Despite Concerns, Qiao Xing Mobile Has Lots of Upside

by: Saj Karsan

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 (NYSE: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 (ORS), 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 (NYSE:NOK), Samsung (OTC:SSNLF), Sony (NYSE:SNE) 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