Kerrisdale Capital

ChinaCast Education Corporation

11.29.11

Posted by Kerrisdale Capital at 6:11 am

We believe that ChinaCast Education Corp. (CAST) is misrepresenting itself in its SEC financial statements.

Our 40-page report explaining our short thesis for CAST is available here.

We have also written a letter to Deloitte LLP expressing our concerns. The letter is available here.

Kerrrisdale Capital and our clients are short and own options on the shares of ChinaCast. We stand to benefit in the event of a price decline in CAST shares, and will transact in the securities subsequent to this post. Please read our full disclaimer at the end of the report.

Below is a summary of our red flags:

1. SAIC Filings report that the ELG business is substantially smaller than what is claimed by CAST in SEC Filings

We acquired the SAIC financial statements for ChinaCast Li Xiang Co., Ltd. (“CCLX”) and ChinaCast Technology (Shanghai) Ltd. (“CCT Shanghai”), which are the main operating subsidiaries that comprise the ELG segment. ELG accounted for 66% of the Company’s gross profit in 2010 and for 100% of the Company’s gross profit prior to CAST’s first brick-and-mortar college acquisition in 2008.

According to SAIC filings, the subsidiary accounting for the ELG segment generated revenue of less than half of that reported in SEC filings from 2007 to 2009. In our report, we include photocopies of the annual inspection reports, as well as signed attestations by the subsidiaries’ legal representatives attesting that the information in the SAIC filings is valid and accurate.

2. SAIC filings provide evidence that shareholder funds were misappropriated during the Company’s acquisition of a business college in 2008

The Company announced in SEC filings that it acquired a business college in 2008 for RMB 480 million. Yet Chinese filings show that CAST paid only RMB 165 million for the asset. We question what happened to the remaining RMB 315 million, and whether it was essentially stolen by insiders.

On April 11, 2008, the Company acquired an 80% stake in the Foreign Trade & Business College of Chongqing Normal University (“FTBC Acquisition”). The Company reported in SEC filings that it paid RMB 480 million for the acquisition. However, SAIC filings show that CAST’s wholly owned subsidiary Yupei Training Information Technology Co., Ltd. paid only RMB 165 million for the asset. When research firm OLP Global demonstrated this in a report, the Company responded that the remaining amounts were paid by CCT Shanghai. However, the 2008 SAIC filings for CCT Shanghai demonstrate that no funds were paid by CCT Shanghai for the FTBC Acquisition, and that cash paid for acquisitions from CCT Shanghai was negligible in 2008. When OLP explained this in a subsequent report, CAST did not reply.

We came to the same conclusion as OLP after independently acquiring and reviewing the relevant source documents.

3. Filings with Chinese securities regulators and the SAIC provide evidence that funds were misappropriated during the acquisition of another college in 2009

CAST appears to have overpaid for its 2009 acquisition of Lijiang College by at least RMB 113 million, based on information from SAIC filings as well as documents filed with Chinese securities regulators that are easily accessible on the internet. We question whether the RMB 113 million was misappropriated during the acquisition.

For the acquisition of Lijiang College of Guangxi Normal University in October 2009, ChinaCast disclosed in SEC filings that it would pay a total consideration of RMB 365 million, of which RMB 295 million was paid in 2009 and the remaining contingent consideration would be paid in 2010. But Shanghai Xijiu Information Technology Co. Ltd. (“Xijiu”), the entity from which CAST purchased Lijiang, had only paid RMB 182 million to acquire Lijiang several weeks earlier, according to Chinese filings. Furthermore, Xijiu was set up by a former CAST employee and its 100% owner at the time of the acquisition was a farmer from Fujian province who did not graduate high school. It strikes us as unlikely that an under-educated farmer was the ultimate recipient of the proceeds from the acquisition of Lijiang College. The question emerges whether this acquisition was used to misappropriate funds during the acquisition of Lijiang College.

What happened to the RMB 113 million difference between the price paid by CAST in 2009 and the price paid by Xijiu for Lijiang College? Who exactly is this farmer who happened to gain control of a British Virgin Islands-based entity that purchased a college in China and then flipped it for a quick RMB 113 million profit to ChinaCast, plus additional consideration in 2010? Did the RMB 113 million end up in his bank account, or in someone else’s? Why has CAST not publicly answered these questions with specific, transparent explanations?

