Is Luxurious Art A Safe Haven?

Bored of stocks, commodities and real estate? What about art? Takung Art ( OTCQB:TKAT) is an Asian company that has created a business model that allows art collectors and investors to buy and sell units of valuable paintings. With Takung Art you don't buy art yourself, you buy a single unit of 1 collection item. In many ways, it is like buying a stock of a firm. If this is not of interest, one can still invest in the firm itself. Hence, Takung Art offers 2 ways to invest in art.

As art is an under-covered topic on Seeking Alpha, this article will focus on the analysis of art, and in specific firms who are active in this specific sector. Firms such as Takung Art and Sotheby's for example.

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Takung Art: Business Model?

If art is too expensive, what about owning a'small part' of it? That sounds like a reasonable idea as the majority of investors simply don't have the money to invest in expensive valuable art.

The investments are long-term as the owner won't get their share of the value till a ten years trade period has expired and his or her artwork gets sold. After a 10 year period, the artwork is sold and proceeds are divided between the owners. As the firm started in 2013, the first sale will start in 2023. How does Takung create revenue? Insight out of the investor presentation tells that Takung gets a fee as well as a trading commission. I believe this is a bit of a restricted business model as these variables heavily rely upon liquidity in the world of arts. And liquidity in the world of arts is another highly subjective discussion.

I believe a firm can never suffer from heaving enough revenue streams as this will come in handy during an economic downturn.

The art exhibits can be accessed through the online trading platform, which provide an accessible way for art collectors and investors to acquire shared ownership.

For example, exhibit 10001:

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Source: Takung Art Portfolio

As can be seen underneath, this piece of art (wrapped in the image above), has seen (as many others) an incredible significant appreciation since its listed date:

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Source: Takung Art Portfolio

The way art is being traded has seen considerable changes over the last decades. Starting with auction houses such as Sotheby's (NYSE:BID) and Christie's, now we have website such as Hihey.com and Artspace.

I realize that text and pictures alone might not give enough information about the idea of trading art. This informative video on Reuters gives great insight on what kind of business Takung Art is, and how others in the financial and art industry, look at it. Normally I wouldn't use videos to explain the nature of a firm, nor analysts' talking about it, but for Takung Art I make the exception.

The Main Question: Is Art Truly a Safe Haven?

As the Chinese equity boom has cooled off, investors are simply looking for other safe havens. Art quickly attracts investors as it's considered a luxury asset which should appreciate in value over time.

But is art a safe haven? As arts are auctioned off, logic tells me that the overall value of art is highly subjective and therefore volatile. The definition of a safe haven is a "place of refuge and security". Looking at it from a qualitative perspective, it's difficult to qualify art as safe haven dependable upon all the variables which can jeopardize its value. Variables such as theft, forgery, destruction and more should not be ignored.

When looking at it quantitatively, a similar conclusion emerges. An extensive study done by Stanford University, a must-read for everyone interested about investing in art, indicates very clearly that investors should be wary of investing in art. A snippet of the conclusion:

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Source: Stanford Research Article On Art Investments

This obviously doesn't mean that everyone should ignore art investments. But it clearly points out that, as with anything else in life, there is no such thing as a free lunch even though the opportunity seems right there:

Takung Art: How Are Earnings So Far?

Evaluating annual results, the firm performed outstanding. The company reported revenue of $11 million for calendar year 2015 which has been a 140% increase on revenue of $4.7 million in the prior year driven by higher listing fees as the number of artworks listed on the trading platform significantly increased.

A while ago, Takung Art announced Q1 2016 earnings, and once more delivered a triple digit growth.

Delving into the numbers delivers us the following:

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Source: Quarterly Filing Q1 2016

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Source: Quarterly Filing Q1 2016

I wonder what happened to the share based compensation. This as the increase in share based compensation is significant: from zero percent out of total costs to $440,736 which is nearly the entire value of Total General and Administrative expensive in Q1 2015. I wonder why this happens for a relative small start up company.

Reverse Merger: What Else Is New

This topic might not come as a surprise to many investors. Takung Art began as a biotechnology firm named Cardigant Medical back in 09':

Source: Takung Art

Then, as seen with many Chinese firms, a reverse merger happened:

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Source: Annual Report Takung Art

A reverse merger can be seen or understood as a firm struggling to get public in their own country, merging with another firm in a different country to get a public listing. This is not always a bad sign, absolutely not, but it's more about investor's general perception as a lot of issues have happened with Chinese firms going public through reverse mergers. And therefore investors should realize that not every reverse merger is a bad thing.

