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Thursday, May 31, 2007

The Empirical Commute

I've told this story to a lot of people and I've written parts of it on Motley Fool and perhaps even on this blog. I forget. But it's probably a good idea to write it down here now. The point is to explain the one thing that most changed how I view the world.

For about 10 years total, I commuted along a 30 mile stretch of highway which was ideal for studying driver behavior. Most of it was 4 lanes. Most of the time, the amount of traffic maximized driver interactions: about 50% of capacity, so there was lots of maneuvering space for people to do whatever things they were going to do. And the traffic was high speed, mostly 70mph (112kmh) and higher.

When I started doing this commute, I also had just bought life insurance, which got me thinking about a simple question, "If I was going to die this year, what's the most likely way that it would happen?" The answer was obvious. These people drove like maniacs. So I decided to focus on trying to avoid a serious accident. My time was valuable and slowing down a great deal day-in-and-day-out wasn't really a possibility and it wasn't clear that it would help. So I started actively studying the behavior of the cars and put a lot of effort into thinking about what they were doing and what they were going to do, but what made the most impact was simply carefully observing it all. Considering that I put in over 12,000 hours, I had lots of time to observe and learn.

What I learned was that drivers have a certain signature exactly like the things described in the book Blink. Some of it has to do with the type of car. Much of it is the trajectory of the car during the span of a few seconds. A lot of it is where the car is relative to other cars and within the lane. With 4 lanes and moderate traffic, there are a lot of degrees of freedom that can characterize the person driving. And the choices people make fall into very clear patterns.

I find that I always read the cars before I'm actually able to verbalize it. None of it is rational thinking, although there was a lot of rational thinking that went into observing the behavior over many years.

It's not that difficult to know what drivers are going to do once they've already started doing it (such as starting to edge over to one side of the lane or look over their shoulder before they change lanes), what I've been able to do is to know it about 5 seconds beforehand. Just last week I was driving someone along that same road and made a total of 4 predictions and they all happened, including one consisting of three steps involving a number of cars interacting.

There's no magic, it's just noticing the patterns that are already there. I've seen other commuters who see it because I see them reacting at the same time I see something.

The important lesson I learned from this is a sense of the complexity of real world systems. I can see that these patterns are weird; they are ruled by a mathematics beyond anything I can imagine. And I can see that any attempt to impose a simple model on it will end up very wrong

I've seen this same sort of thing in other areas, such as playing team based Quake games online (which I haven't done in years). I expect and hope that over time I'll get better at recognizing patterns in the small companies I look at here on this blog.

Reading books like Blink, Deep Simplicity, The Black Swan, the various evolutionary biology books, and others have helped me understand this stuff. Each piece of information adds to the giant jigsaw puzzle. For me, The Black Swan was a very big piece.

On the return trip of the very last day of all my years of commuting on that terrifying road, I thought to myself, "Hey! I made it! No accidents." Then only a minute or two later it happened. The car in front of me slowed down. Not a lot. I slowed down just fine since I had more than enough room in front of me. But a guy named Jeronimo (yes, that's his real name) in a 1989 Honda Civic DX wasn't slowing down enough and I could see it in my rearview mirror. I closed the gap in front of me to give him more room, but it wasn't quite enough. Bump! We stopped, looked. No visible damage. We both drove cheap old cars, so it wasn't a big deal.

I thought to myself that I should thank him for the humorous ending to a long story. I could have stood there pontificating to this Native American and his girlfriend on the median grass about my years of driving and the irony of it all ending this way. Sadly all I did was take down his information, which I still have to this day as a memento, and tell him that I wouldn't do anything unless the car fell apart or something. It never did. It was a Toyota.

I've previously spelled his name Geronimo, but I just dug up the accident information paper and I see that it's spelled Jeronimo.

Tuesday, May 29, 2007

American Skiing Company (AESK)

AESK, AMERICAN SKIING CO., website, sec, yahoo, chart
Obviously a seasonal business.

As of the 10-K, this company owned some big name ski resorts:

But this summary shows that it's not working out:
    in millions         2002      2003     2004      2005     2006
Revenue $272 $264 $284 $276 $307
Resort expenses $166 $168 $167 $172 $174
One time expenses $111
Operating income ($113) $3 $11 $7 $19
Interest expense $54 $47 $88 $82 $87
Net loss ($200) ($82) ($28) ($73) ($66)

Actually I only looked at this because I was curious about the returns on big ski resorts. Based on this, I can't imagine why anyone would build or own one. It puts lift ticket prices in a new light.

So they sold Steamboat for $239.1 million.

They sold Mount Snow and Attatash for $61.9 million.

They sold Killington for $85.2 million and used the cash to pay off some debt.

Based on this, it looks like they're trying to keep The Canyons.

The stock sells at 22. No, thanks.

Monday, May 28, 2007

Asia Electrical Power International (AEPW)

We design, manufacture and market electrical power systems designed to monitor and control the flow of electrical energy and to provide protection to motors, transformers and other electrically powered equipment.
The 10-K for 2006 has an interesting table on page 19. Good idea.

Only 18% gross margins in 2006, but that's up from 14% in 2005.
6% net margins in 2006, up from 4.2% in 2005.

Reasonably strong balance sheet. More than 1/4 of assets are PP&E.
More than half equity.

Revenues increased 18% in 2006.

Officers and directors own 57% of the company. CEO owns 47% but has controlling interest via the preferred shares (see below).

51 million shares on April 16, 2007. The weighted ave shares is only 26.3 million for the year 2006. The Q1 results show a weighted ave share count of 33 million.

According to the equity statement on page 30 (F4) of the 10-K, they started 2006 with 24 million shares and had a 2-for-1 stock split during the year. They also issued another 3 million shares. Why weren't the share counts and per-share numbers adjusted retroactively to adjust for the stock split like other companies?

There's also 5 million preferred shares outstanding, issued to the CEO for compensation along with 2.5 million shares of common (another 0.5 went to the CFO). No options outstanding at the end of 2006.

Each preferred share has 100 votes (common has 1), and not publicly traded.

They also quietly split the stock in the amendments to the bylaws.
(a) the number of authorized common stock, par value $0.001, was increased on a one for two basis, so that the number was increased from 75,000,000 to 150,000,000. Accordingly, the number of issued common stock increased from 24,000,000 to 48,000,000
Accordingly? I could see it the other way around, but it doesn't make sense to me to say "Oh, we just increased the authorized number of shares so, what the hell, we might as well split the stock."

I've been trying to track this down to explain why the diluted share count shows up as such a low number. It just makes no sense and I can't find an explanation. The 10-K shows a weighted average diluted share count of 26,250,000. The Q1 10-Q shows a the weighted average diluted share count of 33,000,000 for the quarter despite the fact that there were 51 million shares at the start and end of the period and apparently no changes in between.

(51 + 51) / 2 = 33 ?
Am I misunderstanding something?

I sent an e-mail to IR and I'm dropping this for the time being.

UPDATE next day:
IR got back to me on my question. Here's what they said:
The 33,000,000 weighted average number of shares was calculated as follows:

24,000,000 shares originally issued and outstanding - these shares have been
outstanding for more than 12 months
24,000,000 stock split made December 2006 - therefore as of March 31, 2007,
these shares were 4 months outstanding
3,000,000 shares issued to Directors December 2006 - therefore as of March
31, 2007, these shares were 4 months outstanding

The calculation is:

24,000,0000 original shares * 12/12 = 24,000,000
24,000,000 stock split * 4months/12 months = 8,000,000
3,000,000 shares to directors * 4months/12 months= 1,000,000
And here's my response:

According to Wiley GAAP 2007, in the section on earnings per share,
"The number of shares outstanding determined by relating (1) the portion of time within a reporting period that a particular number of shares of a certain security has been outstanding to (2) the total time in that period. For example, if 100 shares of a certain security were outstanding during the first quarter of a fiscal year and 300 shares were outstanding during the balance of the year, the weighted-average number of outstanding shares would be 250 [(100 X 1/4) + (300 X 3/4)]. In computing DEPS, equivalent common shares are considered for all dilutive potential common shares." [emphasis mine]

Note that in your calculation below, during the reporting period in question, the first quarter of 2007, all 51 million shares existed for the entire period. It seems to me that you're using a sliding 12 month period when reporting the weighted average shares for the one quarter.

Not only that, but this is a stock split, not an infusion of capital. If I understand correctly, FAS 128 says that stock splits of this nature are to be given recognition retroactively.

