Donald Rudow

Donald Rudow
Contributor since: 2011
With no disrespect to the author's abilities, because I assume he is capable and thoughtful in general; it's not a very well written piece, in my opinion. I don't have a problem with the opinion, it is the lack of a well articulated and original argument that renders it rather useless for me.
It is interesting to observe that all of the comparable companies have not appreciated as much as LOAN since the date this was published. LOAN is very small compared with the companies graphed in this article. Being small, it is easier to grow the business and rational investors will factor that into their expectations, as long as the management team is capable.
Putting the past decisions of the board aside from a few years ago, I think Assaf Ran has done a fine job utilizing the assets available. Both the board and Ran in their respective capacities appear capable and determined to create wealth for shareholders. Both forms of financing are being utilized effectively as the real estate market has healed. It would be nice to see LOAN expand the region it serves with its current model. A hard money lender has to factor in the regulatory costs for both lending and development, as it determines its loan pricing and the specifics of its loan contracts. Not all cities are alike concerning regulatory costs for development, but I imagine NYC is at the higher end then a city like Atlanta is, for example. Any city with lower regulatory development costs than NYC (permitting issues), I would think could be potentially attractive for LOAN and its model. Some cities may be looking to lower these regulatory costs to encourage redevelopment in urban areas. Cities like Detroit come to mind. The growth dimension is worth considering because I think it exists.
What is Toro's opinion on the delay of the audited financials?
This is a well articulated article. Since I have concluded that their strategy has failed, I sold my position. The operating business is worthless. It's a matter of preserving the capital while enduring annual operating losses of 4-5% annually. The fact that this has gone on for so long forces me to conclude that here are incentives in place that continue to support decisions that do not benefit shareholders, and I don't know the details, so continuing to hold this risk is not attractive to me.
Good luck to you. It would be nice to see this company generate profits from operations, but that is not happening so why continue staying in business?
For me, the asset turnover ratio following the aggressive price strategy says everything I need to know. A lower price does lower margins but if it also increases your return on assets that is a good decision. That only happens if you are turning your inventory over more frequently which implies you are turning your assets over more frequently as well. ACTS has lower margins and a lower turnover ratio. The R&D burns through roughly 7-8% of the assets each year and operating profit is consistently negative. This has been going on for years now. I'm calling what has been, as being what will continue to be, without a complete rethinking of their product strategy. The results of their R&D are not good enough. They should liquidate, but I don't see that ever happening. I'll continue to watch this from the sideline. This may hit new all-time lows and become a value play once again. At that time I will reconsider, but only if there is some change in management. Otherwise, I think this is a value trap, and it is worth more as a quasi-Chinese investment trust than it is as a semiconductor company; and given the management are tech-guys and not money-guys, this is a problem.
The Income Statement proves the assets being utilized to generate non-operating income is a better use for the assets. This is a shut-down signal that seems to be confirmed with the strategic failure we have experienced. So any assets utilized in these activities are simply better allocations. If they can continue to borrow at an annualized 2% and earn 6% they should do that all day long. It is far better than spending cash in R&D for operations yielding declining revenues and operating losses.
There is a bothersome account on the balance sheet, though. Related party loans receivables are a concern. Is this a future write-down?
I honestly think they should liquidate the business before they burn through the assets. A few investments that go sour during the next economic contraction could suddenly deplete a significant amount of equity on the balance sheet. Getting these Chinese companies to do anything like that is remote, I think, due to capital constraint issues and the general perspective on their end concerning the relationship between shareholders and management.
Another concern is their accounting firm. Without a resolution between the US and China concerning access to the auditing papers they will be forced to utilize an even (potentially) less transparent Chinese accounting firm that is insulated from US sanctions.
There is always a risk of fraud, though, so your concerns are certainly valid. Even absent fraud, ACTS has several major issues to work through. I am glad I am out of this position with a respectable gain, although I am very disappointed that it was nowhere near it could have been if they had a productive R&D along with a well executed and sound strategy in place.
I have finished liquidating my position with this company too. Their strategy has failed. I don't have any confidence they can compete with the current strategy, and I don't think they honestly think they can either. Zhenyu does not sound confident about the future, himself. They cannot compete in the oem market which is an area they probably have the best opportunity to succeed within.
The result of lowering price to try and generate more revenues has yielded two disappointing outcomes. Negative operating margins and a falling asset turnover ratio. This spells strategic failure for a company that has decided to try and increase revenues by lowering the selling price. They are taking a beating from the competition and I don't expect that to change in the second half of the year.
The R&D should have yielded results by now. It burns through 7%-8% of the assets annually since 2011.
I'll throw my unsolicited comments in here...
Firstly, the rmb has been appreciating against the US$ and the Euro for several years now. This has made their products more expensive for export to the regions denominated in those particular currencies. Regardless of their trade balance levels, an appreciating yuan has a negative effect on the level; making it lower than it would be in the absence of yuan appreciation.
