Wednesday, June 1, 2011

QXM: Motivated Seller

In his book The Aggressive Conservative Investor, Martin Whitman discusses the advantages of investing in a company which is majority-owned by a single entity. Such advantages appear to be coming to the forefront for Qiao Xing Mobile (QXM), which may offer an opportunity for a strong profit for the value investor.

QXM is majority-owned by Xing Resources (XING), a company in a completely unrelated field to QXM. Xing has made it clear that it wants to wind up QXM's business and deploy its assets (mostly cash) towards Xing's mining concerns. This is where the opportunity comes in for the minority investor, as any cash that comes out of QXM has to be shared pro-rata with minority shareholders of QXM. Since QXM trades at a large discount to its cash balance, such a transaction would result in great returns for investors.

To get at the cash, Xing first tried to buy out minority shareholders for a song. But Xing couldn't get the votes needed from minority investors to achieve quorum, so the deal fell through. Just a month later, however, it looks like Xing is looking at another way to pull out the cash, as per the following release:

"We...are currently considering options to divest of our remaining telecommunications business. We expect to formalize and announce our final decision in June 2011...Upon filing of its 2010 Annual Report on Form 20-F with the SEC and announcements of its final decision regarding the telecommunication business, the Company will hold a conference call with investors to discuss both items."

Considering we are already in June, the potential timeline for any transaction announcement (e.g. a sale or significant dividend) is almost upon us. Despite this, the company continues to trade at a large discount to cash and net current assets. But because of the motivated position of QXM's majority-owner, a catalyst to unlock value may be only a few days away.

Disclosure: Author has a long position in shares of QXM.

11 comments:

Paul said...

Saj,

Would you consider short term call options on this at all?

Anonymous said...

About the divestiture--It is my read of things from previous filings that $XING does not wish to sell QXM because it is primarily interested in taking cash out of the business -- However, could a sale that accounts for the cash on the balance sheet not achieve the same thing?

Anonymous said...

check out how wide the options are. your order would be a gift to the market maker.

Anonymous said...

The offer was $0.80 + 1.9 XING = $4.22 versus QXM current price of around $3 (not sure what taxes, expenses,etc would need to include). It's also unlikely that any further offer would be less than the previously rejected offer.

Saj Karsan said...

Hi Paul, Yeah if you're worried about the downside, that may be a good way to go if you can get a good price.

Hi Anon, I read those statements from Xing as attempts to convince shareholders to sell to them, but I could be wrong.

Paul said...

Saj,

By the way, I sent you a linkedin request. you should accept it! :)

Taylor said...

Saj,

What do you think about an investment in XING, the parent company?

It seems to have a decent position in the resources business. It's profitable core business is overshadowed by the losses from QXM, which will not be an issue once it divests itself of QXM. For each share of XING, you're getting .36 share of QXM. Once you back out the QXM stake, you're paying a little over $60 million for XING, a company with $13.7 million in income, a 40% increase from the previous year. I obviously need to dig a little deeper, but it does look good on the surface. Then again, I could be completely off base.

-Taylor

Saj Karsan said...

Hi Paul, those go straight to spam. I use linked-in as much as I participated in its IPO (not at all).

Hi Taylor, I don't love the resources industry, but otherwise I agree with you that XING looks attractive

hcv said...

How concerned are you about investing in china after sino-forest etc. I did a quick look, not a big four auditor (not that it matters much these days!)

Also, there are a lot of ways for XING to extract the value from QXM without benefiting minority shareholders, a related party loan on poor terms is one way.

It does seem very underpriced at these levels given the potential catalyst and prior offer though.

Saj Karsan said...

Hi hcv,

The risk of fraud is certainly there. But there are a couple of things here which mitigate that risk. First, the parent company (who is in the best position to know the real value of the balance sheet) already made an offer for this company a few months ago much higher than its current price. Second, the company has been losing money, unlike the high-flying frauds with ridiculous returns on capital. And finally, the company has been shrinking, rather than issuing capital and growing, the type of activity common in frauds.

Anonymous said...

Saj,

Any thought on this? I could not find any news for today's fall. You are still long or it's time to move out.

Regards,
--Surender

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