I'm not an accountant and I realize this stuff requires a great deal of experience and knowledge. That's why I have an accountant (it took me long enough to realize that I needed one). I'll see if I can get his take on this stuff. We were just going over the same issue for tax purposes a few weeks ago (the weighted average issue, not the stock split).

Price Checks

I'm going back through some stocks I had looked at in the past and determining stock price changes. Just walking through the index of posts.

Intended Color Scheme
Actual investments sold at a significant loss (say more than 5%)
Actual investments sold at roughly breakeven
Actual investments that are currently doing ok
Actual investments sold for a substantial gain
Actual investments that are doing very well (Strathmore is the only one right now)
Acutal investments that haven't done well so far
Missed opportunities that were (at least somewhat) known
Missed opportunities that weren't really obvious
Discarded stocks where my valuation was way too high
Correctly discarded stocks

The Companies
b-Fast Corp (BFTC): 1.5 cents to 7 cents
BakBone Software (BKBO): $1.50 to $1.85 (not very good so far for a 2 year investment)
Bank of the James (BOJF): $17 to $17.50 (bad, correctly bailed)
Seacoast Commerce Bank (SCCB): mostly unchanged (bad, correctly bailed)
LiveWorld (LVWD): 54 cents, up only slightly over two years (bad, correctly bailed)
Bowlin Travel Centers (BWTL): unchanged (bad)
BrandPartners Group (BPTR): was over 75 cents, now 12 cents (correct call)
Bulldog Technologies (BLLD): stock is essentially zero (not surprising)
YaSheng Group (YHGG): recently jumped to $2.15 from under $1.75 (bad, correctly bailed)
Yi Wan Group (YIWA): huge drop (bad)
Schuff International (SHFK): was $3.50, I figured it was worth $4, it's now $27. (major miss)
Strathmore Minerals (2.5 bagger so far)
Solitron Devices (SODI): mostly unchanged (not surprising)
American Dairy (ADY): was $6.75 and is now $20.25 (major miss)
Credit Acceptance Corporation (CACC): Was comparing unfavorably to NICK, was $13 and is now $26 (major miss)
China Bak Battery (CBBT): down somewhat
Caprius (CAPS): down bigtime (not surprising)
C-Chip Technologies (MANS): down from around 40 cents to under 7 cents (correct call)
China Digital Media (CDGT): down bigtime (correct call?)
China Evergreen (now CHWG): not sure but seems down
China Finance Online (CHFI): Since the Shanghai stock market has gone through the roof, this depended on it and has done quite well, but only from about 40 cents to $1.13. (miss)
China Energy & Carbon Black Holdings (CHEY): went dark last year, can't find the stock
Avalon Correctional Services (CITY): I predicted it was worth $3, it's now $2.75, but it sat at $3 for a while (good call)
Malibu Cola, my favorite... not! (CLCL): Stock has gone nowhere (correct call so far)
CaminoSoft (CMSF): was $1.38, now 17 cents (more or less correct call)
Level 3 Communications (LVLT): They're still selling for around five dollars. Here's a case where the supply/demand imbalance hasn't played out and it's been five years waiting (bad)
CapSource Financial (CPSO): went from 51 cents to $2.50 and back down to $1.08 (miss, and also missed in selling Celedon too soon at around $6 in 2003 instead of nearly $16 today)
Computer Services (CSVI): pretty much unchanged (correct call)
Edac Technologies (EDAC): went from around $4 to $7.14 (somewhat of a miss, bailed too soon)
Dyna Group International (DGIX): was around $1, now 71 cents (more or less correct call)
DAC Technologies (DAAT): stock cut in half (correct call, they got squeezed on margins, but from a different direction: commodity prices and the renminbi)
Ezenia (EZEN): stock way down (bad call)
DND Technologies (DNDT): stock went essentially to zero (bad call)
Eternal Technologies (ETLT): has essentially gone nowhere
China Expert Technologies (CXTI): went from 85 cents to nearly 7 dollars! (higher, but I bailed)
Fannie Mae (FNM): my puts expired worthless (very small loss)
Dynasil Corp (DYSL): went from 71 cents to $1.90 (miss)
FP Group (FPGR): fell to 5 cents
Global Aircraft Solutions (GACF):
Sorl Auto Parts (SAUP): mostly unchanged
Moro Corporation (MRCR): was 87 cents, now $2.65 "It sure is wonderful to be able to pass on stocks with a P/E of less than 5" [kick self]
Advant-E Corporation (AVEE): was $1.20, now $1.81
Genex Pharm (GENX): mostly unchanged

Quick list of discards
HOVVB: bad
HSPR: bad
HRBGF: gone?
HTLJ: bad
HTVL: bad
HVYB: up a little bit
HMWS: gone?
NMXS: gone?
NNBP: rags to riches to rags
NNLX: bad
NPDI: bad
NMSCA: fluctuating
NPFV: gone?
HDRX: really bad
HGIIA: rags to riches to rags
HICKA: 2+ bagger
HISC: really bad
HCFB: up somewhat (this is HCSB Financial)
NIMU: 4+ bagger (but it was a development stage company back then)
NEXH: gone?
NMKT: about the same
MLOG: about the same, but essentially no volume in 2007
MLTO: bad
MOBK: gone?
MODM: 3 bagger
MCAM: about the same, lots of fluctuation
MCET: really bad
MRCR: 2+ bagger
MRGN: bad
MSITF: really bad
FCPG: really bad
FIND: bad
FSCR: bad
FULO: bad
MDVN: 6+ bagger
MDTA: 10 bagger (my notes say "software, bad")
DVID: really bad
DOWJB: fluctuating (aren't they a takeover target?)
DSSI: gone?
DXXFF: flatlined
DTIX: gone?
DTTO: bad
FBGO: gone?
FATS: gone?
GBCS: bad
GBIR: bad
GAXC: bad
GECO: gone?
DMEC: gone?
DRMS: gone?
DNAG: bad
EBLC: bad
SEHI: gone?

Quick list of "Worth Following" companies
HOOB: about the same
HYDI: 2+ bagger (it took off starting in mid October 2006, new stuff came out)
HWWI: bad
MNRD: gone?
DYSL: 2 bagger
HRBN: 2+ bagger
DWVS: gone?
DYHP: up slightly
DTGLF: gone?
FAME: up somewhat
GBEL: gone?
GARM: up (I claimed it was a wild card)
DAOU: gone?
DDSI: gone?
DEWY: bad
DFNS: about the same (down in between)
DNII: no info
DSCI: up somewhat
DYNR: 8 bagger ("a mine, but possibly selling cheap")
DRUG: bad
EBHI (was EBHC): down (I had a negative opinion, but I don't see it in the notes)
ERIF: gone?
EVDR: really bad
JOES: down
RZPK: up and then down
EVDR: really bad
ERMS: down
ETEC: down
SMID: down
SPOP: gone?
SPSC: gone?
SCIE: fluctuating
SOTK: bad
SPND: up somewhat
TBV: fluctuating
KMGB: roughly 2 bagger
SZI: gone?
TLF: up
DXPE: 3 bagger

Miller Industries (MLR): up slightly, was up a lot
Man Sang Holdings (MHJ): up somewhat
HQ Sustainable Maritime Holdings (HQS): I said it was worth a split adjusted $10, it's now $11.43
IAGX: I said it might be worth $1.50, it's now down to $1.25 from $2.55
IAIC: down
IAUS: up
IBDI: bad
IBTGF: bad (I claimed ignorance on this one)
IDIB: really bad
IECE: 2+ bagger
IEHC: about the same (I claimed ignorance on this one)
IFSC: down
IFTH: down to 25 cents which is what I thought it might be worth
IMCI: 2 bagger

IMDD: down
IMMD: up-down-up
BCSR (was IMSI): about the same

I ruled out a lot of things because I wasn't confident that I knew enough about them. I ruled out all mines which included an 8-bagger. I don't consider most of these mistakes because I had a lot more uncertainty than I might have now (not just in hindsight, but as a result of looking at so many of these tiny cap companies).

If there's a systematic error, it's being too cautious which is the right side to be erring on. I can also see the effects of the shotgun approach to brute force searching: a lot of stuff falls through the cracks. A lot of quick guesses of valuation are wrong in both directions. That's fine. If you look at any of the quick company checks, there's a lot of stuff that gets missed or misinterpreted. It's really just a filter to increase the concentration of good companies, not to capture them all and not to filter out all the bad stuff.

In the early days, I was too quick to invest.

The purple entries are ones that I fear (thinking something is worth X and having it eventually worth a small fraction of that, or zero). There might be one or two dark-green entries above that should be purple as I might not have caught them all in going through the list so fast.

