Carpenter Tan (tkr: 837 HK) - Would you buy these combs?

Carpenter Tan is a 'high end' wood comb manufacturer and retailer in China/Hong Kong with combs  marketed under the brand 'Carpenter Tan' (譚木匠).  

I've walked by their retail outlets at least a few dozen times (they have outlets located in the Hong Kong MTR which I frequently walk by) and I have been counting the number of customers each time.  So far I've seen no paying customers and a grand total of 4 'window shopping' customers in their stores.  Usually the store attendant is just sitting around.

Are combs brandable?  Because these are some of the most expensive combs I've seen:

(from their homepage www.woodencomb.co.uk)

To be clear, this is denominated in USD.  Out of the nine samples from their homepage three combs are priced above USD90 and one at USD78!  (I am not selectively choosing samples.  But you should take a look at their retail outlets as well)

In 2011 they had sales of RMB244mm with 50%+ EBITDA margins.  Seriously, how many companies can you name globally with that sort of EBITDA margins?  Real world business is very competitive and to make 50%+ EBITDA margins require selling something quite differentiated/high value-add/competitively protected.  These are generally not features of the comb industry.

Is this a fraud?  Your call.

Evergrande Real Estate (tkr: 3333 HK) - Anecdotes to a Pre-IPO Fiasco

Another fairly well known fraud (at least among Asia HY/distressed debt guys) was written up by Citron Research yesterday (read here and download their research here).

No point flogging a dead horse.  I just wanted to highlight the reason Evergrande is well known among the investment community is because Merrill Lynch and Deutsche did a pre-IPO investment in Evergrande in 2006/7 based on the company's business plan to acquire and develop specific plots of land and 'guarantee' of returns.  What happened thereafter was a complete fiasco.  The company took the money and acquired completely different land parcels.  The paperwork was incomplete and the company could not deliver financial statements.  At that point, the pre-IPO investors knew it was a fraud and had pretty much written it off.  Amazingly, Evergrande pulled the IPO off and now we know how.  If Citron (or anyone interested in further investigation) is reading this, I would recommend speaking with some of the former Merrill and Deutsche investment team members (or HY sellside brokers), the backdrop is very entertaining.

It is shameful Merrill was one of the IPO bookrunners.  No way they were not aware of the fraud.  They sold a lousy deal to their clients to get them off the hook on a bad investment.

PS.  Evergrande is another China high yield bond issuer.  I've written before (here) why this is particularly dangerous.

China - More Problems with Fiat Currency and a Government that wants Inflation!

I've been thinking about China's M2 money supply problem (read here and here) for quite some time.  The following graph illustrates the current trend (borrowed from Also Sprach Analyst):

This is the result of a fiat currency and a government that wants inflation, as posted before (here).  Exacerbated by distorted incentives and poor capital allocation by policy banks (here).  It is too easy and tempting to hit that printing press, they just can't help themselves!

How is it healthy an economy half the size of U.S. is 40%+ higher in M2 money supply, with the gap widening by the day?  It is no wonder cost of living in 2nd tier cities in China is comparable to the U.S. according to a survey (here).  Let's not forget the income of an average Chinese family is not comparable to the U.S.

Keep this going and you have high inflation (translating to increasing cost of living, real estate prices and lost of manufacturing competitiveness), a currency with unsustainable value and social instability.  Turn off the spigot and you have banking system and real estate collapse and...social instability as well.  That is between a rock and a hard place.

Nigel Farage - Funny

...yet so sad...

China - The Problem with Fiat Currency and a Government that wants Inflation!

I've always enjoyed John Hempton's blog.  I found his recent entry (here) on Chinese kleptocracy opinionated and entertaining as usual.

His basic premise:

• Chinese government is corrupt, driven by personal interest
• One child policy and limited investment options drive high savings rate
• Banks (and deposit and borrowing rates) are regulated.  Deposit rates below inflation creates negative real rates
• Negative real rates fund SOEs and politically connected entities
• Borrowing at low cost (from deposits) and investing in a highly inflationary environment is effectively looting the public

His conclusion:

• The 'undiscussed' serious threat is deflation (or low inflation).  Low inflation (or deflation) creates positive real rates, and stops SOEs from 'looting' the public and paying back the banks
• And unless the Chinese can get the inflation back up, expect major social problems

While I think his premise is correct - the conclusion is rushed.  His assumption that it is difficult to increase inflation, in my opinion, is misguided.

Herein lies the problem of a fiat currency, particularly under China's currency controls.  Inflation can almost 'always' be manufactured (also known as money printing, much easier in today's digital world).  It is easy to maintain negative real  rates when you control the banking system and the currency. Deflation is not a 'threat', as they can always create inflation (the opposite is not true). And since they control the currency, they can always push money directly/indirectly to SOEs - funding is never a 'real' problem. Which would lead one to question the value of the Renminbi, but that is a separate story.

The real issue, in my view, is whether the government can maintain negative interest rates (keeping deposit rates below inflation), while maintaining social stability/the facade of wealth creation (in an inflationary environment) among the public.  Definitely a very tough balancing act!

PS.  The only way to maintain/balance this in the long term is to drive productivity growth.  Which is very difficult in today's environment.