balance sheet. That would explain some of the new cash.
Net cash is $3.3 million. With only $9.7 million in assets, that's a strong balance sheet. 75% equity.
Q1 2005: $0.08 million
Q2 2005: $0.29 million
Q3 2005: $1.02 million (also stated in this report)
Q4: $1.73 million (i.e. $3.11 million - $1.38 million)
Q1: $1.35 million
Q2: $2.17 million
Q3: $2.28 million
In the notes, they say that the increase in revenue is due to the training center which was opened in Q3 2005. It started out small but increased revenue rapidly. In 2006, they've added new vocational and certification programs (see below NOTES section). Advertising income also increased on the website. It seems like the bricks and mortar learning center is where most of the revenue really comes from.
Revenues for the trailing 12 months is $7.5 million vs $3.1 million for all of 2005. You can see from the list of quarters above, that revenue is increasing strongly.
Gross margins [update: I mean gross costs are small, gross margins are huge] are meaninglessly small, but I wonder if they're correctly accounting for cost of the services for the training center. It all works out the same at the bottom line.
SG&A is $359K, or 16% of revenues (13% for 9 months).
No tax provisions this year because they got approval for being a "foreign invested company" and thus they get zero taxes for 2 years and half-taxes for [I'm not sure if it's 3 more years or just the 3rd year] (see NOTE 11). I would value the business as if they paid tax because they will before too long.
So let's assume about $800K for net income. 1.31 cents per diluted share (roughly 4 cents for 9 months).
Cash flow from operations looks perfectly normal: it's roughly net income plus depreciation and capex is roughly equal to depreciation (which is not much, most of the PP&E is buildings and machinery and depreciates slowly).
The only other cash flows are $7K from issuing stock, the $164K increase in loan from shareholder mentioned above, and the $1.53 million notes payable mentioned above.
CEDA is a holding company for ZHLD and Zhonghe Education Training Center ("ZHTC"). ZHLD is a technology company for online education in China. ZHTC is wholely owned by ZHLD except for 1% owned by CEO as required by PRC law. ZHLD also owns 70% of Beijing Hua Yu Hui Zhong Technology Development Co ("BHYHZ"), formed on Sept 30, 2006 (need to check this out).
US GAAP applies here, as expected.
Buildings: 20 years ($2.8 million)
Communication equipment: 10 years (seems too long for telecom equipment) ($1.1 million?)
Vehicles: 5 years (I've seen Chinese companies use 10 years) ($128K)
Furniture, fixtures, equipment: 5 years ($328K?)
$69K foreign currency translaton benefit, shows up in separate equity account, not income statement.
There are some deferred revenue apart from the debit card stuff.
Advertising for the quarter was $1.5K.
The $1.53 million notes payable is a bridge loan (also here). Sept 29, 2006. 6% interest. Matures March 29, 2007. CEO is pledging 7.9 million shares but it's actually a floorless toxic pledge. Only the CEO is at risk, not the other shareholders. The warrant strike price is 50 cents. Roughly 3 million warrants. 61 million fully diluted shares?
On September 29, 2006 China Education Alliance, Inc., a North Carolina corporation, consummated a bridge financing pursuant to which the Company issued $1,530,000 aggregate principal amount of secured promissory notes and warrants to acquire an aggregate number of shares of common stock of the registrant equal to the highest dollar amount of the principal prior to the maturity date for an exercise price per share of $ 0.50.$407K (10%) of cumulative net income is reserved for the PRC non-distributable reserve to offset extraordinary losses in the future (general reserve), part of it is reserved for company expansion, some for employee welfare, some for a "bonus reserve". NOTE 12.
Also, the company contributes to a post-retirement plan based on 20% of employee basic salaries. PRC is responsible for the liability.
The CEO has been paying dollar denominated fees within the US for accounting, legal fees, etc. from a personal bank account in dollars due to the Renminbi restrictions. This matures in 2006 and can be converted to stock at the market price.
Here's some info about the website. I've gone through some of the parts that don't require login, although I don't read simplified Chinese (or any kind of Chinese).
www.edu-chn.com is a major functional education resources portal website in China. It provides plenty of client resources and strong brand promotion for business developing. Under the website, there are four modules, eight alliances, nine platforms and eight columns of interactive entertainment columns. It provides informative education products through the updated communication tools under www.edu-chn.com. It provides multi-media resources such as college school, middle school and elementary school test papers, courseware, and video data since 1980s, owning intellectual property rights for more than 300,000 sets of courseware and test papers. www.edu-chn.com is a major enterprise-class comprehensive education network platform which based on the network video technology and the large data sources of elementary education resources. It provides online education and material download for customers by integrating “the big classroom of the famed instructors”. By the end of 2005, more than 3 million visitors had viewed the website.I need to get a Chinese reader to look over it.
They also have the learning center with about 36K square feet of usable space, 17 classrooms, and a capacity of 1,200 students. There are courses for the compulsory subjects for middle and high school.
New services are for vocational education, with a website.
CEDA leverages the existing resources of China Vocational Education Society which as members including provincial education bureau and more than one thousand vocational training schools across the country in carry out its fast expansion strategic cooperation with the outstanding training agencies in local area, especially in the aspects of joint enrollment, resources exchanging and on-site training agencies establishments. The Company has carried out various level cooperation with over one thousand professors in their respective expertise fields, more than two thousand membership schools, over three thousand school principals, over fifty thousand school teachers, as well as over one hundred news media and twenty scholarly research organizations.And here's something interesting:
CEDA’s “Millions of College Students Employment Crossroad” program is developed in response to the high jobless rate for China’s current college graduates. More than 35% of the college graduates can not find a job in the year of graduation. Many of the college graduates pursue vocational training after college education. CEDA’s “Millions of College Students Employment Crossroad” program is to establish a long term training program for college students to build connections with corporations and obtain education programs prescribed by the hiring corporations.There are about 16,000 high schools in China, 847 are "key schools" which have the best teachers and resources. In key schools, the college entrace rate is actually above 90%! Student with poor performance can still get into key school by paying a sort of tuition. Overall in China, this amounted to over $3 billion in 2005. That's about $3.5 million per school which might be something like $2,000 per student? That's a lot of money.
In 2004, the Chinese online education market was at $1.8 billion and will probably increase over time. A "well-known market consulting firm" iResearch predicts the market will become twice as big as that within a year or so. Another research firm estimates there are 111 million Internet users in China.
CEDA plans to duplicate its Harbin area model in other parts of China.
They will probably raise an additional $6 million (presumably around 12 million shares) for expansion in the future. So long as they do it right and get the same return on assets, that's fine.
I would actually be more comfortable if CEDA's success rests mostly in the training center revenue than the online revenue. Revenue has clearly expanded and the company is doing well. The business model seems to be quite good, but I wonder about competition in the future.
So far in 2006, they seem to be heading toward a free cash flow of about $4 million for the year. With 61 million fully diluted shares, that works out to about 6.5 cents per share, which alone would justify a share value of around a dollar. The future growth is the real wild card here.
The financial statements seem fine, but they could be better. There are details here, but there isn't a big picture of how the business works. I don't get a clear mental image of how the customers, the schools, the instructors, etc. all interact in terms of how the whole machine functions. Is it a Sylvan Learning Center sort of tutoring thing? Is it a voc/tech school sort of thing? Is it like a Cliff Notes distribution company? An SAT preparation type thing? If it's a combination of these, what are the business segment characteristics?