Now, let's take a look at the numbers...

By my reckoning this is a company where you can almost not bother looking at the accounts – you could short it off the website. But – being an accounting junky I am going to look at the accounts anyway.

First I want to look at the 10K. There they break down the business by section -

You can see why the stock is sold on the Air-tickets and Hotel booking business. Air-tickets it seems have an 84 percent gross margin. Hotel bookings a 67 percent margin. Tours have a 13 percent gross margin.

There is one thing which jumps out like a sore thumb in this table - and that is there is no elimination line in the revenue break-down. Surely the Tours business buys stuff from the air-tickets or hotel businesses?

That lack of an elimination line is enough to question the company’s accounting. If they don’t trade with each other at all then they do not belong together – and there is no reason to have them within one corporate structure.

However I am less concerned with the revenue line than with the cost line. Look at the cost of services in the air-tickets and hotel business. The air ticket business had cost of services of 2.7 million dollars – and this is for a business that claims to have 24/7 offices all over China, delivery in over 50 cities and an IT Team of specialists across the world.

The company fortunately even gives us a break-down of costs in various sections.

This global team of IT and CRM specialists comes cheap – website maintenance for the core airline booking company comes to $44 thousand. No website maintenance is listed for the hotel business at all.

It is of course consistent with my discoveries about the website. There is no functional website, no booking system, no payment system, no international airline tab except in Chinese, no rental car tab, and photos of all the international hotels being identical.

As it is impossible to pay (despite them claiming “convenient online payments”) it is likely that there is no substantial revenue in that business.

The company is however not entirely fictional – there was a real kiosk travel business – and there is an underlying travel agency.

The company claims in its core business to have 248 employees at YZL as of the end of 2007 – but given growth and acquisitions that number has grown. This business claims staff costs of $436 thousand. That is about $1800 per person per year using the low 248 employees number. This business would normally include some IT staff and other above-average wage earners – indeed one of the slides above says that the hotel booking business has “over 200 professional staff”. The minimum wage in Shenzen is 1100 Remimbi per month which is $162 per month or $1940 per year. At a first cut this company is paying under minimum wages. In the claims at the top of this post they claim over 300 UTG customer representatives in just the call center. I guess a lot of people might be part time and there are very few higher-wage staff such as IT workers. But whatever – either they don’t have the staff or they are very lowly paid or the accounts are wrong.

Total salaries are just over $500 thousand – and the company has claimed to have IT staff around the world, a 300 seat call center and over 200 professional staff.

The company also claims to have telecommunications expense of about $75 thousand annually. With over 300 people in the call center (as per their stock promotion quoted above) these call centers would be the cheapest in the world to run bar none.

However here I am comparing the salary bill to minimum wages. A quick Google search tells you that sales managers in Shenzhen are very highly paid by Chinese standards. Here is an article from 2007 that suggests the average salary for a Shenzhen sales manager is over USD40 thousand. There has been wage inflation in Shenzhen since then. Average salaries in Shenzhen are only a fraction of those lofty levels but still roughly 4 times minimum wage. It seems impossible that there is a 300 person telephone center function here at those salaries and the cost base detailed in the annual financials – however I can only point out inconsistencies – I cannot verify whether the annual filing (10K) or the 300 person phone center statement is correct.

But hey – I am being kind to them. I am using the end 2007 employee numbers. The 10K has the following employee disclosure:

Employees At the current time, including our officers, we have approximately 780 full-time employees, including 80 administrative employees, 200 marketing employees and approximately 500 employees working at our three call centers. None of our employees is a member of a union and our relationships with our employees are generally satisfactory. In accordance with Chinese Labor Law, we provide social security and medical insurance to all our employees.

Total staff and salaries costs are – as I noted – just over $500 thousand. And for that money – less than $700 an employee per year – they not only pay them but they provide social security and medical insurance. (I don’t think I need to go through the proxy, work out costs of the executive staff and hence – by subtraction – work out the costs of the non executive staff. If you do it though you will conclude that – if there really are almost 780 non-executives and they are only paid that then they must have a truly miserable existence. Whatever – it is unlikely that their relationships with “780 employees” at that total staff cost would be “satisfactory”.)

Thinking about the costs from a business perspective

I want to think about these costs from a business perspective. There is almost no customer acquisition cost in the accounts. In this business getting customers in is really expensive. Travel related click fees are amongst the most expensive clicks on Google – and I presume that they are on Baidu too. Indeed in a thin-margin business like www.checkin.com.au if you aggressively seek additional customers you grow quite nicely but eventually with negative margins. You will make money only if the customers return and book more flights/hotels without paying additional click fees to Google. This is a company that – at least in its accounts – is growing like a weed with zero customer acquisition expenses – and with an entirely dysfunctional website.