Friday, April 20, 2012

Expedia (NASDQ:EXPE)

These were my unpublished thoughts pre-spin off of Expedia during 4Q 2011. I chose not to participate due to the fact that both businesses were neither cheap nor are they fantastic, coupled with poor overall climate.

Looking back with hindsight, at then level of $25.02, after the firm did a one-for-two reverse stock split, i.e  2 expedia pre-split to 1 trip advisors and 1 expedia post-split which is now at $35.95 and 31.53 respectively. Returns will be 34.9%.

I was also contemplating a long Expedia and short Priceline but thankfully Priceline though pricey, has some strong reasons to defend its valuations a little (at that time). I would have been killed had I shorted Priceline. Why? Take a look here, courtesy of Google Finance.

(All amount in US$)
1) Business
  • Spun off from Microsoft in a IPO in 1999
  • Online travel agency co, stand alone or package, owns,, Seatguru and
  • Competing with Priceline (PCLN), Orbitz (OWW), Ctrip (CTRP), Travelocity, Yahoo travel, Bing travel and Kayak (search only). Notably Orbitz is most often quoted due to availability for price comparisons
  • Spinning off worlds largest trip reviews site, Tripadvisors (TRIP) with flagship site and 18 others travel media/ad sites such as AirfareWatchdog, CruiseCritic and FlipKey
  • Expedia purchased TRIP in 2004 for $237mm and has 2 classes of equities, A and B
  • TRIP has a booking fee estimator (simple no frills system) and combined information of itinery which is greatly appreciated. Furthermore, it also has a good stock of reviews (over 40 million entries) on various locations and hotels which no other competitor has yet and it helps to retain users
  • Business model wise, PCLN operates on a auction model with fixed travel times so price discovery and money saving are key. EXPE is more of higher end, more flexibility type of travel booking. 
  • PCLN also has no booking fee vs EXPE, however 2009 all dropped booking fees, typically $6.99 to 11.99 hidden in government taxes and fees. However some like OWW still charge for multi carrier itineries
  • EXPE also does not have cancel or change fees if performed 48 hours before
  • Some may prefer to have no fuss and book a secured quality lodging over an uncertain PCLN even it means a premium or slight discount for EXPE especially for sales tickets
2) Business Segments 
  • Hotel bookings - Negotiate deals with hotels, sometimes even buying up inventory to resell at a mark up. So the firm earns a portion of total sum paid for the hotel rooms, not as booking fees
  • Airline ticketing - Firm gets unpopular seats from airlines at a discount on these sites and the site can opt to sell at a mark up
  • Tie ups with and in China and has yet to realize its full potential
3) Financials 
  • EXPE is at 274.06M sh * $ 25.02, approx $6.85B mkt cap and around 17x PE 
  • TRIP's 35% of revenue and profit is from EXPE
  • 2010 EXPE / TRIP 
  • Revenues                        $3.35 / 0.486B (or 14.5% of total), growth 13% / 38% 
  • Revenue TTM                 $2.80B / 0.401B, growth 9% / 34% 
  • EBIT                                 $ 0.83B / 0.26B (or 31% of total), growth  / 33% 
  • Unique visitors / month -   73M / 40M
  • Registered users -             ? / 20M
  • EXPE has grown revenues at 13.24% and FCF by 20.9% p.a over last 5 years
  • Estimated 10-15% annual growth for TRIP
  • Bulk of EXPE revenue is hotels (60%), airline booking (12%) and cruise/car and destination (10%)
  • 15% of bookings are for multi package bookings for same itinery
  • Bulk of TRIP revenue is CPC (Cost per click abt 80%), rest CPM (display ads 15%) and others 5% 
  • Firm also estimates global online travel ad/media to be worth $750B 
  • The firm generates an annual ave $500M fcf TTM, high $600/ low $400 @ crisis, mostly $500mm. At current prices, EXPE is at 11x FCF
  • EXPE will lose hedge against ad costs from TRIP, rising ad/op costs also hurt 1Q 2011 bottomline 
  • TRIP may introduce new businesses such as direct hotel bookings which is EXPE's main business and carries a higher margin than airplane tickets (CEO Dara Khosrowshahi said spin off will not affect EXPE ability to compete against PCLN)
  • EXPE and OWW stopped posting American Airlines (AMR) flight details and impacted earnings. However to note, AMR contributes only 1% to sales and airline booking is only 12% of total revenue. The issue is that AMR tried to have more of the customized flight fees to itself without going through EXPE since it offered a combined hotel and airline package through other sites such as PCLN and 
  • Liberty Interactive owns 19.3% of EXPE and may have influence on the management decisions
  • New entrants like Gogobot offers a combined package deal with social media (Seeded by Schmidt of Google) 
  • Google's purchase of travel data specialist ITA Software will affect the entire online travel space. it is also using search algorithms to favor Google places over other sites and it is noted for 2010, upstream traffic directed to TripAdvisor from Google has declined while same period from Facebook was up 30%. 
  • Then spin off will be by 3Q 2011
  • The most interesting thing is TRIP makes money regardless of which broker as long as theres ads and affiliate fees when bookings are made on the affiliate sites 
  • Tencent bought a 16% stake in Elong (EXPE's china arm) for $84.4M. Tencent is akin to the Google of China with their own facebook and messenger services and 674M active users. It is traded on Hong Kong as 0700 HK. EXPE added 8$ for $41.2M. Both deals done in 2011.
  • Elong has a 9% market share versus Ctrip (Nasdaq) with 53.6% in 2010
  • PCLN trades at 52x PE and gained 150% since 2009 (now trading at $26B mkt cap) while EXPE is below its 2009 price. 
  • Travelzoo inc (TZOO) also trades at 64x PE
  • Orbitz (OWW) is significantly profitable, focuses more on airline segment
  • Travelocity (Not listed)
  • Kayak (Not listed) - search only and referral 