4. Unnecessary Capital Raises

ChinaCast has raised capital from investors numerous times, and also amended its warrants in a way that effectively functioned as a capital raise. In each case, the Company had ample cash on its balance sheet prior to the capital raise, and in our opinion, there was no reasonable justification for raising capital. In multiple situations, capital was effectively raised at low valuations, diluting shareholders in what we believe would be an irrational manner if the Company’s SEC financial statements were accurate.

5. Red Flags Associated with Historical Years

Our examination of CAST’s SAIC filings and the backgrounds of key personnel revealed several additional red flags that we believe are worth mentioning, given the other evidence for fraud we cite elsewhere in the report.

First, ChinaCast Co. Ltd. was previously censured by the Chinese government for falsifying bank documents. Prior to the Company’s IPO, management of ChinaCast Co. Ltd. was found to have fabricated bank transfer documents in order to deceive regulatory officials and pass certain capital verification requirements. A notice regarding the document falsification was filed with Chinese regulators.

Second, a central CAST executive was previously the CEO of a U.S.-listed Chinese reverse merger bulletin board company in 2002-2003. That company announced the acquisition of certain Chinese media assets but never closed the full transaction, and its stock now trades at a negligible value.

We urge officials at Deloitte, NASDAQ and the Securities and Exchange Commission to review our report. In our opinion, there is clear evidence that CAST is providing false financial information to one set of regulators, given that SEC and SAIC financial statements diverge by a material disparity. We believe it is the American regulators and investing public that are being defrauded.

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Advanced Battery Technologies, Inc.

5.5.11

Posted by Kerrisdale Capital at 9:05 am

We believe that Advanced Battery Technologies, Inc. (ABAT) is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC filings.

In collaboration with Prescience Investment Group, we have put together a 35-page report on ABAT and why we believe it is a fraud.

Click here for our report on Advanced Battery Technologies.

If Prescience’s website is overloaded with traffic, an alternative copy is available here.

A video summary of the findings, along with discussions with certain customers, are available at the following links:

Our evidence includes:

SAIC filings show that ABAT is reporting significantly lower revenue and profit to the authorities in China. For 2009, SAIC filings showed less than $2 million of revenue, compared to $64 million in SEC filings.
ABAT has unreasonably high margins in an established industry with strong competitors. The Company’s SEC-reported margins and return on capital are virtually impossible. Out of 106 global battery manufacturers as classified by Bloomberg, ABAT has the highest operating profit margin by a wide margin. When compared to six leading Chinese battery makers, ABAT’s operating margin is triple that of its closest competitor and six times that of the median operating margin of the comparable companies.
Site visits show underutilized facilities lacking in quality control. We hired investigators to visit both the Harbin and Wuxi facilities, and provide photos as well as commentary from our investigators. Our investigators concluded that both facilities produce commodity, low-margin products that are highly unlikely to be generating industry-leading margins or return on capital.
In December 2010, ABAT announced that it was acquiring a Shenzhen battery maker for $20 million. We believe this acquisition is a sham, and that ABAT paid $20 million in 2010 for an entity that they had previously bought in 2008 for $1 million, but had not disclosed to public investors.
Confirmation from former customers and partners that the Company is likely a fraud. After visiting one of ABAT’s plants, one customer called the facility “absolutely the biggest joke I’d ever seen”. A recording of the conversation is available here. In another conversation available here and here, a customer said the CEO admitted to hiring an accounting firm “to cook his stock price up”.
Low quality auditors and high turnover. The Company has had 4 auditors in the past 7 years, with no auditor being ranked in the top global 100 auditors at the time of hire.
Unqualified CFOs and high turnover. A CFO or auditor has resigned at least once a year. The Company’s past three CFOs have included: (i) a company insider who has been general manager of the Company’s main operating subsidiary since 2004, and is therefore not remotely independent, (ii) a 29-year-old who was formerly VP Finance at China Natural Gas, another fraud, and (iii) a candidate whose primary experience comprised of being a financial adviser at Smith Barney.
Continuous share dilution through secondary offerings, despite having more than adequate cash reserves. Through repeated share issuances, the Company has grown its outstanding shares from 10.0 million following

Our complete findings are available in our report.

Kerrisdale Capital, our affiliates, client accounts and other contributors to the report are short and own options in the securities of ABAT and stand to realize gains in the event that the price of the stock declines. We may buy, sell or short shares of ABAT at any time. We will not disclose if we discover something faulty with our analysis at a later date.

