Archive | June, 2011

A Sign of the Times, Perhaps, Buried in the WSJ?

30 Jun

Buried at the bottom of an article in this past Tuesday’s WSJ about due diligence firms sprouting up to investigate Chinese companies for hedge funds and other Western investors was a little tidbit it seems everyone either didn’t read, or felt comfortable ignoring regardless. The WSJ – investigating Deloitte’s resignation as Longtop Financial’s auditor – seems to have encountered a not-unsubstantial speed bump which I’m afraid may be indicative of far larger and more troubling problems:

A spokeswoman for Deloitte’s global network referred questions to its Chinese affiliate. Efforts to reach the Chinese firm were unsuccessful.

There are two largely distinct possibilities here: First, the WSJ reporters are not very good/diligent investigators/researchers, or second, Deloitte’s Chinese JV is in more trouble than we thought, in the wake of its involvement in frauds like CCME and Longtop.  Ordinarily, I’d simply put a call into Deloitte’s offices in Shanghai myself (it took me about 90 seconds to find a phone number), but its now ~3am local time, and I have no desire to leave a voicemail and wait for a callback that very well may never come.  Giving the reporters at the WSJ the benefit of the doubt that they – having been given the contact information for Deloitte’s China office by Deloitte global – would be able to figure out how to get at least a “no comment” out of someone there, leads me to believe there may be something amiss.*  Seeing as I have no other information upon which to base this concern, I’m not putting too much credence in it, but it is something upon which I’ll be keeping an eye going forward.  Nothing really surprises me in China anymore.


*Of course it is entirely possible “efforts to reach the Chinese firm were unsuccessful” means the reporters gave up, or otherwise mangled the effort.


7Y Auction – Third Time’s A …… Not

29 Jun

Disappointing week for auctions, here’s today’s 7 year note results:

Yield 2.430 vs. 2.429 prev (5/26), Indirects 32.17 vs. 47.64, Bid To Cover: 2.62 vs. 3.24, Coupon: 2.375 unchanged.

Last 10 avgs (prior to today): Yield 2.45, Indirects: 50.15, Bid To Cover: 2.894

Updated Auction Calendar, Chart and Stats [GDocs]

No more US auctions until after July 4th.

Some Perspective on YOKU’s Warner Brothers Deal

28 Jun

While something akin to Netflix is still a relatively new concept in China, I think we’re in serious need of taking a step back from today’s ridiculous reaction (judging by the stock rising 35% today) to YOKU’s new deal with Warner Brothers.

China’s Youku Inc (YOKU.N) has agreed with Warner Bros Entertainment’s local joint venture to offer pay per view movies on its newly launched online paid content platform, Youku said on Tuesday.

Under a three-year agreement with Warner Bros, Youku will add 400 to 450 Warner Bros movies to its Youku Premium library.

“People are increasingly willing to pay for high-quality content, and we take the growth of Youku Premium as a sign that the market is improving for paid services,” Dele Liu, Youku’s chief financial officer, said in a statement.

Great, so YOKU is paying (paid) a lot of money for content it now has to try to sell into a market that may or may not exist.  Let me rephrase that: In order for this deal to be break even (let alone be profitable), YOKU has to convince users not accustomed to paying for “premium” content to…pay for it.  Has this strategy worked anywhere in the world?  I can’t think of any examples of any similar size/scale.

Youku Premium, officially launched on Tuesday, began beta testing in October 2010. Since then, the service has processed 200,000 paid transactions for its library of more than 300 movies and 3,880 educational programs.

According to YOKU’s annual report, they had roughly 280 million monthly visitors.  In 8 (or 9) months then, assuming this number hasn’t changed, they’ve had 2,240,000,000 visits. Two point two BILLION.  In that time, their “beta” test of Youku Premium resulted in 200 thousand transactions.  I’m not entirely sure of the scale of the beta test, but only 0.009% of site visits resulted in a transaction. That’s only 8 or 9 out of every 100,000.