Takung Arts: Auditor

Takung Arts was audited by AWC Limited, but the firm has recently changed auditors to Marcum LLP. I think this is because their previous auditor AWC got themselves in a lot of trouble for potential violation of PCOAB rules (and more) which involved the audit of Kandi Technologies. AWC recently changed its name from AWC to DCAW.

It's important to notice that Takung dismissed AWC as the auditor did not resign. Any auditor is either dismissed by the firm (a dismissal), resigns from the audit engagement (resignation) or extricates itself from the audit engagement:

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Source: Changing auditor overview

The given fact that Takung changed auditor is a positive sign, nevertheless, it's another firm in the long list of Chinese small-cap stocks which change auditors due to the auditor being in trouble (for a variety of reasons).

Doing further digging in Marcum LLP opens another book of interesting information. Another author on Seeking Alpha penned an entire article about some of Marcum's clients. Marcum seems to have a lot of small cap Chinese stocks under their wing and many investors have a significant opinion on this. I don't believe it's necessarily a red flag, but I do think perception is once more an issue here. The commentary section of that article gives quality insight on how other users perceive the business of that specific auditor.

Moreover, Takung Art had AWC (CPA) as auditor since October 2014:

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Source: Annual Filing Takung Art

Takung Arts: Risks

Art has risks. What if an artist stops (and the value of their art sky rockets?), or if people realize it was a theft (physical or online) or forgery? These variables can jeopardize the price of art much like that of a binary option, either 1 (everything) or 0 (collapse). Furthermore, we are talking an online-business which might suffer from an internet breach (or worse).

I've covered small cap Chinese firms on Seeking Alpha, such as CAAS (CAAS) and some others. I'm aware of the risks involved with small cap stocks as I've burned fingers before. One of the risks clearly involved with this small-cap stock is low volume which is the main reason why I'm avoiding Takung Art. Low volume causes a variety of issues, from potential price manipulation to large bid/ask spreads which could see you lose a lot of money.

Currently looking at the valuation of Takung Art provides us with (very) difficult information. It's difficult, as there is not much (historical and competitive) information readily available. Looking at the current price of the stock, many investors already had their joy as the stock is at more than 100% year to date:

It has a current P/E of roughly 13. That seems ok, but it is expensive if compared with other Chinese Small Cap stocks.

When evaluating through a DCF, with an EPS of $0.46, the overall indication quickly screams out value (as it's currently valued at $6):

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Source: Author (trailing 12 month EPS comes from gurufocus.com)

This is also where the current danger is: the firm has outstanding growth numbers with incredible earnings growth, a profitability margin of high double digits with low liabilities. Thinking along those lines would consider any stock with such growth factors undervalued. But is that fair? Low volume makes it risky.

Is Art Stock Recession Proof?

If we think the entire stock market is in the latest phase of the bull market, what if we hit a recession? It's not about Art being recession proof, it's about the (frequency) of services related to art during a recession.

The only comparison we can use is Sotheby's as the firm is so large it will clearly show signs of distress during less profitable economic times. This is in contrast to smaller firms which will have significant volatility and therefore it will be more difficult to find specific patterns.

The underlying chart shows a very clear pattern:

I would like to specifically point out the significant drop in profitability (profit margin) during crashes over the last 2 years.

Conclusion

This article is about art as well as the firm's activity in this sector. And based on the research done in this article, both organizations have interesting characteristics to offer to investors.

Takung Art is a startup firm which provides very interesting opportunities to invest in art besides the normal common assets such as stocks, real estate and commodities. Art shouldn't be ignored completely considering the large amounts of revenue going through auction houses such as Sotheby's and Christie's. Where there is money, there is potential. But as long as there is no volatility, I'm not even considering it.

Is art a safe haven? As arts are auctioned off, logic tells me that the overall value of art is highly subjective and therefore volatile. The definition of a safe haven is a "place of refuge and security". Looking at it from a quantitative (such as the research provided by Stanford) and qualitative perspective (the risks involved, theft, forgery and more) art does not qualify as a safe haven. In reality I realize nothing qualifies as a safe haven per definition even though I might have some extreme art investors who will disagree.

In reality there is no such thing as a free lunch and all we can base our opinion on is what might have a 'fair' price. And a 'fair price' is a phrase which has a difficult relation with the industry of art.

This article was meant as introduction to the art part of the investable equity world. Sotheby's, Takung Art and others should not be ignored as they offer a different route in the world of finance. They might not be of interest now, but will be in the future.

Disclaimer: I do not hold any positions in Takung Art nor Sotheby's. This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions from beginning to end. This information is not a recommendation or solicitation to buy or sell securities, nor am I a registered investment advisor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.


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