This email does not constitute investment advice or a recommendation of any sorts. Shorting a $1.60 stock with a $120 million market cap can be risky. Just because a stock is fundamentally worth $0 does not mean that it will end up at $0 in the near or intermediate term.

Please read the full disclaimer at the end of the report.

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Urbana Corp.

2.28.11

Posted by Sahm Adrangi at 4:02 pm

Accounts managed by Kerrisdale currently own shares of Urbana Corp. (URB.A and URB on the Toronto Stock Exchange), a closed-end fund with holdings in securities exchanges and financial services companies.
Urbana is trading at a 30% discount to its Net Asset Value of $2.06. The fund owns three main assets: (1) shares of CBOE, which account for 27% of the portfolio, (2) shares of NYSE Euronext, which account for 40% of the portfolio and (3) shares in the privately held Bombay Stock Exchange, which account for 15% of the portfolio. The rest of the fund’s holdings are comprised of a variety of smaller public and privately held securities exchanges, as well as several public and private financial services companies.
Owning the company’s portfolio at a 30% discount strikes us as a reasonably attractive proposition. The fund’s investment manager, Tom Caldwell, is an experienced veteran in the exchange space, as well as the broader financial services industry. We hope that he does not make any foolish future investment decisions. The company has been repurchasing shares, which seems to be the best use of capital given the stock’s current discount to NAV.

Accounts managed by Kerrisdale currently hold Urbana stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date.

Introduction

Urbana is a publicly traded closed-end fund. The fund owns financial services assets, primarily in the securities exchange sector, and is managed by Caldwell Financial Ltd, an investment manager that has been run by Tom Caldwell since the 1980s. Caldwell has been a prominent investor in private exchange seats and an advocate of demutualization, public offerings and industry consolidation in the exchange universe.

Historically, Urbana tended to act as a vehicle that allowed public investors to invest in private exchange seats. Several years ago, much of the company’s holdings were in the seats or private ownership stakes of exchanges like the NYSE, AMEX, CBOE and numerous other domestic and international stock exchanges. Over time, many of those exchanges have gone public and today, 70% of the portfolio is comprised of publicly traded stock. The two largest positions are shares of CBOE and NYSE Euronext, both of which Urbana had acquired through owning pre-IPO stakes.

Urbana provides helpful one-pagers on a regular basis that calculate the fund’s NAV. The most recent is attached here. I’ve also pasted it below…

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Aéropostale, Inc.

12.30.10

Posted by Sahm Adrangi at 9:12 am

Accounts managed by Kerrisdale currently own shares of Aéropostale Inc. (ARO on NYSE), a teen retailer with stores in the United States, Canada and Puerto Rico.
ARO has historically been a well-managed retailer experiencing strong growth, above-average margins, and high returns on capital. While the company is operating at peak margins, has a maturing store base and faces tough prior year comparisons, the stock’s current valuation is nevertheless too cheap. ARO trades at 4.1x EV/EBITDA and 10x P/E. Its valuation seems too low.
In addition, in the event of a double-dip recession, ARO is better positioned than most other teen retailers, given its low-price status within the teen fashion segment.