Next is 11/12/2005.

Sunday, May 27, 2007

Advanced Materials Group (ADMG) quick check

ADMG, ADVANCED MATERIALS GROUP, INC., website, sec, yahoo, chart

In my first pass through the Pink Sheets (mid 2005 to early 2006), I had three levels of filtering. Lately I've been acting more like there's only two layers of filtering: rather than quickly going through everything passing layer 1, I'm diving into them all in detail. This isn't going to work since it's too slow.

Long running industrial products company focused on making stuff from a raw material base of flexible components. Foams, foils, films, adhesive composites into components and finished products. They're in Dallas.

They're trying to expand into foreign markets such as Ireland and Singapore.

This is a lot like Epolin that I had invested in for a while. Epolin may still succeed. Or they might just languish forever. I don't know.

Strong competition and low barriers to entry. So ADMG has focused on patentable and proprietary products. I wonder if that's like the drunk stumbling around at night under a streetlight looking for his keys because the light is better there than where he lost them.

57 employees.

Revenues up 15.4% (new customer and more sales from existing customers). The Singapore strategic manufacturing venture declined slightly.

The bulk foam stuff is getting killed by increasing shipping costs, so ADMG moved operations to Singapore in a joint venture in 2003.

27.8% gross margin (up from 23.7%).

Big NOLs due to losses up to 2004.

Results are expected to get better in 2007. Product development and selling expenses will increase, however.

Corporate salaries are quite reasonable.

Some sort of fund owns 25% of the compay.
The chairman owns 22%.
Executives and directors own 64%.

Financial Statements:
Half of net income is due to income tax benefit.
Operating margin is 8.2% (was about 1.5% in 2005).

$4 million in total assets! most is current as AR, inventory, and deferred tax assets of $634K.
Not much PP&E, good.
$856K drawn on line of credit.
$2.55 million equity.

Operating cash flow matches earnings without the tax benefit ($628K).
Low capex much less than depreciation.
Paid back half a million in debt.

Free cash flow is probably a bit less than $600K. 4.6 cents per totally diluted share (see Q1 for share count).

Q1 Results:
12.1 million shares on April 10, 2007, 435K outstanding options. Assume 13 million totally diluted shares.
Revenues up 8%.
Gross margin 19% (down from 28% partly due to the introduction of "Nundies", see below).
Operating margin 4.6% (down from 7.7%).
More than half of net income is income tax benefit.
Adjusted net income is $104K, 0.85 cent per diluted share (prior year was over 1 cent).

Inventories are up a bit.

Some cash burned in operations vs small amount gained in prior year.
Small capex (half of depreciation).
Repaid some debt.

Singapore revenue continued to decrease.

And here's something interesting:
During the first quarter of 2007 the Company launched "Nundies," a new women's undergarment product owned by the Company. This product is being sold through retailers and is available for direct purchase at mynundies.com.
Here's the website's description
Nundies is a one-time use, disposable "pa*nty" that adheres to the inseam inside of a woman's pants. This tulip-shaped "pa*nty" is intended for use as an alternative to wearing traditional underwear. Made from a nylon/lycra blend, Nundies are as soft as your conventional under*wear, but they take up less space and don't leave embarrassing pa*nty lines.
The "*"s were added so I don't get a zillion website hits from the wrong sorts of readers (I'm still getting silly hits for this article).

Distribution is almost non-existent.
Nundies are currently available at: Neiman Marcus: Dallas (Downtown, NorthPark, and Willow Bend); Los Angeles, CA; and Las Vegas, NV. Lingerie Store: Sheers, The Bodywear Bar and specialty boutiques throughout the United States! On-line at the popular www.HerRoom.com, www.blissworld.com, or www.mynundies.com.
The retail cost is $3 each. If I understand how these, um, "fit", it seems to me that they don't cover a lot of area (rather than being some new material that doesn't show a line).

Of course is this takes off, the stock will probably go to the moon. I think that's extremely unlikely.

The stock is probably worth at least 70 cents. The current price is around a dollar. It had been around 65 cents. It was well below 25 cents less than two years ago.

UPDATE next day:
For an interesting view of the SEC tracking down suspicious behavior, here's an interesting example. The SEC got really riled up over this one (see the "sec" link and UPLOAD documents).
AECC, AMERICAN EDUCATION CORP. (THE), website, sec, yahoo, chart
I started looking into it, but it got too complicated and I didn't have time. Perhaps sometime later.

Saturday, May 26, 2007

Two Years of Blogging

It's been just over two years since I started this blog. I still remember this first post*. I didn't want to make some self-conscious introduction or try to worry about who might read it, I just jumped into a stock, and then another stock, and another. It evolved over time and took on a direction just based on incremental effort.

Looking at this blog got me thinking about what I've learned in the last two years about the process of blogging. I guess it makes sense to number them as "rules".


Rule #1 Go your own way
It's very tempting to see what other people are doing and to duplicate it. I spent a lot of time worrying about what I'm doing wrong in the blogging process compared to other bloggers, but I ended up just doing it my own way. It would be too difficult to do anything else.

Rule #2 Keep it real
This has been a lot more difficult to do than I would have expected. By "keep it real" I mean that the blog represents what's going on in my head and captures the things I'm looking at rather than a stylized, cleaned-up, presentation made after the fact.

What makes this difficult is exposing one's own mistakes, idiosyncracies, weaknesses, and biases to the world and not covering them up. It means making lots of small independent judgements plus big overall opinions about things largely unknown that you know could end up totally wrong, that someone else reading the blog is likely to know a great deal more about.

What makes this easy is that it requires almost no editing. I generally write a post as I'm thinking it through or as I'm going through SEC documents. I don't have to sit down and structure it more than a few changes here and there.

This rule has improved my abilities as an investor enormously.

Rule #3 Compare opinions with results
I need to get back to doing more of this again because I found it very useful to see how I viewed things vs how they eventually played out. It definitely has influenced how I view things nowadays.

Rule #4 Quantity is better than quality
This goes against what I would have expected. But I'd have to say that looking at hundreds of companies at a high level has been hugely valuable. But it's also helped to pick apart a lot of companies in detail, even when they didn't turn out to be investments.

Rule #5 Try out new ideas, discard ones that don't work
A lot of times I ask myself how I can better understand or structure the information. This led to the visual financial statements that use cheapass bar charts. A lot of the way I do things has evolved over time and it's easy to worry about being inconsistent, especially when discarding something that doesn't work well. But so what.

Rule #7 Don't sweat the unimportant details
The fact that there's no rule six would probably bother people. It's not important. The problem is knowing what details are important and what details are not. I think that's where Rule #4 comes into play. If you look at 100 balance sheets and see the same things over and over in certain types of companies, then when it happens again it's unimportant. On the other hand, if you've looked at 100 balance sheets and suddenly see something new, it jumps out without even thinking about it.

At some point, I should post about the thing that's probably most responsible for me becoming so much more focused on large amounts of information and patterns (very much along the lines of the book Blink). It's a really odd and unexpected thing, and Darwin could tell you what that means.

Rule #8 There are two important dimensions: companies and time
Here's where I've failed the most and it's where someone more like Warren Buffett can do much better. It's not enough to look at a large number of companies. To get the maximum results, it's important to follow them over time and look for opportunities as they occur. I need to figure out how to do better at this.

[I might add more rules in the future]

* the stock was selling for 1.5 cents at that time. It's now 7 cents. It's been as high as 48 cents in the past year: 30 bagger. Hehe.

Zhongpin Inc (ZHNP)

Zhongpin, Inc, ZHNP sec
Someone wanted me to look at this (which I already did, but I'll do it quickly again and take notes).
...meat and food processing company that specializes in pork and pork products, and vegetable and fruits in the Peoples Republic of China (PRC). The Company is developing a nationally recognized high quality brand for meats and food products that encompasses a meaningful part of the everyday Chinese meals.... In 2005, Zhongpin was ranked the sixth largest producer in the national meat industry in terms of revenue. Zhongpin’s also exports its products to the European Union, Eastern Europe, Russia, Hong Kong, Japan, and South Korea.
10-K for period ending Dec 31, 2006
13.8 million shares and 5.3 million preferred shares on March 15, 2007.

16 international and domestic fast food companies in the PRC.
36 export-registered processing factories
1,531 school cafeterias, factory canteens, army posts, and national departments
2,721 retail outlets in PRC

Compound annual revenue growth of 56% in the last 5 years.