Sources : Wall Street Journal, Firm websites, various sources

Recruit holdings (0550 HK)

Similarly, I wrote this in 2011s and was unable to take action due to the partly some convoluted paper process to apply from my country to this counter in Hong Kong and the various fees involved (broker quoted) . Will T reminded me that this would have done very very well.

*** Please be reminded the numbers and situation to this firm have change and is outdated.

(All in HK $)
Businesses Background 
  1. Printing services 
  • Prints educational, lifestyle books for publishers and presses, 7th largest intl exporter to US
  1. In-flight magazine advertising
  • Only HK listed firm working with 4 largest China airlines and one in Taiwan, leader in China
  • Global in flight airline ads revenue worth US$1 billion in 2006, probably US$2 billion now assuming 15% growth per year. So with $616m or US$79 million revenue, its about 4% of global market share. A journal also mentioned Asia taking 30% market share, and China is probably internal flights + some externals, so I would think its around a fifth of Asia's total air traffic so that works out to be 6% of global market share. So 4-6% is feasible.
  1. Recruitment magazine advertising
  • 2010 return to profitability - likely further shrinkage with shift to internet model
  • Carve-out of printing business, Recruit will hold 57.98% post event (at least 50%) 
  • 25 Feb, PN15 submission approval granted and 18 Mar, PGL submitted listing applications
  • IPO and share placemen of PGL, after which spin off preferential PGL to shareholders   
  • Parent price at
  •  $2.70, 311.71m shares = mkt cap $840m, PE of 4.9x, PB of 1.7x
  • In 2010, firm earned $169.5m/ $319.2m (net/ gross profit) over $1152.5m of revenue 
  • In 2009, firm earned $92.8/ $208.1m  (net / gross profit) over $698m of revenue 
  • CAGR growth of over 27/ 24% for revenue / profit resp.
  • S/D costs went up $76 to $110m (44%) as the most significant impact to P&L
  • Net cash is approx $100m, including financial derivatives and investments 
  • Trade receivables went from $224.2 to 340.3m while payables 138.8 to 128.7m (2009 to10)
  • SH equity stands at $495.5m, firm earned $77/ 50m of FCF
  • Segmental results (2009/2010)
  • Advertising 
  • Revenue $243.7/ 616.6m, profit $47.5/ 122.3m 
  • Assets $171.1/ 218.65m, liabilities $69.8/ 65.93m, net  $101.33/ 152.723m
  • Printing 
  • Revenue $454.3/ 534.9 m, $66.7/ 74.0m profit 
  • Assets $411.54/ 483.67 m, $71.1/ 67.7 liabilities m, net $340.435/ 415.978 m
  • March 2009, spin off Cinderella Media scrapped. (I.e travel advertising too good to give up!)
  • The long range price is $2.20-28 so if carve-out fails, a likely immediate loss of 18.5 - 21.4 % 
  • 4 hurdles to be cleared are, shareholders (check), both firm's board and listing approval
  • The advertising is asset light and more efficient in generating profits
  • RONA 2009/2010 is 46.8/ 80% for advertising versus printing of 19.5%/ 17.7%
  • Valuations
  • The closest competitors trade 7-9x PE but growth and ROE/ROA are not as good or even negative
  • A recent outdoor advertiser was listed on HKSE for 10x PE
  1. Printing business (slowing growth, lower ROA)
  • Valued at lower of 5-6x PE or 1x PB
  • With normalized profits of $70mm and net assets of $415m, = value of $350-420mm
  • Recruit once subscribed for 4.18% (407.273mm shares)of PGL at $0.30 through conversion of loan to equity
  • That values entire PGL at $2,923mm. Whilst this figure is off as it is a conversion instead of a cash payout, we believe management remains optimistic on the value of PGL
  1. Advertising business (fast growth and grows 20-30% p.a, higher ROA)
  • With a PE range of 10x
  • Normalised profits of $100mm = value of $1,000mm
  • With fast growth, higher PE of 12-15x plausible but pegged it at the lower range
  1. Combined entity 