Accounts managed by Kerrisdale currently hold ARO stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date. Business Description Aéropostale (the “Company”) is a mall-based specialty retailer of casual apparel and accessories. As of October 30, 2010, the company operated 958 Aéropostale stores, consisting of 904 stores in 49 states and Puerto Rico and 54 stores in Canada. The Aéropostale banner designs, markets, and sells merchandise principally targeting 14- to 17-year-old young women and men. The company offers a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans and outerwear, as well as accessories, including sunglasses, belts, socks and hats. Based in New York, Aéropostale was established in the early 1980s as a department store private label brand by R.H. Macy & Co. In 1987, Macy’s launched the first Aéropostale standalone store. While still part of Macy’s / Federated Department Stores, Aéropostale expanded to over 100 stores, and in August 1998 the division was sold to Aéropostale management and Bear Stearns Merchant Banking. The company’s IPO occurred in May 2002, and the company has grown from 300 stores, $550m of revenue and $60m of EBITDA in FY 2002 to 950 stores, $2.2bn of revenue and $440m of EBITDA in FY 2009. That tremendous growth was done with no acquisitions and no equity raises since 2004. In fact, outstanding shares have steadily declined from 127m shares in 2004 to 88m shares today, thanks to share repurchases. The stock has risen more than 7x in the past seven years. Here are some relevant charts demonstrating ARO’s impressive growth. As of October 30, 2010, the Company also operated 44 “P.S. from Aéropostale” stores, which cater to children ages 7 to 12, and pursuant to a licensing agreement, the company had an international licensee which operated eight Aéropostale stores in the United Arab Emirates. Operating Trends The ARO of today is obviously not the ARO of 2003. Management has previously guided that the Aéropostale store base would mature at 1,000 to 1,200 stores. At the most recent quarter-end, the Aéropostale store count stood at 958. If we assume a store unit growth rate of 5% to 10% in future years, which is below the company’s historical average of 10% to 15%, we should see a mature store base within several years. Second, the company’s margins and revenue per square foot have reached peak levels, whether compared with historical metrics or the metrics of other mall specialty retailers. The company’s EBITDA margin stood at 20% in the last twelve months ended 10/30/2010, compared with an average of 15% from 2005 to 2009. We’ve provided summary operating metrics for some comparable companies in this attachment, and we can see that the mean and median EBITDA margins for comparable companies is 13%-14%. ARO’s average sales per square foot are also at peak levels. They were $624 in fiscal year 2009, compared with $534, $543, $545, and $572 in fiscal years 2005 to 2008. In our comparable companies analysis…

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China Education Alliance, Inc.

11.29.10

Posted by Sahm Adrangi at 10:11 am

UPDATE – December 7, 2010

China Education Alliance hosted a conference call this morning to address investor concerns. We believe that the call was essentially 45 minutes of false information and misleading statements. We’ll review the call and the new information provided on the company’s websites, and determine whether a response is necessary at a later date.

For now, we’ll make two points. First, the CFO stated at a conference presentation in November that the company’s Heilongjiang Zhonghe Education Training Center is fully operational, provides IT training, is highly profitable, and has been at the same location since 2005. We have video footage of the CFO’s statement and will make that available if necessary. This previous statement made during the November conference conflicts with the CFO’s new claim that the center is being “re-modeled” for a new school for the arts. Second, we had multiple investigators examine the company’s websites from inside Harbin, as opposed to only the United States. For instance, this report from one of our investigators was done from inside Harbin.

We fully stand by our report and our claim that China Education Alliance is mostly a hoax.

UPDATE – December 2, 2010

This morning, CEU issued a press release announcing that their auditor, Sherb & Co., “performed confirmation procedures on most of the Company’s bank balances”.

Such confirmation procedures in no way vindicate the company of fraud. We are certain that such “confirmation procedures” are routinely done on the cash balances of companies that are defrauding investors and fabricating their SEC financial statements. We’re not sure about the specific details of how China Education Alliance is able to show Sherb & Co. cash balances that match SEC filings. But we believe that many companies in China can find a way to show inflated bank balances to their auditors, and satisfy “confirmation procedures”.

The company does not have business assets that can generate the revenue and net income that it reports in its SEC filings.

We stand by our report that China Education Alliance is defrauding investors and has fabricated its SEC financial statements.

We will continue to update this post as additional news comes out.

ORIGINAL POST:

We believe that China Education Alliance (CEU) is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC filings and that the company is mostly a hoax.

We have put together a 30-page report on CEU and why we believe it is a fraud.

Click here for our report on China Education Alliance

Our evidence includes:

The company’s websites do not work, despite the fact that CEU is an online education provider and its websites are the company’s main revenue-generating assets. We have recorded three videos here, here and here which show that the main www.edu-chn.com and www.pk1234567.com websites have non-functioning payment methods and are full of broken links and HTML errors.

The company’s websites receive a fraction of the visitor traffic generated by comparable sites such as those operated by China Distance Education Holdings (DL), which reports lower revenue and lower margins than CEU despite having functioning websites, a larger number of web assets, operational payment schemes and no broken links on their sites.

We hired an investigator to visit the company’s training center in Harbin and found it to be barren of desks and teaching equipment. We provide a video where we present a slideshow of the empty building. We also explain why we are confident we visited the correct location.

The company’s local filings to the Chinese government show that the online business generated less than $1 million in revenue in 2008. We provide SAIC filings from 2006, 2007 and 2008, including both original Chinese photocopies as well as English translations.

The company’s financial figures are not believable when compared to publicly traded comparable companies. CEU reports higher margins and revenue growth when compared to DL, CEDU and CAST, despite having a non-functioning website and a vacant training center.