Zhongpin, Inc. owns 100% of Falcon Link Investment Ltd (British Virgin Islands)
Falcon Link owns 100% of Henan Zhongpin Food Co. Ltd
Henan Zhongpin Food Co. owns 90% of Henan Zhongpin Food Share Co., Ltd
Individual shareholders, mostly Zianfu Zhu (as required by PRC law to use the word "Share") own 10% of Henan Zhongpin Food Share Co., Ltd
Henan Zhongpin Food Share owns 100% of a bunch of companies:
  1. Henan Zhongpin Industry Co., Ltd.
  2. Henan Zhongpin Imports and Exports Trade Co., Ltd.
  3. Zhumadian Zhongpin Food Ltd.
  4. Anyang Zhongpin Food Co., Ltd.
  5. Deyang Zhongpin Food Co., Ltd.
  6. Henan Zhongpin Fresh Food Logistics Co., Ltd.
  7. Henan Zhongpin Business Development Co., Ltd.
The PRC pork market is the largest in the world: 53% of global production and consumption
Most sales are in open-air markets and on streets.
New hygene regulations in 1995 encourage replacement of open-air markets by modern stores. The trend is happening. Also a major trend toward frozen and fresh/chilled meat which is possible with the improving cold chain infrastructure.

The market is fragmented and has hygene issues.

These guys are serious:
We regard our logistics capabilities as the keystone to our growth strategy and believe our comprehensive plan for logistics management, which includes the integration and coordination of our transportation, warehouse management and inventory control systems, as well as the integration of our marketing and manufacturing efforts, will enable us to accelerate our growth by expanding our operations across the PRC and internationally. At December 31, 2006, we operated sales offices and warehouses in over 50 cities in the PRC, including Shanghai, Beijing, Guangzhou, Zhengzhou, Wuhan and Xi'an. We plan to expand our network of sales offices and warehouses in up to 14 additional cities in the PRC by the end of 2007, and are targeting cities with over 1,000,000 residents, annual per capita income exceeding 10,000 RMB ($1,245) and good infrastructure, including transportation, telecommunications and a positive commercial environment.
They're also focused on expanding the product line.

map of China
They own and operate two (now three?) slaughterhouses, both in Henan (an inland province about halfway between Beijing and Chongqing). They lease and operate a slaughterhouse in Heilongjian (extreme NE). Expanding new plants in Henan.

Pigs come from local pig farms in the vicinity. All have health certificates from relevant authorities. Processwise they got ISO 9001 in 2002. Also some hazard and sanitation certifications. Veterinarians take blood and urine samples from a random sampling of pigs and test for disease. The pigs are quarantined for 24 hours with water only, then another inspection with inspectors of the Animal Husbandry Dept.

106 QA employees (18 engineers, 88 staff).
2,870 employees total (2,037 in operations), 532 sales, 67 R&D, 234 admin).

Customer concentration: Five customers were 20% (down from 22% and 26% in prior years) of revenues. No 10%ers in the last 3 years. No government contracts.

Xianfu Zhu is a controller shareholder: 46.3% of the shares. Other insiders own another 10.2%.

91.5% of revenue is from PRC.

Low tax rate.

Revenue and net income increases:
2003: 22%.... 47%
2004: 45%.... 79%
2005: 31%.... 113%
2006: 96%.... 8% (realistically more like 80%, removing the liquidating charges)

Earnings per diluted share:
2002: 5 cents
2003: 7 cents
2004: 13 cents
2005: 27 cents
2006: 31 cents (realistically more like 45 cents, removing the liquidating charges)

2002: $4.8 million
2003: $5.8 million
2004: $10.1 million
2005: $10.2 million
2006: $32.6 million

Return on total ending assets:
2002: 5.8%
2003: 5.6%
2004: 8.6%
2005: 2.4%
2006: 6.3% (really more like 10%)

Return on total starting assets:
2003: 8.4%
2004: 10%
2005: 18%
2006: 12% (really more like 18%)

We're looking at about a 10% return on assets. It's being hurt by gross margins.

Gross margins:
2002: 11.4%
2003: 11.7%
2004: 14.3%
2005: 16.6%
2006: 14.3%

Net margins:
2002: 4.34%
2003: 5.20%
2004: 6.47%
2005: 8.05%
2006: 4.42% (really more like 7%)

They have good credit and can borrow lots of cash at rates of around 7%.

21% cash
13% receivables
10% inventories
32% PP&E
12% construction in progress
9% intangibles (way up from prior year)

Current ratio is around 1.

Liabilities + Equity:
20% payables
23% short term loans
52% equity

Equity increased greatly in 2006 due to additional paid-in capital from preferred stock.

Free cash flow roughly matches net income over the years, although there are big shifts in assets and liabilities.
Huge expansion expenditures that are financed by short term loans and the big preferred stock conversion.

Let's take a quick look at Q1.
still 13.8 million shares on May 1, 2007.

Cash, AR, and construction contract assets increased.
More short term loans.
Liabilities increased significantly.
Equity is 47% of assets now.

Revenue up 83% over prior year.
14% gross margins.
8.2% net margins.

Earned 22 cents diluted.

annualized return on assets would be around 15%. (Checking Q1 2006 results vs full year and seeing them being roughly 1/4 of it, this seems like a reasonable thing measure.)

More preferred stock converted.

Free cash flow is ok, matches net income.
More big construction investment.
More net short term loans.


These guys are pushing it to win. That's a good thing, especially since it's a one-time situation where the future leaders will be established now.

For an inefficient area of business like this, I would have expected higher margins and returns on assets for a company in this situation (scaling up, improving productivity against open-air markets and such). What happens if this really turns into a slugfest and a competitor has better economics for some reason? ZHNP could end up in deep pig-doo-doo.

This looks better now after looking more closely.

If this were insanely cheap like ETLT (say $5 per share), then I'd definitely be interested. But the stock is selling for $10.75. That's a good price, possibly a 50% discount from full value. Maybe I'll think about it. Perhaps the price will come back down.

My gut instinct says this is good.

UPDATE Tuesday May 29, 2007:
Thanks to James Altucher for the compliment! Maybe someday I can quit my day job and do this for a living.

Wednesday, May 23, 2007

American Bank Note Holographics (ABHH)

ABHH, AMERICAN BANK NOTE HOLOGRAPHICS, INC., website, sec, yahoo, chart, Com (1 Cent)

As a paper money collector, getting a copy of the Australian $10 plastic note with a hologram was a must.

I looked at them back here on Dec 12, 2005. At that point, I figured they were worth $2.75 and were selling for $5.98. Today they're selling for $3.35. Looks like they took a big hit on March 15, 2006 when this 8-K was issued. ABHH's "HoloMag" product was suddenly rejected by Visa due to problems with electrostatic discharge. In November 2006, they terminated the whole program and suggested possible remediation by ABHH.

They took a hit in Q4 2005, writing down inventory and reversing revenue. Revenue still came in and they recognized it in 2006: $2.3 million.

Net income per diluted share:
2002: 44 cent loss (impairment of goodwill)
2003: 5 cents
2004: 10 cents
2005: 3 cent loss
2006: 18 cents (really more like 6 cents for continuing operations).

Revenues jumped in 2005 and stayed there in 2006.
On March 15, 2005, VISA announced its intention to phase out the Dove hot stamp hologram that we supply for the VISA card, and to replace it with an integrated holographic magnetic stripe. On April 8, 2005, we entered into an Agreement with VISA, pursuant to which we were authorized to supply HoloMag to VISA approved card manufacturers. We began shipping HoloMag to VISA authorized card manufacturers in the second half of 2005. On March 14, 2006, we were informed by VISA that, as a result of the ESD issue, VISA was effectively ceasing the HoloMag program (the “VISA Decision”). VISA then moved to include either the Dove hot stamp hologram or the Mini Dove hot stamp hologram, both of which we supply, as the security device on VISA cards. By letter dated November 7, 2006, we were advised by VISA that VISA was terminating the VISA HoloMag Agreement.
Visa revenue is a bit over 1/3. Same for Mastercard. Exports are increasing somewhat.

Cash flows:
Net income was $3.6 million. Favorable deferred taxes and AR offset somewhat by AP resulted in $6.0 million in cash flow from operations.

Small capex.
Very little financing.

Balance sheet:
$8.5 million net cash (43 cents per share) on $31 million in assets, mostly current assets.

