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China IPO

Lessons from Longtop

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Well, Longtop did not turn out to be long top, it was a short top if you will. I sold most of the shares today (still 50 shares pending in Scottrade).

The problem with Longtop (LFT) is not fundamental, it’s rather valuation. In current market, I think an unproven Chinese financial software (IT service) company like Longtop can not sustain its bubble price at IPO.

Some lessons:

1) Be careful of IPO (maybe I got MR at pure luck, but I did not get it in the first day). Also be careful of all underwriters: from JP Morgan (NINE), WR Hambrecht (XFML, GSIT), and Goldman Sachs (LFT)…NINE and XFML are in my Hall of Shame list, will LFT join them too?

2) Again valuation. A good company does mean good stock. Look at Baidu during 2004 IPO to 2006.

3) Don’t averege down if I haven’t made any money from a stock, e.g., SBUX, LFT,…I think CROX is different because I made money on this one, and has some knowledge on it. In other words, if average down too many times, something must be wrong here.

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Categories
Master Series

More Buffett and Munger Readings

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What a day. I mean the stock market. Monday IBM gave us some good news. Today neither Citi nor Apple (and New Oriental if I may add) sent out re-assuring news, and the market (both Dow and Nasdaq) tanked…

These days I started to read the Buffett shareholder letters date back to year 1978.

I also found this talk “human mis-judgement” given by Charlie Munger, vice chairman of Berkshire Hathaway, to be enlightening. Two things I immediately connected with:

1) Association: He mentioned Coke is associating its product with Olympics etc. I think McDonald is another genius doing this. It gives all kinds of toys to the kids. So as Buffett’s own Geico Car insurance, did you see all these “stupid” ads on TV?

Geico = a cool car insurance company.

2) Frog is not as alert to a slow cooker compared to being put into hot water. I know I have similar problem. Take my loss on Longtop as an example, I did not sell when it dropped a little every day. Today I decided to sell some eventually because it dropped more (under $17 the IPO price).

reading picture
(source: creighton.edu)

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China Stocks

China ADR crashed

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(Update) Halter US China Index closed down 7.89% and FXI down 7.55%. China Mobile (CHL), a major component of both index, is down 7.79% today.

FXI (FTSE Xinhua 25) dropped 7.23% as of now 11:27 AM US CST.

Halter US China Index (web site), which is more broad based Chinese ADRs traded in the US (although PetroChina, China Mobile has a bigger weight), dropped 7%.

And last but not least, trader818 China ADR index, dropped 8.4%.

Sounds a lot like the Feb 28, 2007, except the bear comes early this year. Although the general US market also dropped a lot, this Chinese drop seems a bit excessive. I unloaded some LFT today (yes I decided to take the bite, rather than hanging there dead). I think going forward small cap Chinese ADRs, especially newly listed IPOs, will perform wose than the large cap ones. Just like the “2-8” and “8-2” phenomena in China domestic market, when things are uncertain, stay with the big guys 🙂

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China Stocks

Got some China Mobile

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I decided to buy some China Mobile shares, after did some reading in the weekend. Today’s news is China Mobile walked away from Apple regarding iPhone, cool. Since I placed a limited order ($85.25) last night, I got it at $84.22 shortly after it started trading.

Two things: China Mobile (NYSE:CHL; HK:0941) is not cheap, at PE 33 and a market cap of about $340 b (Yahoo and Google Finance), it is the biggest mobile operator in the world. It has around 362 m subscribers (end of Nov 2007, according to its web site). Note the stock price has gone up 100% in 2007, and about 80% in 2006.

On the other hand, China Mobile is growing at around 20% top and bottom line. For a company of that size, it’s not easy. And one nice thing about it, it does not carry as much risk as other Chinese ADRs (say LFC, or PTR). This is important in current uncertain economy and market environment; and relevant for me after I suffered the paper loss from CROX and LFT. I believe people (especially young people) in China will use their mobile phone talk to their friends, text messaging, get to Internet…even if Chinese economy slows down after Olympics, as many people expected (which I don’t agree).

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Categories
Business China

China corporate tax rate reform: winner and loser

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The following screen shot is from Capital Week Jan 5, 2008

2006_7_CHN_Tax_rate

We know from Jan 1 2008 China will have a unified corp tax rate of 25% (some tax rebate for certain industry and foreign enterprises will still apply for a while).

It appears retailer, bank, home builder, and telecom (include mobile phone) will be the big winner here as they are paying a rate of 37%, 34%, 35% and 37% in 2007, respectively. From year 2008 they will enjoy the lower rate of 25%.