The company has had 4 low-quality auditors in the past 6 years. In contrast, the comparable Chinese education providers DL, CEDU and CAST all have top-4 auditors.

The company raised capital in 2009 at an irrationally low valuation without providing a sensible rationale for why the capital was needed. It already supposedly had $38 million of cash on its balance sheet prior to its unnecessary capital raise.

Our complete findings are available in our report.

Kerrisdale Capital is short and owns options in the securities of CEU.

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Sterling Shoes, Inc.

11.2.10

Posted by Sahm Adrangi at 1:11 am

Accounts managed by Kerrisdale currently own shares of Sterling Shoes (SSI on TSX), a shoe retailer in Canada.
We think Sterling is trading at a trough valuation multiple off of trough profit margins, and expect operating metrics to rebound as the economy recovers. Given the company’s leverage, our base case scenario features attractive upside for the stock price.
Nevertheless, shoe retailing is a mediocre business, and there may be secular issues impacting the company that we’re not aware of.

We introduced Sterling Shoes in our June 30th letter, and in this post, we’re going to elaborate on our investment thesis for SSI. Accounts managed by Kerrisdale currently hold SSI stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date.

Sterling Shoes is a Canadian footwear retailer with 160 stores. It sells both private and designer label shoes at retail outlets across Canada. While shoe retailing is not a great business, we think that the company’s shares are priced attractively and could double or triple in our base case scenario. The company is moderately levered, with C$28mn of debt that gives it a debt-to-EBITDA ratio of approximately 3.5x. Its market capitalization is only at C$14mn, given the current stock price of C$2.06. Our thesis is that if profit margins return to 2005-2007 levels, the stock could be worth C$7 or C$8 if the company becomes valued at a reasonable 5x EV/EBITDA multiple. Operationally, the business has been weak during the recession, but not disastrous. The current leverage is not high enough to exhibit bankruptcy risk, unless the underlying business suffers secular deterioration. We don’t see signs of that happening, since much of their revenue comes from non-private label brands, and their competitive landscape hasn’t changed much since 2006-2007.

Business Description

Sterling operates several different shoe store banners, predominantly in British Columbia, Alberta, Ontario and Manitoba. Its two main banners are Sterling Shoes (~40% of revenue), which focuses on women’s shoes, and Shoe Warehouse (~50% of revenue), which is a low-priced discount shoe retailer. Stores are typically found in high-traffic retail locations, like malls or retail districts. Here are two pie charts that show the company’s store breakdown by banner and by geography:

Based out of Vancouver, the company was begun in 1987 with 5 stores, supported by local financiers experienced in retailing and managed by a small team that included former CEO Jeremy Horwitz. Horwitz stepped down several months ago, after more than 20 years with the company. The company expanded steadily…

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Interval Leisure Group

9.30.10

Posted by Sahm Adrangi at 6:09 am

Accounts managed by Kerrisdale currently own shares of Interval Leisure (IILG on Nasdaq), which runs one of the two global timeshare exchanges.
While we like various aspects of the business and continue to be holders of the stock, the declining customer count concerns us and we’re watching it closely to see if it stabilizes.

In this post, we’re going to write about Interval Leisure Group, Inc. (IILG on Nasdaq), one of the two global timeshare exchange operators. We own shares in Interval and have for over a year. There’s numerous things we like about IILG – it operates in a duopoly, has high free cash flow margins and returns on capital, is valued at a high free cash flow yield, and the company has unique barriers to entry that protect it from competitive threats. That said, IILG is one of our investments that’s “under review”, and although we own it and believe it currently deserves a place in our portfolio, there are several risks that we’re closely monitoring. This is one of those stocks where we like the historical trends, but find it difficult to determine whether those same trends will continue into the future. So far, our research has allowed us to remain comfortable with the stock in our portfolio.

Accounts managed by Kerrisdale currently hold IILG stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date.

Introduction

IILG’s core business is to provide timeshare exchanges. There are two companies that comprise this sector: IILG and RCI LLC, which is owned by Wyndham Worldwide Corp.

Interval Leisure also owns a resort management business in Hawaii, but it constitutes less than 5% of EBITDA, so we’re not going to spend time on it.