I figure they're worth at least $1.50

Tuesday, May 22, 2007

Conforce (CFRI) "interview"

Conforce International CFRI (combined links) announced an "interview" today, which was pretty much just an audio PR thing, driving the stock price of CFRI down by nearly 40%. I was playing freecell, so I hope I didn't miss anything. Humorously, the interviewer mentioned the exciting stock market results of CFRI reaching 1 million shares of trading. They probably weren't expecting the exciting 40% drop. "Exciting" cuts both ways.

My impression of the CEO is not particularly great (long strings of cliches with occasional information), but he seems adequate. Their actions are better than their words.

I'd say the bigger news is the trial order for a highway trailer product.
...a trial order for its newly developed EKO-FLOR Highway Trailer flooring system from The Netherlands-based ATC Houthandel b.v. ("ATC"). ATC is a leading manufacturer of wood floors for trailer and closed box-vans in Western Europe.
I bought some shares today (selling a small amount of Strathmore Minerals).

Saturday, May 19, 2007

China Education Alliance (CEDA) Q1 Results

CEDA (combined links) Q1 10-Q I'll be comparing these results to the Q4 results in the 10-K I looked at here.

Period ending March 31, 2007.
58 million shares on May 11, 2007.

Balance Sheet
Cash increased to $3.6 million from $1.8 million.
Prepaid expenses dropped 32% to $892K.

PP&E net dropped by $300K to $5 million (but depreciation was only $153K).
Franchise rights increased to $877K from $690K (depreciated over 5 years)

AP is up slightly.
Deferred revenues is down by a third to $205K.
Slight increase in notes payable to $1.53 million

Equity increased by $1.12 million to $8.3 million.
Total assets are $10.4 million.

Income Statement

Total revenue is up 23% from Q4 and more than double the prior year (a lot of that is acquisition).

74% gross margins (up from 63% in the prior year and 73% in Q4).

SG&A is the most important part of the this entire statement. In the 10-K, they showed a huge jump in SG&A while Q1 through Q3 showed much lower SG&A. Since they didn't break out Q4's results, the question was whether that was a single charge in Q4 or whether it was somthing which showed up in the audit and required them to restate the prior quarters. However, they never issued amended 10-Q statements... but this is a Chinese reverse merger, and we've seen that it takes time for them to get their accounting act together. Didn't Buffett say something similar about Korean companies?

So anyway, if the SG&A in Q1 is high, then we [might] assume that the 10-K increase was for the whole year and not just Q4. It also would make it much less likely to be shady, in my opinionated judgement.

SG&A is $1.0 million. The 10-K number was $2.3 million while the Q3 number was only $359K. Last year's Q1 number was $175K. A $1 million SG&A number for this year's Q1 is consistent with an overall elevated expense rate explanation for the 10-K result. This is probably why the CEDA stock went up considerably after this report came out.

Breaking down the SG&A:
Selling: $750K vs $89K ($1.4 million in the 10-K)
Admin: $158K vs $30K ($1.5 million in the 10-K)
Deprec: $106K vs $56K ($124K in the 10-K) (Q4's capex + franchise rights was $2.2 million, so this jump vs the 10-K makes sense)

$100K net interest expense. Q1-Q3 last year had almost no expense, but Q4 had $135K net expense. The bridge loan showed up during Q3.

Very low tax provision.

Net income is $1.0 million vs $680K in prior year, a net loss in Q4, and $1.2 million in Q3.
$259K foreign currency translation adjustment... sweeeeet.

Cash Flow Statement
Depreciation was $153K while capex was $26K.
Prepaid expenses and other (teacher advances, advertising prepayments) added $429K to cash from operations vs income.

No other significant flows of cash.

I'd guess free cash flow for the quarter to be around $1.3 million.


Depreciation schedule:
Buildings: 20 years
Vehicles: 5 years
Furniture, fixtures, equipment: 5 years
Franchise rights: 5 years

No impairments. This means $100K of PP&E disappeared? This might be pre-paid service contracts which are amortized (straight line) and involve unlimited access to study materials for a fixed time.

Advertising cost: $146K for the quarter

No customer concentration.

PP&E breakitdown
Buildings: $2.9 million
Vehicles: $133K
Communications equip and software: $1.8 million
Furniture/fixtures: $972K
Total: $5.76 million
Accumulated deprec: $746K

Sept 29, 2006 bridge loan. 6% interest, 1.53 million warrants at 50 cents. Matured March 29, 2007. Paid in full. It seems like the warrants have expired based on the amortization schedule, but I'm not sure.

30K shares issued for services on March 7, 2007.
Selling expenses increased by $661,415 or 743% to $750,438 from $89,023 in 2006 due to the increase in agency fees associated with increased sales and advertising.

Administrative expenses increased by $128,068 or 433% to $157,663 in 2007 as compared to $29,595 in 2006. The increase is due primarily to an increase in salaries due to the overall growth of the business of the Company.
Did it jump suddenly in Q4 of last year?

50K shares issued to an IR agency.

Based on this previous financing agreement, there are now an additional:
6.5 million shares
6 million warrants at 69 cents
3 million warrants at 80 cents
3 million warranats at $1

I'm going to discount the dilution due to the shares somewhat due to the high strike prices of 80 cents and especially $1. So I'm viewing this as an equivalent of 17 million shares of dilution.

I don't see any other dilution, so I'm assuming about 75 million totally diluted shares. This would result in about 1.73 cents of estimated free cash flow per totally diluted share. The business is seasonal with more revenue (but also inventory purchases) in Q3-Q4.


I'd say the business is worth at least a dollar per share, probably a lot more as they continue to grow. I continue to own the shares.

This is what I said about it after the 10-K came out:
I might be acting stupid here, but I only sold one-fourth of my stock after that bizarre 10-K. I'm relying somewhat on gut instinct and somewhat on the fact that, after dumping a quarter of my stock and after the price drop, I'm reasonably comfortable owning this much stock at this particular price point. We'll see what management says next.
So far, I believe I made the exact right decision. Selling some of the shares made sense considering the added uncertainty. Will I buy them back? Probably not.

Sunday, May 13, 2007

Optionable (OPBL)

OPBL, chart, news, sec

I noticed last night that a lot of people were being referred to the blog from the Yahoo message board for OPBL. They were looking at the work I did on Sherb back in Dec 2005.

So let's take a quick look at Optionable and see if they're objectionable.

Let's start with the 10-K for the period ending Dec 31, 2006:

52 million shares on Mar 12, 2007. 2.5 million options, warrants, etc. on Dec. 31, 2006.

Formed in Feb 2000. Commodity derivative brokerage services for brokerages, financial institutions, energy traders, hedge funds. Focused on energy derivatives (like Enron did). Historically focused on natural gas. Their discussion assumes natural gas, which could be because they were too lazy to re-write it for their expanded role. Nothing wrong with that, I'd view it as a good thing, really.

Two markets: futures and OTC.

Futures are on exchanges like NYMEX. Either electronic or guys in a room shouting. Shouting adds intelligence and experience to deals.

Options are traded on the OTC. This is typically non-standard and can require a broker to seek out to match up buyers and sellers. Bigger fees for this.

Claimed trends: more interest in natural gas options, lower credit/counterparty risk on OTC, more players, need for more transparency, need for mark-to-market tracking rather than theoretical.

What does OPBL do?
Plan going forward:
How they make money:
The founding stockholders entered into an agreement to sell 10 million shares to NYMEX (19% of Optionable). Also selling warrants to allow NYMEX to own up to 40% of the stock via dilution and put someone on the board. As long as NYMEX owns its shares, OPBL needs NYMEX permission to do a number of things: acquisitions, related party transactions, paying dividends, adding debt, making any new big deals with other companies. NYMEX and the founding stockholders gets right of first refusal on share sales (includes convertibles), especially change of control of the company.

OPBL is making a rights offering, I think, for NYMEX. It's complicated.

Bank of Montreal was 24% of business (18% in the prior year). Apparently not a related party.

18 full-time employees. A consultant as CTO. A consultant as CFO (that's bad). Five software engineer consultants.

4 patents. Whoop-dee-doo.

$16 million revenues
$10 million gross profit
$1.5 million operating expenses
$6.2 million net income

The industry is fast paced and requires a lot of change to keep up.

Chairman Mark Nordlicht
From Platinum Partners, ran the Value Arbitrage Fund. Also West End Capital. BA Yeshiva University 1989. Owns 28% of the stock.

CEO Kevin Cassidy
Managing directory of Capital Energy Services (energy options brokerage firm on NYMEX). Business development, sales, marketing, operations oversight. No degree listed, probably a good sign (watch out for over-educated people in the financial industry). Owns 6% of the stock.