Labor costs have been increasing and there may be uncertainty over when the CCP will ease up on their policies designed to transform the consumption portion of gdp into an increasingly higher and important component for the future. A 'strong yuan' policy supports that endeavor (putting downward pricing pressure on imports). Will China's monetary policy change fundamentally with a higher default rate in loans? The credit issues are probably temporary, i.e. a short run problem, so I doubt that a strong yuan policy will change over the long run.
A new CEO, I expect, will put his own stamp on the strategy going forward. The past few years have been low on risky capital investments. Perhaps the new guy brings with him a new strategy. If they are going to pursue an export oriented approach involving regions that are almost certainly trying to devalue their currencies to grow the company, this may require capital investments outside of China to get and keep a competitive edge for an extended period of time.
I would like to see a strategy going forward that addresses the currency issues at work. China is not the cheapest manufacturing location anymore and the policy trends of China and its traditional trading partners cannot be ignored if the company prefers to avoid headwinds.
I did not agree to it. The buyout terms the board agreed to were far below the equity value of the company, and a good portion of the total capacity was new, with only a couple of years of depreciation incurred. Shareholders got a bad deal on the buyout.
Thank you for the link. I am not surprised they have re-listed on another exchange, albeit without the biodiesel business apparently. I'm not planning on entrusting my capital with Yu Jianqui anytime soon.
All China VIEs are prone to moral hazard problems. It is unavoidable due to the incentives that arise as an owner of the VIE versus the incentives those same owners face as shareholders entitled to excess benefits provided through the contractual agreements.
There exist 'x' owners of the VIE and 'y' owners of the company that owns the VIE contracts. If the 'x' owners of the VIE are part of the 'y' owners of the company that owns the VIE contracts (and x<y), The benefits to the VIE owners of a $ or rmb within the VIE is greater than the benefits of a $ or rmb to the VIE owners within the company that is contractually entitled to the benefits. So there is an incentive to capture these benefits within the VIE as owners through various means we are familiar with. The assets funneled out of the VIE are generally much greater in magnitude than the benefits lost as shareholders, because x<y, so the VIE owners have an opportunity to be net gainers. These incentives exist regardless of how honest and upstanding the VIE owners are as executives in charge of the contractual relationship.
This does not even address the ability of these contracts to be supported in a Chinese provincial court, which is another issue.
I explained this in an article published on SA.
Great work. This kind of thorough investigation into Yidatong is necessary. It's not just a revenue issue here. The role this company may play in 'laundering' equity and credit financing from off shore into the VIE as reported, and subsequently out to other parties through related parties transactions the VIE conducts with its suppliers and customers seem to be a central issue (as is always the case with these structures). I think the cash balance, whether it exists or not, is less important than achieving transparency on Yidatong.
Once the assets are transferred to the VIE they are out of the reach of shareholders, regardless of fraud accusations. It represents a vault, to some degree, safe from foreign investors up to this point. The capital controls are only part of the problem in my opinion.
Nice review of current events.
Problems for me concerning this stock. (1) It is essentially nothing more than an investment in a VIE. These organizational structures are prone to problems involving moral hazard, which I have written about previously here on SA. (2) DSO of ~5 months with no Level 1 cash seems inconsistent with the statement that operations fund all their cash flow needs. (3) The Yidatong relationship has too much uncertainty surrounding it. If it generates all that revenue for NQ, why is it not a completely independent company that is distinct from Xu Rong's other company? Co-mingling of assets and records are a risk. (4) Exactly why is all that cash sitting there as Level 2, earning less than it should be as a non-cash, non-short term investment asset base, according to recent quarterly filings? Operating yields on non-cash eq, non-short term investment assets are an implied 4%, 7% and 4% for the past three quarters. Not making use of the assets within its operations cuts the operating earnings yield on its assets in half. Is this bad management, a temporary issue, or indicative of the true nature concerning the intent of acquiring that cash in the first place from the markets?
Foreign currency, government debts, and publicly traded equities are also level I assets according to the unique definitions for assets provided by FAS 157.
Block was on an interview with Bloomberg this morning. They have already been speaking with NQ, under another name according to him. So this has already happened, even if it wasn't during the cc. MW has already forwarded their information to the SEC. They fully expect NQ to follow the same path as Sino-Forest, according to Block this morning.
A 'Level II' classification for a bank balance is absurd, quite frankly. Cash, sitting anywhere as cash, should not be classified as Level II assets. PWC basically states they did not confirm the cash balance, if 'Level II' is their claim in the annual report. I didn't read it, and I've only just begun paying attention to this, but as an investor that sends a huge red flag. We've seen bogus cash statements coming out of China all too often the past 3 years.
Great story, if only it were true...
Just based off of a brief analysis on the data I have, statistically speaking, JCP has the SG&A costs of a company generating $20b in revenues, assuming it is capable of generating revenue yields on assets similar to the average. But, it has historically not been able to turn over its assets like the rest of its competitors have, on average.
Nice, even if it is basic, piece. I too like the ownership level. Research has shown there is a sweet spot for Chinese equities, concerning inside ownership. Too much, and funneling of assets becomes more of a risk.