When consumers purchases timeshare interests, they purchase the right to vacation at a certain resort for a specified period of time (ie. 1 week or 2 weeks) each year. They can also choose to swap their timeshare interests with different timeshare owners, allowing them to vacation at different resorts each year. To make that swap, they need to use a timeshare exchange. IILG and RCI are essentially the only two timeshare exchange providers, and virtually all timeshare resort providers belong to one of the two networks.

Click here for a nice chart from a Goldman Sachs research report on how timeshare exchanges operate.

A few features make the industry conducive to an effective duopoly. Each resort operator must enroll its members in a network that has a large number of other resorts. Since IILG and RCI are the only exchange providers, and the two feature 2,400 and 4,000 resorts respectively, it’s nearly impossible for a new exchange operator to break into the duopoly.

From a developer’s standpoint, the ability for members to exchange units is one of the major selling points for timeshares. Thus, it is critical to use an exchange provider with a large network of available properties for customers to swap. This makes Interval’s vast network of resorts a sustainable competitive advantage and barrier to entry; the more people in IILG’s network, the more valuable it becomes.

As a result, IILG and RCI, which have been operational for 30+ years, have enjoyed high margins, high returns on capital and strong pricing power for the past decade. We’ve tried to think through how their competitive advantage could be splintered in the modern era, where internet communication would allow some sort of web startup to break their duopoly. Thus far, no competitor has been successful, and we can’t think of a business model that could. Redweek.com, which is one of the most successful competitors, hasn’t been able to generate a sufficiently high inventory of timeshares to convince vacationers to leave Interval or RCI in large numbers. A look at IILG’s financial statements also gives no indication that online threats are weakening their lock on the timeshare exchange sector.

But we’ll admit that although we can’t conceive of a workable business model that would enable a new firm to steal market share from IILG and RCI, that doesn’t mean that it’s not possible. With innovation and an appropriate amount of funding, it’s possible that a new startup could find a more effective way to bring timeshare exchanges to consumers. This is one of the risks with an investment in IILG.

More background on IILG

In 2009, approximately 31% of U.S. timeshare owners were Interval members and approximately 44% were members of RCI. Here is a quick comparison of Interval and RCI:

RCI and Interval are different in a number of ways, though it’s not particularly relevant to our thesis. Interval is considered to have more upscale properties than RCI, which results in…

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PriceSmart Inc.

7.30.10

Posted by Sahm Adrangi at 1:07 am

Accounts managed by Kerrisdale currently own shares of PriceSmart Inc. (PSMT on Nasdaq), which runs Costco-style warehouse clubs in Central America
PSMT is a well-managed, steadily growing company in a region (Central America) and industry (warehouse clubs) with promising long-term growth prospects. Capital allocation has been intelligent since the 2003/2004 restructuring and operational execution has been top-notch
While not especially cheap, the valuation is low enough to warrant a place in our portfolio. The company trades at similar valuation multiples as its peers, but is posting materially higher growth / margin metrics

PriceSmart (PSMT) manages warehouse clubs in Central America. The company’s business model is similar to Costco, BJ’s and Sam’s Club – PriceSmart operates large warehouse retailing stores that sell perishable foods and basic consumer products, sometimes in bulk, with ancillary services including food courts, tire centers and photo centers. All shoppers pay an annual membership fee. The company operates 27 stores in Panama (4), Costa Rica (5), Dominican Republic (2), Guatemala (3), El Salvador (2), Honduras (2), Trinidad (4), Aruba (1), Barbados (1), US Virgin Islands (1), Jamaica (1) and Nicaragua (1). The new CEO, Jose Laparte, provides a nice introduction to PriceSmart’s operations in a video here.

An investment in PriceSmart is not going to double overnight. The company is unlevered; growth is predictably steady; and the valuation is not irrationally cheap. But given the company’s near-term operating momentum and long-term growth outlook, the valuation is low enough for us to include the stock in our portfolio.

Accounts managed by Kerrisdale currently hold PSMT stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date.

Introduction

Sol Price, founder of Price Club, and his son Robert Price opened the first PriceSmart store in 1996. The Price family pioneered the warehouse club business model when they opened their first Price Club in 1976. They grew the store base to 94 before merging their company with Costco in 1993. Shortly after the Costco merger, the Price family founded PriceSmart, effectively transporting their proven business model to Central America and the Caribbean.