President Edward J. O'Connor
Also from Capital Energy Services. Negotiator and keeps track of the money. Owns 10% of the stock

CFO Marc-Andre Boisseau
Advises all sorts of small public companies. CFO for hire. University of Montreal. Is there some connection between this and the Bank of Montreal? Doesn't mean anything wrong if it is.

Directors and officers own 44% of the stock.

Related party stuff:
Edward J. O'Connor owns 50% of CES, CEO is managing director of CES and OPBL got a deal with CES to work on the floor of NYMEX. OPBL pays a fee to CES and assumes floor expenses. OPBL owes CES $1.5 million. CES assigned the debt rights to O'Connor and Cassidy. This was then modified in ways I don't understand. If OPBL raises capital, the loan interest rate drops from 12% (ouch) to 4.68%.

The CES agreement was cancelled in Jan 2007 and is now assumed by the OPBL subsidiary OPEX.

Some related party customers include Northern Lights Energy, Platinum Partners, Fenmore Holdings. Chairman is managing partner or stockholder of each of these. The grand total of revenues from all these is less than $1 million. But I don't see a resolution of the $4 million related party revenue. It's not Bank of Montreal, from what I can tell.

Sherb & Co auditors, 12th largest public company auditor. Don't just assume they're evil. Audit fees are cheap, as expected: $67K, with another $3K of other fees (fine).

Unqualified opinion.

Cash heavy assets. Cash and receivables is nearly all the assets. $2.5 million net cash. Roughly half equity.

Liabilities are accrued compensation, taxes payable, and a massively discounted debt to the Chairman. Also another massively discounted debt. Looks like that's just an accounting thing based on the 12% potential interest rate?

Earnings per totally diluted share are probably around 11 cents per share.

Receivables absorbed a lot of cash, which was more than offset by the income tax not yet paid and the accrued compensation (the top guys are probably not drawing all their salary).

Very low capex.

Paid $1.2 million debt to CEO, Chairman, and that other guy I mentioned above.

One company is 37% of accounts receivable.

The Chairman's father leases a seat on the exchange for CES to do its floor operations.

End of 10-K

Now how about the Q1 10-Q for the period ending March 31, 2007

Big jump in cash to $12 million from $8 million. Net cash is $4.4 million, up from $2.5 million.
AR decreased
Incentives receivable increased some

Two big new assets:
Trading rights of $1.2 million
Intangible asset of $1.1 million

Accrued compensation continues to climb to $3.1 million
Tax payable up a bit.

The discounted debts are up a bit

Equity up big time.

Revenue of $9.1 million
Gross profit of $6.1 million
Tax of $2 million
Net income of $3.1 million

Earned about 5.6 cents per fully diluted share

As expected from the balance sheet, cash from operations was very good: $5.4 million.
Looks like they had to account for fair value of warrants and options, which I've noted before could cause stock prices to oscillate (good for me).

They purchased the trading rights and intangible asset (doesn't seem so intangible, now does it?) for $1.2 million and $400K respectively. $223K capex.

Nothing in finance except some options and warrants exercised (no surprise there, given the stock price increase).

55.5 million fully diluted shares.

Trading Rights: This is an indefinite right to trade on the floor of an exchange (presumably NYMEX).

Intangible Asset that they bought with cash: customer list from HQ Trading (energy derivatives brokerage), also assumed continuing operations of HQ. $400K paid now. $400K payable in 2008, another $400K in 2010, and 900K + 600K warrants.

Nearly 20 million warrants are being issued to NYMEX. Needs investigation.

Ok, let's skip ahead to the disaster part.

8-K issued May 8, 2007
May 8: Bank of Montreal ("BMO") stops working with OPBL during an ongoing external review of BMO's commodity trading losses. BMO is a major customer of OPBL.
May 9: NYMEX is offering various options trading on the CME Globex platform in June. These will likely compete with OPBL's OPEX platform. Unknown impact on OPBL.

Let's check the news:
BMO suspends business with OPBL.
OPBL says that's the way the business works: sometimes you lose money.
Another shoe drops: NYMEX competes with OPBL.
People start thinking this is like Long Term Capital Management.
A lawyer says:
"They weren't reporting the actual trade value," says Swick, referring to the Deloitte claims reported in the National Post. "Looks to me like there was some conspiracy between Optionable and the BMO traders to hide the losses."
and then there's this:
The situation appears to have Optionable a bit worried. It is hiring a crisis management firm and asking lawyers if it has grounds for its own suit against BMO, according to a report by Toronto's Globe & Mail.

And then of course the lawsuits fly.

Ok, for starters, I'm going to guess that the BMO issue is not going to be as big a deal as it seems. There's a good chance that I'm wrong about that, but let's start here.

Next, I'm going to assume that BMO is lost forever as a customer.

I don't think the NYMEX move is as serious as it looks. Why would they buy 19% of OPBL and then waste money on duplicating their efforts?

NYMEX has this gigantic warrant to increase it's ownerhip up to 40% with a strike price of $4.30. Needs more investigation.

One customer in Q1 accounted for 30% of revenues, which I'm assuming is BMO.

If we cut the revenues by a third, I'd expect a gross profit in the next quarter of around $4 million, operating income of $3 million, and net income of perhaps $2 million. With 55.5 fully diluted shares, that's 3.6 cents per share for a quarter.

Tentatively, I'd say the stock is worth at least $2.00 per share.

It's funny because with all the bad press derivatives get, especially energy derivatives, it's odd for me to find something like this that could actually be a good deal. After considering uranium futures and how they benefit the industry, it's quite easy to see the real economic benefit of energy futures. If I'm selling heating oil in Michigan and I've got a big inventory of oil, I may need a hedge to avoid major financial disaster if oil prices go down fast.

I'm not saying there's no scam here, but I don't smell one (big difference that's easily lost on most people, especially panicking investors).

I'm seriously considering buying some of the stock if the price is right.

UPDATE Monday May 14, 2008:
They just issued an 8-K saying the CEO, Kevin Cassidy resigned on May 12. This leads me to believe that something is worse than it seems. Now I'm not considering buying stock (that could change, however).

UPDATE Monday May 14, 2008:
I just saw a notice that NYMEX is resigning from the board of directors of OPBL to avoid a conflict of interest as they investigate the situation. I don't see this in any news yet.

UPDATE same day after the close:
The CEO resignation combined with the NYMEX resignation and backing off puts this stock in a whole different category. More like a lottery ticket.

Friday, May 11, 2007

more thoughts on uranium prices

In all honesty, any thoughts I have on uranium prices at this time are probably wasted thoughts. But I find it interesting.

I read another uranium price prediction article today. First Uranium Corp, a South African Developer, says prices this year could reach as high as $150. This is not exactly a bold prediction considering the price has been on a continuous upward climb to $120 today. A bold prediction would be saying it might drop to $75 or climb to $250.

Looking back, I've been puzzled by how consistently low predictions have been in the past. Even David Miller who was the boldest and most accurate underestimated the increases. So after all that, people still don't want to look stupid by claiming $250. I see this over and over.

The problem is that prices above $115 have never happened before. [While previous jumps had been greeted with cheering, the jump to 120 was met with a strange silence.]

It's like the DOW being stuck at 1,000 during the 1970s. It was considered the ceiling, like the dial on a guitar amp that only goes up to 10 (or 11 in some cases). No one would expect to turn the dial and magically start seeing numbers appear in front of the needle: 12, 13, 14, 20, 30, 50, 100. That's never happened before. But more importantly, there are well proven laws of the physical world that demonstrate why it won't happen.

No one has seen uranium prices climb continuously without falling back down again due to 1) the government scaling back it's price support program, 2) nuclear accidents putting the brakes on nuclear power development (but only in the US, and it still didn't stop uranium demand from increasing in the US), or 3) the government dumping huge amounts of uranium into the market after the Cold War from downblended weapons. So even worse than the guitar amp dial, we're instinctively expecting the dial to snap back down to 4 or 3. I think that's why uranium stock prices have been dropping lately.

But things happen all the time that have never happened before. They're surprising when they happen, but then later, they just get dumped into the list of "already happened" things that are considered "normal". It's a big scam in the human mind.

Unlike the guitar amp example, with uranium there are very well established laws of economics which say the price will continue going up and that it won't come back down. But because this is unprecedented, we think it won't happen.

Up until 1972, oil prices had been declining steadily and were amazingly predictable. But if you look at this chart, the future would look absolutely nothing like the past (and note how inflation makes the picture better). And there were good reasons for why everything changed. If someone considered investing in oil in 1972, would you say it was a bad idea because the prices would fall back down in the late 1990s? Black Swans happen, and there are certain conditions where they're quite likely.