While this number will surely increase significantly when Youku Premium is rolled out across the site, I’m FAR less optimistic than other participants.  I’ve been privy to semi-confirmed reports of illegally-hosted copyrighted content not just on YOKU’s competitors’ sites (of which there are many), but on YOKU’s platform, too.  Ultimately, there are two questions investors must ask themselves:

  • Why would Chinese users accustomed to getting content for free pay for it, when it can still be accessed for free with minimal effort/inconvenience?
  • YOKU hasn’t filed a 6-k yet, but from the myriad of news reports I’ve read, this is NOT an exclusive deal, i.e. the content will still be available elsewhere and Warner Brothers is still free to strike similar deals with YOKU’s competitors.  This isn’t even the first such deal Warner Brothers has struck!  Is Youku’s brand strong enough to keep users coming back?

The company is growing revenues at an incredible rate (so they claim), and the market is growing.  But in evaluating how much to pay for the stock, we have to consider more than just headlines.  Is a company worth 35% more because they signed a non-exclusive to sell content into a market not accustomed to paying for it?  I highly doubt it.

5Y Auction Results, July Auction Calendar

28 Jun

Today’s 5Y auction is out and it was largely disappointing; I’ll let the numbers speak for themselves. Here’s the results for all of today’s auctions:

5 Year – Yield: 1.615 vs. 1.813 prev (5/25), Indirects: 37.62 vs. 47.07, Bid To Cover: 2.59 vs. 3.20, Coupon: 1.50 vs. 1.75

4 Week – Yield: 0.005 unch prev (6/21), Indirects: 26.43 vs. 16.52. Bid To Cover: 4.57 vs. 4.44, Coupon: 0.005 unch

52 Week – Yield: 0.20 vs. 0.18 prev (6/1), Indirects: 27.39 vs. 33.18, Bid To Cover: 4.15 vs. 4.69, Coupon: 0.204 vs. 0.183

Updated Calendar For July/August

I updated the auctions calendar for July and tried to include as much of the early August auctions as possible (as it seems everyone is fixated around the debt ceiling impasse currently going on in DC right now). This schedule is subject to change at the whims of Treasury. We’ll do our best to keep it updated should these things change.

Updated Auction Statistics/Calendar/Charts [GDocs]

2 Year Auction Results: Down Down Down The Rabbit Hole

27 Jun

2Y Auction – Yield: 0.395 (new low) vs. 0.56 prev, Indirect Bidders: 22 vs. 31.29,
Bid To Cover 3.08 vs. 3.46, Coupon 0.375 vs. 0.50. Highlights: New low in Yield, prev low was .40 on 10/26/10, Coupon .375 same as low on 8/24/10

26 Week – Yield 0.095 vs. 0.10 prev (6/20), Indirects: 40.28 vs. 45.31, Bid To Cover: 4.93 vs. 4.69, Coupon: 0.097 vs. 0.102

13 Week – Yield 0.025 vs. 0.035 prev (6/20), Indirects: 26.86 vs. 42.61, Bid To Cover: 4.67 vs. 4.69, Coupon: 0.025 vs. 0.036

Updated Historical Auction Stats/Charts and June calendar [GDocs]

Note: I’ll have the updated July auction calendar posted tomorrow shortly after the 5Y auction


The Anecdotal Economy: Adventures in Big-Box Suburbia

26 Jun

In the past week, I’ve had the opportunity, nay, the pleasure to spend time at some of our Nation’s finest big-box retailers and warehouse stores out here in northern New Jersey.  I did so not in the name of channel checks or due diligence, but to actually, ya’ know, buy stuff, specifically large quantities of meat, lawn & garden supplies, and bbq accessories. What follows are some observations, in no real order particularly, of my experiences.  Please excuse my rambling, possibly incoherent prose.

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At Goldman Sachs, Chinese Tech Companies Apparently Have the Same Risk As U.S. Ones

24 Jun

I’ve been analyzing (YOKU) for the past three weeks, and as I said most recently, I can’t possibly see how the stock could be worth more than about $21/share, using what I think are pretty optimistic assumptions.  I read Goldman Sachs’ – YOKU’s lead cheerleader underwriter – report before I published, and I’m still going through it and finding data, figures, conclusions and other “analysis” I find very puzzling, to put it nicely.  I’d made a note to myself during my first read-through to go back and check GS’s WACC calculation, since their Cost of Capital was only 12%, which seemed pretty low to me considering we’re trying to value a high-growth, relatively high-risk company in China.

Today, I finally went back and checked GS’ work, and what I found is at the very least EXTREMELY confusing, and at worst, deeply, deeply troubling.

Here’s why:

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