The company suffered growing pains early on, and profitability declined in 2003 and 2004 due to mismanagement and an expansion strategy that was too aggressive at the time. The Price family responded by contributing additional equity, taking over the CEO role, and re-directing the company on a more steady, ROIC-focused trajectory. Since then…

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CPEX Pharmaceuticals

6.30.10

Posted by Sahm Adrangi at 1:06 am

Accounts managed by Kerrisdale currently own shares of CPEX Pharmaceuticals, Inc. (CPEX on Nasdaq), a biotech company that has recently suspended its R&D efforts and is exploring a sale of itself.
Typically, our posts focus on the investment thesis behind a given investment. While we own CPEX and think it presents an attractive risk-reward opportunity, this post will only briefly touch on our investment thesis. We’ll spend more of this post discussing the activist campaign undertaken by Richard Rofe of Arcadia Capital Advisers, because it provides an interesting case study of how activists can add shareholder value for small biotechs with multiple disparate drug businesses.

This post is about shareholder activism at CPEX Pharmaceuticals, Inc. Accounts managed by Kerrisdale currently hold CPEX stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date.

The example of CPEX illustrates how shareholder activism can boost stock prices at certain small biotechs. In cases where a successful drug / royalty stream is being used to fund an unpromising R&D program, activists can step in and generate shareholder value by essentially separating the unrelated businesses. Royalty funds or dividend-oriented investors can invest in the profitable drug / royalty stream, while early-stage biotech investors can invest in the higher-risk / higher-reward R&D program, assuming they think it’s worth their capital.

Introduction

CPEX is a specialty pharmaceutical company that, prior to April 2010, operated two businesses.

Its first business is comprised of its ownership of one simple asset: a right to royalty payments equal to 12% of the sales of the drug Testim by the pharmaceutical company Auxilium Pharmaceuticals. Testim is a profitable once-a-day gel for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim’s share of total prescriptions for the gel segment of the U.S. testosterone replacement therapy market was 22% for the full year 2009. CPEX had developed a drug delivery technology in the late 1990s when it was part of Bentley Pharmaceuticals (CPEX was spun off in 2008) and had licensed the technology to Auxilium in 2000.

The company’s second business was comprised of the R&D program for a new drug Nasulin, an intranasal formulation of insulin to treat hyperglycemia in patients suffering from Type 1 and Type 2 diabetes. Without getting into specifics, Nasulin appeared to be a failure. CPEX had spent 9 years of R&D on it, and had completed more than a dozen Phase I and II studies, but had made little progress on developing a marketable drug.

Its third much smaller business is a royalty stream for a drug being developed by Serenity Pharmaceuticals and Allergan, Inc. that treats nocturia, a condition…

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Coventree Inc.

6.1.10

Posted by Sahm Adrangi and Jeff Borack at 1:06 am

Accounts managed by Kerrisdale currently own shares of Coventree Inc. (COF/H CN), a former Canadian packager of non-bank asset-backed commercial paper currently in the process of liquidation
Coventree has a market cap of $57m at the current share price of $3.79, compared to a net asset value of $85m. The Company is in litigation with the Ontario Securities Commission, but based on our view of its potential loss liability, the timeline of the litigation, and the timing of potential distributions to shareholders, we think Coventree is an attractive investment opportunity

Coventree Inc. is a liquidation-oriented investment. When it was operational, the company was a Canadian specialty finance company that would package and sell non-bank asset-backed commercial paper. When the asset-backed commercial paper market shut down in August 2007 because of the credit crunch, Coventree ceased operations and announced that it would wind down its business. Management intends to distribute net proceeds to shareholders. Before it can do that, however, it must resolve ongoing litigation with the Ontario Securities Commission. Based on our estimates of Coventree’s potential liability from the lawsuits, ongoing expenses and timing of the litigation / distributions, we think that shares of Coventree are attractive.

Accounts managed by Kerrisdale currently hold Coventree stock, and we may buy or sell shares at any time. We will not disclose our sale if and when we sell, and we will not necessarily disclose that we have changed our thesis if we discover something faulty with our analysis at a later date.

All dollar amounts in this analysis are in Canadian dollars. Coventree trades on the Toronto Stock Exchange.

Assets

Coventree most recently published financial statements on May 6th for the period ending March 31, 2010:

The company has $84m of cash. It has $5m of Other Investments which are comprised of shares of Xceed Mortgage Corp., a publicly traded company on the Toronto Stock Exchange. The $3m of promissory notes on the assets side of the balance sheet are offset by $3m of limited recourse debentures on the liabilities side…

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