Replies to post #50 on Universal Travel Group (fka UTRA)

[tnzalu]

I understand there must have been legitimate business reasons to exit the CFO. You can check my post history for my ping to Joe Natural on this co and his reply. I bought on downgrade overselling and am looking for a trade here, however, I might trade half my position and hold the other half depending on how this week and next goes.

[Post-it]

Just my 2 ct, after some DD; have not gone through the whole 10Q yet in detail, but the overall picture becomes a bit more clear.

1. Gross margins. There is a huge difference between ticketing (air travel and hotel) and packaged tours. If I understand it well, in the case of ticketing just the fee/commission is booked; therefore low cost, high margin. In the case of packaged tours, the travel agent buys the ticket and the hotel reservation for say 1000 yuan and sells it for 1.100 yuan; high cost of goods sold, low margin.

CTRP is mainly ticketing, hence the much higher PE.

Q results are difficult to compare if the mix between ticketing and packaged tours has changed. And this was the case in Q210, with the addition of two low margin businesses.

2. Acquisitions. In May UTA confirmed its intention to buy 4 more travel agencies:
Shanxi, rev. 5.6M, net inc. 0.4M, net margin 7%
Tianjin, rev. 3.7M, net inc. 0.9M, net margin 24%
Kunming, rev. 9.4M, net inc. 0.9M, net margin 9,5%
Shandong, rev. 4.4M, net inc. 0.8M, net margin 18%

On the last day of the Q they confirmed Shanxi and Kunming, i.e. only the lower margin businesses.

Q2 clearly shows that margins (gross and net) are lower in Q2 than in Q1. Management claims that this is due to the inclusion of the two new low margin agencies. Brean Murray however seems to find that the margins of the new acquisitions are indeed low, but that the margins of the existing packaged tour business has actually been still lower ('margin erosion'). This would be serious enough, as it seems that more and more this will become UTA's bread and butter business.

In my view, it would have been better for UTA to close the purchase of the two new agencies one week later; the figures (margins) in Q2 would have looked better (Rev would have been some 4M lower and the bottom line hardly different). Closing on the last day and adding all results of the whole Q to the accounts also looks questionable.

I would like them to close asap the two pending higher margin acquisitions, though this may be difficult as a small part would be paid in shares and these don't have the same value anymore as two months ago...

BTW it seems awkward that the low and the high margin businesses all seem to have a price of 6 x EPS. Maybe therefore the two pending acquisitions are not yet confirmed.

Bottom line is that UTA needs to concentrate on the integration of new acquisitions. The idea is that they bring economies of scale, cost cutting, leverage brand recognition and generate synergies. This is UTA's business model and so far they have not yet proved that they can easily manage.