DSWL has some real challenges, as you point out. RMB appreciation relative to the western currencies and increases in labor costs are problems. Labor cost issues can be addressed through capital investments designed to increase labor productivity, but they obviously need to come up with more revenue.
Thanks for the update surfgeezer. The Capesize and Panamax market charter rates have relatively lower volatility than does the Handymax vessels the past few months. Does anyone know why this is? Maybe this is just an anomaly with the data I have.
I have a correction to make on the second table. The dwt 2011 figure for SB should be 1,886,400... implying no change in dwt between 12/31/2011 and the 6-k information supplied 5/8/2012. I apologize for the error and I'll inform the SA editors. It doesn't change any of the rankings.
@V Investor, check the charter rates for DSX in 2012. The last two charter rates reported by DSX were just this last month... $13k gross/day for a Handymax and $9.7k gross/day for a Panamax. There is a 5% commission expense on these. Also, when comparing the OI, I think NMM incorporates interest as an operating expense so the operating expenses are not as apples to apples as one would like.
I wanted to limit the analysis to historical data and avoid speculating about the future. So I focused on the assets. I do agree that the timing of the contracts matters. Hopefully, the work here will supplement your own research.
There seems to be a flurry of ACTS pieces on SA recently. Your article is the most relevant. There is no need to try and convince investors to buy, like the two preceding articles intended to do. There is a need to convince management to allocate the cash and cash equivalents optimally. Cash and cash equivalents represent a little over 70% of total assets. Half of this balance could be used to buy back shares at these ridiculously low prices while still leaving enough to cover nearly all operating costs for the next year, assuming the revenue and costs remain identical with last year as a percent of assets.
I like the review of the management team, this is essential to know for investing in China and one I spend time on. While accolades by the provincial government are nice, one has to worry about rent seeking activities enabled by guanxi, and the provincial bureaucrats meddling with ACTS's executive team should give any investor caution in my opinion. Still, the executive team's education in Taiwan and the US suggests to me that they should understand western investors better than the typical small cap in China that has had little to no exposure to culture outside of China. I have been accumulating at these levels, but I would like to see them decide to employ capital outside of China. There are cheaper places to manufacture than China, and we now know China offers no protection of property rights for US investors in the manner we would like, so geo-political diversification of their asset base would reduce the risks that appear so specific to China right now. That China-specific risk is not going away without some sort of revolution in ideological thought within the PRC, which may not happen for a very, very long time.
So, let me get this straight... they are suing the group that outed them as frauds because they alerted the public to their fraud?
Amazing. Absolutely amazing. Only in China.
It's always good to remember the wisdom of legends. RiP Walter!
This is rather rich following the exodus of middle management along with the halt. I despise frauds and I hope you can recover what you have lost by trusting this company's executives. There were too many problems for this company to ever have fit into my set of potential investments, regardless of Waldo Mushman's research.
I think you are probably correct on the design of these restricted shares being influenced by the stronger possibility of a buyout with the company selling below its net current assets.
Jay, I am really happy you wrote this and posted it on SA. The growth rate in O/S over the 2003-2007 years is 2.47%. The growth rate since 2007 has been 7.10%.
The growth rate in O/S has nearly tripled. The income growth rate has been far too low to sustain the 7%+ growth rate in outstanding common. Earnings in 2007 - $9.4m, earnings in 2010 - $5.0m for a negative 18.73% growth rate in earnings. Granted, the golfing industry has contracted since 2007, but that only reinforces the problem with a triple in the growth rate of the common. Retained earnings over the 2007-2010 period have destroyed equity with a growth in accumulated deficits over this period at 7.26%
I'm not bashing ADGF, seeing as I am long this stock. I'm just expressing my dissatisfaction with the gifting of the shares. It is unjustifiable.
It is always interesting to review someone else's portfolio and reasoning behind its creation. Needless to say, your approach is going to be subject to extreme volatility. I've dealt with the emotions of panic under periods of accelerating losses and like you, gone back to the books and more research before giving in to the urge to 'do something' before determining whether something tangible has changed that should cause me to change my underlying thesis. I hope your concentrations pay off.
Just an observation on my part... The leaders of the left have recently been the most economically illiterate the past 11 years and this is nothing more than a reflection of the constituency. I agree with Bove, but this is bigger than just Obama. The 'demonizing' of the financial industry has been running with few checks of sound reasoning during this period of time and has been supported by mainstream media outlets like CNN and MSNBC. Frustrated people are looking for someone to blame. Combine this with widespread ignorance of economic principles and you see Occupy Wall Streeters tweeting about the elimination of private property rights and other ideas that would accelerate the demise of any remaining freedom we have as we continue or collective travels on the road to serfdom.
Indeed.
Thanks for the feedback. From the perspective of the parent company, a wholly owned foreign entity sounds more natural to me and that is why I wound up using the WOFE acronym. But, I have read the wholly foreign owned enterprise/entity phrase and seen the WFOE acronym as well. A WFOE sounds more appropriate from the PRC perspective to me. But, if the WFOE is a more conventional acronym I'll have to start using it. I certainly don't want any unnecessary confusion.