I contend that the situation with uranium right now is severe. Like I've said many times in the past, we have extremely inelastic demand combined with extremely inelastic supply which is far lower than demand, and that demand has always been growing and the growth is accelerating very fast with China building 2 reactors per year, Russia, India, and lots of other countries developing reactors. Eventually supply will catch up, but it's going to take a very long time. All facets of the industry need to expand.

UPDATE same day:
Kelvin Chan has an article in Seeking Alpha listing recent analyst uranium price predictions. Excellent! What I'd really like to see are predictions from 2005 and early 2006. But let's take the oldest 5 predictions in the list (without checking beforehand):

Sept 12, 2006: CIBC $70 by the end of 2007
Sept 12, 2006: Deutsche Bank $59 in 2007
Oct 16, 2006: John Zechner Associates $80-$100 (unknown time frame)
Oct 18, 2006: Nufcor >$60 in 2007
Oct 18, 2006: Casey Research $100-$150 (unknown time frame)

Looking ahead at more recent predictions shows the same thing.

My prediction? Well, I'd say any guess is likely to be wrong, possibly in a big way. But forced to guess, I'd say $150 by year end 2007 and $300 by year end 2008. And I don't think there will ever be a stable long term price. I guess it will jump to high levels maybe like $400 and dip to levels like $75, but I'm guessing that it won't spend a lot of time below $100 going forward.

UPDATE May 12, 2007:
I had noticed earlier in the week that UxC's spot price also jumped up to $120, so I guess it's official. You've got to figure that right now, with the new uranium futures tied to UxC's prices, that UxC would feel like they don't want to seem like they're pushing the price up. But they have standards for computing the price, so there's presumably not much wiggle room. On Friday I got a small pile of extra cash to invest. I bought more Strathmore Minerals and I'm trying to buy some more CFRI.

Thursday, May 10, 2007

Advanced Battery Technologies (ABAT)

ABAT, ADVANCED BATTERY TECHNOLOGIES, INC., website, sec, yahoo, chart, Com ($0.001)

10-K: Heilongjiang ZhongQiang Power-Tech Co., Ltd. ("ZQ"). PRC organized 2002. Officies in the cold north of Harbin. Two professors from the Harbin Institute of Technology are on the ZQ advisory board. Lots of engineers from the school.

After going through their engineering prowess, we finally get to find out what they do. This is a bad sign (I've used the Three Stonecutters story a lot when dealing with engineers).

ZQ makes polymer lithium ion batteries. Average 3.8 volts per cell. Thin configurations or large footprints. Once again, they dive into their engineering prowess of how thin the batteries can be.

Then we get to the point:
At the present time, ZQ Power-Tech produces only one finished product. This is a cordless miner’s lamp equipped with a rechargeable PLI battery.
They now produce 100K lamps per year. They also sell battery cells for cellphones and laptops and digital cameras.

Three years ago, they made a 500 pound car battery for an electric car: 120mph or 240 miles.
The battery discharges 5% of its energy per hour, when not in use, so daily recharging is necessary.
My guess is that's why they made it three years ago, not for the past three years.

They've been getting some business with customers: 2006 Chinese bus company ordered 5 batteries. 2006 agreed to sell hybrid car batteries to Left Coast Conversions. 2007 sales contract with Beijing Guoqiang Global Technology Development to supply 3,000 PLI battery sets for electric garbage trucks for the Olympics (I wasn't aware of the electric garbage truck event), $10 million contract.

7 Chinese patents. 1 US patent.

ADAT has 4 employees in New York. ZQ has 1,260 employees: 23 admin, 40 marketing, 40 R&D, the rest are production.

Chairman/CEO Zhiguo Fu owns 15.8% of the company.

Assets are mostly PP&E and receivables. $22.5 million in assets. $21 million equity.
$1.3 million in fairly normal looking liabilities.

Revenues leaped to $16 million from $4.2 million. Backlog is $18 million on April 11, 2007.
55% gross margins.
45% operating margins.
significant taxes being paid.
37% net margins! Excellent!

50 million shares on April 11, 2007. Lots of shares issued to employees and others for compensation. 6.5 million options outstanding? Limited to 8 million currently.
Assume 58 million totally diluted shares.
Earned 10 cents per totally diluted share in 2006. Seems like 2007 and beyond is a wildcard. This would be great if it was cheap, say less than a dollar. Let's check the stock price... $2.75. Probably a good price, but not cheap enough. It was under a dollar before March. Looking at the prior 10-Q, it wouldn't have looked as good, but still might have been interesting. Damn laziness.
Definitely worth following

UPDATE same day:
Interesting observation of the day is the global top website ranking. As you'd expect, Yahoo, MSN, Google, YouTube, Myspace are tops. Also Windows Live. But here's where it gets interesting. The 7th ranked website is in Chinese. So is the 9th. Number 11 is Yahoo Japan. Thirteen is Chinese. Number 23 is Russian. 26 is Google German. 28 is Google Brazil which is bigger than Amazon.com. In 30-39, only three are in English. Google India is bigger than eBay. Google Thailand is bigger than Dell.com. Google Portugal is bigger than the New York Times.

Non-English websites are huge. What happens when the Internet is no longer English-centric? A gigantic free-for-all mix of every sort of language, dominated by Chinese, Hindi, English, Spanish, Arabic, Bengali, Russian, Portuguese, Japanese, German, Javanese, Korean, French, Turkish, Vietnamese, and Telugu.

Most widely spoken languages:
1) Chinese Mandarin: 1,120 million
2) English: 480 million (less than half!)
3) Spanish: 332 million
4) Arabic: 235 million
5) Bengali: 189 million
6) Hindi: 182 million
7) Russian: 180 million
8) Portuguese: 170 million

Sunday, May 06, 2007

uranium continues climbing to $120

StockInterview reports that the spot price of uranium increased again to $120 from the insanely high $113 which was a jump from $95 and so forth. This is TradeTech's spot price, not UxC's price (which comes out Tuesday), and UxC's price is the basis for the upcoming uranium futures market. TradeTech's price is not based on any actual sale of uranium, but their guess based on bids and asks. Presumably, the $120 price is somewhere in between.
As we have advised the growing number of media contacting StockInterview.com, the market is in a ‘wait and see’ phase ahead of NYMEX futures trading. Sellers are not eager to quickly sell out, and continue to stretch their speculation to the limit. The gulf between the weekly spot price and the long-term uranium price now stands at $35/pound. This was the long-term uranium price in November 2005; now the dollar amount is the spread between spot and long-term.
emphasis added.
I actually bought more Strathmore Minerals when the price dipped last week.

Apparently, some of the more enthusiastic commentators are taking that hypothetical $500 number and giving it more credibility than it should have, according to the author, Julie Ickes. My understanding of that $500 number (and I could be wrong) is that it's the highest number that the price could reach before it started causing nuclear power plants to stop buying uranium and presumably shut down or else switch to other costly methods of getting more reactor fuel. I view that number as an upper limit on the price, certainly not a "price target".

The article reports that sellers are discouraged from lowering prices to match the buyers' prices because there's another potential auction coming up in May (same people as last time).

The uranium futures market starts up in the coming week. Everyone's going to be watching it.

UPDATE Mon May 7, 2007:
TradeTech has a new article out about potential government sales of uranium.
The proposed sales strategy would sell ‘measured quantities’ of uranium in order to reduce inventory levels and inventory costs, as well as reduce the overhang these inventories may have in the market, according to Rutkowski. “We don’t plan to dump uranium,” Rutkowski told StockInterview. “We have a lot of inventory, but uranium miners are worried that DOE would affect the market. We want to be good neighbors with them.”

Rutkowski said that should the sale take place, selling a ‘very small’ amount of uranium is needed to generate revenues ‘to keep the DOE’s Portsmouth (Ohio) facility running through 2008.’
The chart in the article is very interesteing. The current excess inventory is around 133 million pounds. I figure they could hold down prices for about 5 years if they really tried, but that would be it. The slowdown of production during that time would only make the eventual uranium crunch even worse, since demand is clearly going up seriously. And that's how they got into this whole mess to start with.

