Monday, September 28, 2009

Xing Mobile

Many Chinese stocks appear to currently trade at relatively lofty levels, but not so much in the mobile phone segment, as consumers have held off purchasing expensive units and inventory contraction has pushed down margins. A few weeks ago, we looked at a company in this industry that appears to trade at a rather large discount to its value. But while the discount appears large, that company is rife with risks. For those looking to exploit the negativity currently surrounding this industry, there are other options available. One such option that a reader has mentioned is Qiao Xing Mobile (QXM), a Chinese manufacturer of mobile handsets.

Once again, this isn't a company you would want to bet your life on. Earnings reports are not at all timely (for example, second quarter results are still not yet available), control rests with a father/son duo, and the company recently changed auditors (rarely a good sign). Furthermore, the company has some convertible debt which is potentially dilutive to shareholders, however, thanks to the company's low share price the stock would have to rise significantly before shareholders would be diluted.

As part of a diversified portfolio, however, this stock does have downside protection and strong upside potential. While the company trades for just $150 million, the company's net current asset value is closer to $350 million. While in the case of Orsus Xelent, most of the liquid assets were in the form of receivables from a single distributor, for QXM the largest liquid asset is cash; cash net all liabilities is approximately $200 million!

This divergence between what the company owns and what the company trades for appears to have caught the attention of activist investor Himanshu Shah. Shah recently filed a statement of acquisition showing he owns over 7% of the company. Here's an article describing how he has gone about inducing management to increase shareholder value in another company in which he owns a significant interest: Raleigh Investor Gets His Way

QXM is also quite a bit larger than Orsus, and as such it does not rely on only one distributor (though customer concentration is still rather high). Furthermore, despite inventory markdowns and liquidations resulting from the economic turmoil, the company has remained profitable.

Ordinarily, this would not be an industry to which value investors would flock. The mobile handset market is frought with both low-cost domestic competition in China, as well as high-end competition from abroad (e.g. Nokia, Samsung, Sony etc.). All of these companies are under constant pressure to produce new and innovative designs with product life cycles often under one year. (Compare this to a company like WD-40, which doesn't have to invent's already done!) However, we have now discussed two companies in this space that are trading at significant discounts to their liquid assets. Without having to take risks on only one company, investors are being offered a chance to take part in a growing industry in an emerging economy at very attractive prices.

Disclosure: None


Pov said...

Looks like fraud written all over it. Issuing converts while sitting on a mountain of (imaginary?) cash, changing auditors, majority owned by XING, all too odd to be comfortable with this company. Have you done any more digging on this aspect? If it's not a fraud, it's a screaming buy, but if it is, your investment could be worth zero.

Akwon said...

Thanks for responding my post. I thought I was ignored all together. Great insight. I still think it is fraud as well, too many signs you pointed out, and in the numbers shows something is not right.

prince said...

Saj, Gents,
I've been looking really hard at this company, trying to wade through it's 20-F and 6-K. I agree if it's true it's the deal of a lifetime, if not then well bye bye shirt!

The big question is, do they really have all that cash? I'm assuming even a half decent auditor should be able to prove or disprove it.

I've been reading an article that explains signs of fraud key excerpts:
(free site, just provide a valid zip and skip the free offer)

* Persistent cash shortage and failure to pay bills when due

* Diminishing income or sales

* Growing inventories, accounts receivable and accounts payable, each of which is inconsistent with the business's revenue size and direction

* Creation and classification of suspense items in the accounting records

* Extensive "cleaning up" of account balances by journal entries at fiscal year-end

* Late or incomplete monthly financial reporting

* Recurring recommendations by auditors or consultants for improvement in systems, personnel, policies and procedures

* Increased aging or write-offs of accounts receivable

* Holding vendor checks for mailing outside the established system for paying bills

* The inability to contrast and match up reported financial information with known physical characteristics of the business because of business size, the form of presentation of the financial information or the physical movement of business assets at a faster pace than the reporting systems can gather and report

So the if we can find out if they cash exists we should be in a decent position as this is a NCAV stock like we don't see much.

Remmy said...

I was looking at ORS and QXM a few weeks ago and noticed that the investor relations are curiously similar. Something seemed fishy when I was reading the Investor FAQ pages for both firms. I believe one site has changed since I first started researching but the "something is going on here" intuition has stuck with me. I am still long on both but will monitor with extreme caution.

Christopher Pavese said...

Great call here to date!

How do you manage to uncover these hidden gems?

Saj Karsan said...

Hi Christopher,

I can't take credit for this one, it was mentioned by reader akwon on a previous post.

Follow by Email