Orsus: Looking Beyond Risks for Value 5 comments
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Orsus Xelent (ORS) is a Chinese cell phone maker that trades for $22 million on the AMEX. The company has a ton of risks:
Almost all of its sales are to one distributor. Having one customer is always a risk, though this risk is somewhat tempered by the fact that many consumers purchase Orsus' phones.
This distributor owes Orsus $76 million, or more than three quarters worth of sales at the current pace!
As a foreign-owned entity in China, its taxes are about to double.
The company prides itself on being innovative and meeting end-user needs, yet its R&D budget was about $11,000 in the latest quarter.
It has guaranteed a $17 million bank loan to one of its suppliers.
In many cases, these risks would be enough to turn a value investor away from a company like this. But as Mohnish Pabrai notes, value investing is about investing in companies with upside potentials larger than the downside risks. Clearly, there is some risk with Orsus Xelent, so what possible upside is there that can trump these risks? The answer is the company's low price on several levels.
First of all, Orsus trades for a P/E of around 2! Companies normally trade at such levels if earnings are expected to fall drastically. For Orsus, however, earnings and revenue this year are expected to be even higher than they were last year, as the company continues to supply more and more of rural China with mobile phones.
The company also trades for about half of its liquid assets. While those assets do include a ridiculously large sum due from its main distributor, that number has come down in the last quarter. Furthermore, the company has taken out a 3rd party insurance policy on the overdue receivables, which should provide some protection. The distributor is also guaranteeing a portion of Orsus' outstanding loan, whatever that's worth.
Orsus can hardly be considered a risk-free stock. Nevertheless, despite a huge number of risks, the upside potential of this company was too high for this value investor to ignore. This penny stock trades at a massive discount to its earnings and to its assets. Time will tell if that discount is justified.
Disclosure: Author has a long position in shares of ORS
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My e-mail:
Mr. Karsan:
I enjoy your articles. They are well done. Regarding your recent article on Ors, I was interested in seeing if you had any information or knew where to find it concerning the following.
Since Beijing Xingwang Shidal Commerce Co (Xingwang) is Ors’s main client and owe the bulk of the account receivables, I am interested in:
(1) the financial status of Xingwang, including their financial statements, and the state of their business to determine whether they have and will continue to have the ability to pay the accounts receivable;
(2) the level of demand that Xingwang has and will continue to have for Ors’s cell phones. Helpful information would be the levels of sales and inventory of Xingwang to see whether they have sold all the phones and need more or whether they have a backlog and will have decreased levels of orders.
Do you have any of this information or know where to obtain it. I did send an e-mail to Ors contact on their website, but I have not had much success with this in the past with other companies (plus I always ask for only publicly available information).
Thank you,
(name)
Mr. Karsan's response:
Hi Mark,
I'm afraid I couldn't provide you with any insight on that without compromising my own research. Hopefully the company will get back to you! Good luck!
-Saj