On the other hand, it will have little effect for Information technology, automotive, and machinery etc. as they are enjoying lower tax rate and will enjoy it for a while.

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Stocks

A crazy week and ICR XChange conference

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What a crazy week. The market continued its downward spiral while we hear all kinds of bad news from economy front: from the credit crunch for big guys and little guys; AT&T CEO says some customers can not pay the phone bills; American Express (one of Berkshire’s core holding) had it biggest drop since year 2002…

I also did something crazy (which I regret) this week. My biggest mistake is I sold some MR shares. Yes it did go up after I sold it, just like other stocks did in the past. I will try to buy back some MR shares in the near future because I believe its growth will not affect by the credit problems we are facing now.

Next week, I am eager to wait what the guys at Crocs and Ruth’s Chris Steakhouse have to say at ICR XChange conference. The link of webcast is here.

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Categories
CFA Stocks

Stock option helps cash flow for Crocs?

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I was reading the cash flow statement of CROX Q3 2007 10-Q. One thing caught my attention is the “Excess tax benefit on share-based compensation”, about $38.6 m for first 9 months of 2007, plus the “Exercise of stock options” $ 14 m., the total “Cash provided by financing activities” is $ 52 m, compared to the cash from operating activities for about $ 22 m.

This is a bit strange because normally we want the cash comes from operating activities, i.e., a company’s main business. For instance, in the case of Crocs, its main business is manufacturing and sale of Crocs sandles. It’s not a financial service company: a bank, or a lender of student loans something.

I did a little research on this topic. I found a paper written by Marc Siegel which describes what companies do these days to artificially boost cash flow statement (legally), and a newspaper article from Rocky Mountain News explains this a bit in plain English.

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Stocks

Self reflection on my stock investments

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All right, before I was going to do an accurate calculation of the annual return of my portfolio, all my year 2007 gain (realized and unrealized) are gone by yesterday market close.

Blame the market? Blame the CEO of Crocs and Longtop? Blame Jim Cramer? Blame the Fed (as Jim Cramer did in his show)? Or I should simply blame myself? I should have expected some of these coming: Crocs has been under pressure since last Q; and Longtop has not done well ever since its IPO pop. Keep in mind LFT is not as high profile as the NetSuite, the software as service IPO in the silicon valley. After all, it was my own decision to get into those mess 🙂

My pain did not come just from loss, I can think of couple reasons that aggreviate my pain:

1) The “potential gain” from Crocs all vaporized. As Charlie Munger once said (point 11: removal of something almost possessed, but never possessed): if one tries to pull a meat already in a dog’s mouth, the dog will not be unhappier (vs. not getting the meat at first place).

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Stocks

Quick check on Crocs’ inventory

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More blindman’s check on elephant…

Crocs stock (CROX) had a big drop in last two sessions, amid the loss of patent lawsuit in EU, and some rumors on the business slowdown in general. When Crocs reported its Q3 2007 earning back on Oct 31 2007, it mentioned there is some excessive inventory because of the disruption of a new distribution center in Europe (and to less extent distribtution problem in Japan and China).

Here I am calculating its historic turn over ratio here (source: Crocs Q3 2006 10k, Q3 2007 10k). The ratio is defined as sales divide by inventory. The higher the ratio, the better for the company’s revenue growth.

First 9 months 2005: 75,022/28,494 = 2.63
First 9 months 2006: 241,824/49,128 = 4.92
Full year 2006: 354,728/86,210 = 4.11
First 9 months 2007: 622,554/195,256 = 3.19

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Stocks

Blindman, elephant, shoes and houses

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It has been a while: I realized my understanding of some of the stocks is very much like a blindman perceives an elephant. I mean, I usually get a partial picture of the real thing, sometimes the partial picture is distorted.

blindman elephant pic
(source: throwtheword.com)

For examples, the investing in Crocs (the shoe). It was a good ride until Oct 31, 2007, when the shoes started to fall off. Initially I was thinking I am doing the research by reading the 10Q, 10K, checking out the things in store, doing some calculation using Google spreadsheet (I regret to check it right before Oct 31 earning). But even with that, did I get a full picture of the whole thing? Same thing can be said for checking out the housing markets in Shanghai (trying to determine how Vanke will do in China).

In other words, it could be pure luck (not my research) that helped me to had a good ride. But then the tough time comes, when the luck is gone, you know what happened.

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