TradeTech talks about the rumors that the Nuclear Energy Institute had lobbied to prevent speculators from buying government uranium, which would be pointless because speculators would simply buy everything else and the utilities would be battling each other out for the government uranium at high prices. No free lunch.
“I don’t believe the utility plan went anywhere,” Rutkowski told us. “We would probably get sued for discrimination,” if the government barred speculators from participating in those auctions.
In terms of the excess uranium:
“Not all of this is commercially available.” He explained there were bottlenecks in getting the Off-Spec Non-UF6 to market because ‘it needs further processing.’ He told us, “The majority is in forms other than UF6, and it could take years to get processed. Not many companies have the facilities necessary to process it.”
and then there this:
“There is an interest in the creation of a nuclear fuel reserves,” Rutkowski said. “The reserve would be to safeguard against supply disruptions, whether these are environmental or through force of nature.” Rutkowski compared this to the strategic U.S. petroleum reserves.
Rutkowski said that they don't want to get mixed up in the marketplace. Good idea. And he seems to think that TradeTech is "doing good work."

UPDATE later that day:
The report on the futures market shows contracts trading started at $132.05 and ended a session (the session times are very strange) at $140 per pound.

I wonder about the long term price. I've seen a recent bloglike post saying the $40 range. Given the imbalance and the nature of the industry as I understand it, I would think it will be a long time before supply saturates that much. There's a lot of exploration work that will never pan out. In a steady state, you'd expect the price to be slightly above the marginal cost of the highest producer (after lining up the producers starting from the lowest cost).

Cameco's announcement was interesting. A lot of things went wrong and the mine was risky.

Friday, May 04, 2007

Berkshire Hathaway Q1

10-Q for the period ending March 31, 2007

Here's my quick opinion: looks good, I think they'll survive as a going concern for a while.

$46 billion in cash, perhaps $15 billion is needed for operations, leaving $31 billion ready for opportunity with lots more streaming in. Don't underestimate the value of that. Read the book The Black Swan, there are convincing and simple reasons the future is likely to be more unpredictable than the past [and this trend has been going on for a long time, and in hindsight we don't realize how unpredictable it was]. Luck favors those prepared for it.

I see a huge jump in receivables which, if I understand Item 2 in Management's Discussion, is due to the Equitas deal.
Invested assets at March 31, 2007 exclude approximately $6.9 billion of investments received in April 2007 in connection with the Equitas reinsurance transaction. The estimated fair value of these investments was included in receivables in the accompanying Consolidated Balance Sheet as of March 31, 2007.
Insurance premium revenue is more than double Q1 2006 due to Equitas, but that's deceptive since the associated losses also increased a huge amount. But it's still a significant increase in operating earnings in insurance (22% if my calculations are correct).

Utility revenues are up over 50% from Q1 2006. That's a segment I like to see growing a lot, given what I know about Berkshire. They're currently doing $2.4 billion in construction for regulated utilities. In the notes, much of the revenue increase came from adding PacifiCorp. 23% increase in utilities operating earnings from last year's Q1.

Finance revenues are up something like 40%. Operating profit in finance increased about 14%.

Net income per share is up 12% from last year's Q1.

Always look at the movement of cash in the business
Operations spun off $4.6 billion dollars (way up from the $2.4 billion last year).

Fixed maturity securities (bonds, debt, stuff like that): Berkshire bought $1.5 billion in fixed maturity securities but sold off and/or allowed to mature $5.6 billion. So there's been a noticable shift out of this stuff.

Stocks: Bought $5.3 billion in stock. Sold only $400 million. So there's also a shift into stocks [Berkshire is always trying to shift cash into somewhere, but only when it makes sense].

Acquisitions: $870 million this quarter. Obviously that's going to be a lumpy and opportunistic category ($5.5 billion last year's Q1).

The utilities borrowed roughly a net $700 million.

The main story I see in the cash flow is selling bonds, buying some stocks, and cash increasing by $2.2 billion due to operations spitting out more than investments can use [I could easily see Buffett allocating the entire free cash in a matter of hours if the price is right, so Berkshire holders have about a 10+ year option on any fabulous large opportunities that may show up... and the cash will not be squandered].

I think Berkshire paid $870 million for TTI.

On average, Berkshire's current stock investments have been roughly a two-bagger. That's not a useful measure except as a lower limit on how well Berkshire is doing in that area.

Berkshire is essentially borrowing $18 billion from the government by deferring taxes (probably mostly capital gains on investments).

The IRS is trying to get Berkshire to pay more tax based on the timing of insurance things, but Berkshire is appealing it. Regardless, Berkshire shows it in the financial statements based on the standard accounting formulas. The amount is currently $857 million.

28,710 "A" shares were converted into "B" shares during the quarter, leaving about 1.1 million "A" shares and 13.6 million "B" shares.

Investment gains decreased by about $1.9 billion this quarter.

I skipped over the General Re legal part.

Segment Revenues
GEICO: up (8.3% increase in premiums earned)

Gen Re: up but that's probably meaningless. Property/casualty normal business is down and they're doing it on purpose to avoid unprofitable business (that's been the plan and it's good)

Berkshire Hathaway Re: up by a factor of 8 due to Equitas. Actual premiums written this quarter were down 41% due to crappy pricing that Berkshire wants no part of. Another sign of a heating economy.

McLane: up 8%, both price increases and new customers

MidAmerican: up 18% due partly to colder weather than 2006, but still some expansion

Shaw: down 11% due to 12% drop in carpet sales, all due to the housing slowdown. No big deal, Shaw is still doing well.

Other (bricks, paint, shoes, underwear, etc): up 23%, but mostly due to acqusitions. Building products down 9%.

Services (jets, ice cream, newpapers, kitchen tools, sheesh): up 28%

Total (excluding BH Re's lumpy increase): up about 11%

Segment Earnings
GEICO: down (on purpose, they lowered rates in some markets presumably to widen the moat... it's the Ray Kroc garden hose thing) and will continue down. They value the float and the market share with GEICO.

Gen Re: down due to property/casualty swinging way down to a loss due to Euro storms while life/health is up

Berkshire Hathaway Re: massively higher due to Equitas

McLane: up 5% but gross margins are down very slightly which must be carefully controlled for a low-margin business like that. Other expenses were down, however.

MidAmerican: up

Shaw: down 41% due to the housing slowdown, but they're still earning $91 million! Stick in your eye, doomsayers.

Other: up 36% due to acquisitions

Services: up 128%! mostly due to NetJets, thankfully (a fast growing business that people like to think about rather than Dairy Queens which are typically dirty and not at all glamorous... although money doesn't stink as they say in Russia). Acquisitions also helped.

Keep in mind that insurance earnings are largely guesswork (and it really depends on who is doing the guessing), but showing any real long term profit is gravy since the real benefit is the float.

Buffett doubled his money on junk bonds. All the other fixed maturity securities did about what you'd expect.

Berkshire has $1.8 billion in mortgage backed securities.

The real estate brokerage business is not doing all that badly considering it was winter and the expected unexpected real estate downturn

The natural gas pipelines look like a cash cow, but that was during winter when they make their money.

NetJets revenue for the quarter increased by $300 million over 2006's Q1. They earned a profit of $36 million thanks to increased prices and a better mix of planes. 14% more jets.

The glorified-mobile-home revenues are down slightly, but profits are good.

The famous foreign currency hedge took a tiny hit this quarter.

The SQUARZ warrants expire this month... has it been that long? The warrants are each now $2,192 in the money, so all the warrants together are worth $8.1 million associated with Berkshire's borrowing of $334 million. There was a warrant premium payable to Berkshire (the negative interest rate) at essentially 0.75% per year? If I have this right, the lenders paid Berkshire around $2.5 million and the warrants they hold are worth $8.1 million. Berkshire essentially borrowed $334 million for four years at a cost of only $5.6 million. Buffett wins. Is anyone surprised?

If I had to disappear for 10 or 20 years and had to park my money somewhere, I'd probably put a large part of it in Berkshire Hathaway. I understand the business enough to have a good idea of how it will behave going forward. I figure it will take at least two more generations of management before they would even begin to do any stupid things. And Berkshire would be a great deal more difficult to destroy than most other businesses. The corporate culture is about as good as it gets, and I've seen first hand how much that impacts operations, even far from HQ. The businesses are mostly excellent. Buffett has made a lot of decisions that add value without it being immediately apparent, so it's better than it looks. The structure of everything is carefully crafted for exactly what I would want as an owner. Buffett and Munger spent decades figuring it out and setting it up very well.

The business is not insanely cheap, but I believe it's clearly worth more than the market is paying for it.

Reading The Black Swan now, it confirms the way I look at businesses: looking for reasons not to invest based on characteristics I understand. But based on the what the book says, I should reject that confirmation, burn the book, stomp on the ashes, and continue writing my anti-resume.

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