  • Total value $1350 - 1420mm 
  • If purchased now, you will still get the printing business for free!
  • Expect the combined entity to trade at conservatively $1350 - 1420
  • Possibly higher if the advertising business takes off
  • Represents a conservatively possible 60 - 69% return 
  • The IPO and spin off is positive for the parent, Recruit as:
  • Parents gets cash for the IPO listing, possibly for expansion of new businesses
  • The ads business is asset light and with little depreciation, the solid earnings will be visible
  • Possible acquisition candidate due to strong balance sheet and phenomenal growth
  • A higher re-rating of the business is highly likely 
  • Fears of ending of airline ad contracts may be alleviated as logically, a 5+5 year extended contract duration is feasible (since they are the market leader) and hence a minimum of 10x PE is definitely reasonable. Every new contract hereon adds to the $100m profit
  • The IPO and spin off is positive for the subsidiary PGL as:
  • More understanding to the firm = more demand
  • Shareholders get less of the free spin off = less pressure selling = more stable pricing
  • Parent retains over 57% ownership, giving more upside potential for PGL
  • PGL executives incentives are more aligned to the performance of PGL
  • Other positives 
  • Insiders are taking part (Stock incentives and buybacks recently)
  • one of them an ex JCDecaux staff 
  • In 2009, the printing business raised sales by 36% while overall export market dipped 10% with 20% excess production capacity 
  • Management foresaw publishers will reduce suppliers to maintain bargaining clout
  • Competent management able to manage paper prices and fx exposures
  • One of the most solid balance sheet and profitable presses in the print industry 
  • Institutions typically buy in post spin off due to risk mgmt and trouble of selling subsidiaries
  • Spin offs take on average 6-12mths to happen from announcement and 1 year to realize value in a study conducted by Penn State in 1990s

    UE E&C

    Posted this to remind myself. I wrote this in mid 2011 at compelling price levels but was not comfortable with the non-niche business segments and cyclical construction industry and hence did not take up a position in this. Seems like I was sorely wrong on this...

    Took me a while to comb through new firms and old in Asia and after much consideration, I have decided to write on this interesting company.

    • One of Singapore's established engineering and construction player with 30 years of operations.
    • Spun off from UE in 2010 at $0.48/sh, 70 mm shares offered on top of UE holding 200mm. With 60mm placement and 10mm via public.
    • Firm being related to UE is naturally related to the Straits Trading / OCBC empire (note common directors)
    • Business units (revenue %)
      • Construction - 85% Bulk of the business, fluctuating and thin 2-5% ebit margins
      • Engineering (mech and electrical) - 8.2% Decent small business with 10-15% ebit margins 
      • Building materials & equipment - 6.8% Small but profitable with 20+% ebit margins
    Investment Thesis
    • BCA (Building Authority) expects S$22-28 bn of public constructions and 7-9b in 2010 for private sector.
    • Firm enjoys a position of being related to both public and private segments.
    • Simply a statistical play, Mr. market is paying me S$20mm to buy a firm for free. 

    • Trading at S$ 0.37 per sh with 270 shares in total or approx S$100mm in mkt cap
    • Despite being in the construction/ ppty field, it has mostly generated cash flows which is a big plus 
    • Firm had a bumper year in 2008 -09 due to ION Orchard, Marina Bay Sands and several other mega projects which is unlikely to happen in the near future. So earnings of S$40mm in 2009 will probably revert to 2007 levels or slightly over at around 7-10mm range.


    • Slowdown in ppty sector (likely but not significant for 2011). 1H 2011 rev down 13+% and profit down 7+% 
    • Negative margins for constructions and engineering, likely for construction (biggest revenue contributor).
    • Firm suffering cash burn in future (historically leveraged to be involved in ppty devt and construction).
    • Only 70mm out of 270mm shs are floated of which  60mm is in the hands of institutions, some of which if you check are known long term holders like 2G capital.
    • Firm did mention no dividends promised in the prospectus and I believe may be valid since the entire sector is slowing and that firm has historically been in a negative working capital situation. May not be a bad thing since it may hint at stronger bargaining power to have faster current asset turnaround versus their liabilities.


    • I would expect to pay above net cash and securities value of S$120mm. (Downside is capped)
    • On top of that, I will pay around 5x owners earnings on a worst basis, about S$4-9mm = S$20-45mm.
    • So total value will be approx S$ 140 - 165mm or 40-65% upside from current levels.
    • However if you look at it, it is one of the dominant players in both construction and engineering with above average margins. If you pay 10x, that's equivalent to S$160 - 210mm or 60 -110% upside.

    Disclosure: Author does not own a stake in the firm described above.

    China Yurun (1068 HK)

    All figures in HKD
    China Yurun has been one of the market darlings for a while but a recent spade of negative developments have exposed the firm's vulnerability to market cycles. Further, there have also been observations that led me to think that this firm may not be what it seems.


    1. Their Hog farms do not have any livestocks at all (Bloomberg)
    2. 3 of 5 exec directors exercised and sold their options at $17-18 nish per share
      • CEO and ED sold 2.45 and 2.5 mm shares post exercise during 24-26 August
      • While CEO still holds, his stake has been steadily declining while the ED holds zilch now
    3. Subsidies received from government to the tune of $0.7bn when profit/sales is  $2.7bn/ $21.4bn
    4. There has been heavy capex and firm continues to report low utilization (1H 2011 spent $1.6bn, which is substantially all of its profits in 1H 2011) and spent $3bn+ in 2010 when profits were $2.7bn. Net assets doubled from $8.4 to 14.4bn 
    5. China had a total 15.09mm hogs volume in 2010 while the firm had a slaughtering capacity of 35.6mm hogs? They preparing to take over the world?
    6. Lease prepayments are a whopping $2.7bn while PPE stands at $9.7bn and total assets at $13.6bn. And the prepayments are so regularly paid ($0.6-0.8bn p.a) while not regularly disbursed/paid down and the sum accumulates. Adding prepayment for PPE, its a regular $0.9bn p.a outflow
    7. Ownership certificates for $2.1bn worth of land is not obtained despite being paid for (suspected to be related to lease prepayments)
    8. Company land pledged to support loans of the Chairman's personal property development venture
    9. Negative goodwill recognized as income to the tune of $0.18bn and also occured for past years. This means the company has purchased consistently firms at a price below their recorded book values. The surplus is then accorded to Yurun as profits.
    10. Further, companies bought were revalued at aggressive levels of 80-1000x earnings as hinted by "Long Term Value Researcher" in Seeking Alpha 
    11. Despite sales growing from $13.8 to 21.4bn, trade receivables was stagnant at $0.58bn in 2010. Over receivables grew due to enlarged VAT tax recoverable and derivatives
    12. The firm has $5.9bn in cash and $3.6bn in total loans
    13. Contracted commitments were $1.6bn and authorised commitments not contracted were $1.2bn, totalling $2.8bn for 2010 versus $0.38bn in 2009
    14. Placed 90mm shares ($23.88) in April 2010 and 47mm ($30.00) in November 2010 to end with total shares currently of 1810 mm
    The Defense of Yurun
    1. They are in slaughtering and processing, not in hog farming. Hog farming is the private business of Chairman. (Still does not explain the absence of live stocks)
    2. Chairman and executive director Zhu Yi cai owns 25.94% or 470.7mm shares (15 July 2011)
    3. Assuming price of carcass meat is US$1.50-2 per pound and market weight of a hog to be 250 pounds, thats US$375 -500 per hog. With 15mm total livestocks, that works to be US$ 5.6 - 7.5bn of value or RMB35 - 47 bn at USD RMB of 6.384. So that ties in with the 60% market share Yurun claims
    4. KPMG are the auditors