Qiao Xing Universal Telephone: The Most Undervalued Chinese ADR

Finding strong companies to invest in during a down market is one of the best ways to reap financial windfalls when the market's eventual recovery happens. The market sometimes can act irrationally and punish stocks more than it should.

The Chinese ADR market has been red hot over the last 12 months with companies such as Baidu (BIDU) increasing in value by 400%. In fact, the average China ADR trades at a PE of close to 50.

Frederick Kobrick, one of the best stock pickers of all time and author of The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security, gives numerous examples in his book of stalwart companies such as Cisco (CSCO) and Wal-Mart (WMT) and how one would have realized multi-fold gains by holding stocks and accumulating when others were selling.

In today's world of Technical Analysis, there are pros and cons to both methods certainly, but using Fundamental Analysis to find strong undervalued stocks in times of a market sell-off, can help you realize huge gains in-deed. Qiao Xing Universal Telephone, Inc. (XING) is one such company.

XING is a Chinese ADR that historically has traded at a PE of 8, while the telecommunications industry PE averages in the high-teens. It currently trades at a PE of under 4 on a forward basis. Why? Poor transparency compared too many other ADR's available.

XING is a Chinese holding company that owns 61.3% of Qiao Xing Mobile (QXM) which accounts for 80% of XING's revenues. XING also owns COSUN, which is one of the leading fixed-line phone companies in China and is becoming a leading Mobile phone solution, focusing on the low-end rural market and estimated to grow at 40%.

Dutton Associates is the sole analyst and has a recent Strong Buy on the stock with a price target of $20.32. 2007 Earnings per Share are estimated at $2.31, increasing to $2.54 for 2008. XING is growing at 30% a year, which should continue for the next several years. Book Value on the stock is $11.85, which means that XING is trading at a 25% discount to Book Value. Value stock pickers such as Frederick Kobrick say a stock is cheap if it is trading under the growth rate and becomes overvalued when it reaches a valuation of twice its growth rate. With that in mind, XING could trade at a PE of 30 x $2.31 ($69) to a PE of 60 ($138) before it became overvalued. That is a 7x to 15x return if it could reach those levels.

However, the lack of corporate transparency keeps a lid on what XING could be valued at as noted in the latest Dutton Associates research on XING. It is reasonable to think that XING will return to a historical PE ratio of 8 to 10, which would put the stock from the high-teens to low 20's, which would be a 2x return. Only if XING decides to improve transparency, will it reach the century mark however. Long term investing requires patience and constant evaluation of a stocks business and fundamentals. As the fundamentals change, then it requires a reassessment of your investment. When the fundamentals are still strong and the stock is trading well below fair value levels, then it is time to accumulate for the long term.

Disclosure: Author has a long position in XING

Comments

[MasterP:]

Dutton is not a bona fide analyst. They are paid a significant fee by the company to "cover" them. Clearly an independence issue

2007 Nov 20 08:44 AM

[hacker4490:]

Xing doesn't just have corporate transparency issues.

YOUR WRONG!

sec.gov/Archives/edgar...

"Total, net
536,361 70,462
Had the above non-cash income and expenses been excluded, net income after extraordinary gain would have been RMB 253.2 million (USD 33.3 million) instead of RMB 789.5 million (USD 103.7 million), and basic earnings per share of common stock would have been RMB 7.06 (USD 0.93) instead of RMB 22.03 (USD 2.89) for the six months ended June 30, 2007. "

basic earnings per share of common stock $0.93 cents! not $2.89!!

and you forgot about the income overstatements? The trailing p/e your looking at on Yahoo! may not reflect the income overstatements.

~hacker44XX on the Y! forums :)

2007 Nov 21 01:23 AM

[Konstantin ...:]

$0.93 EPS excluding extraordinary gains for 6 months - not bad for a stock that closed at $8.42 yesterday. Taking into account that second half is always stronger than the first half for consumer electronics sales, $2+ EPS for this year excluding extraordinary gains is very reasonable to expect. So, the P/E is around 4 for a growing, profitable company in one of the hottest segments of one of the hottest economies. Truly, the most undervalued growth stock among the Chinese ADRs.

2007 Nov 21 06:49 AM

[Konstantin ...:]

3 weeks ago an investor bought 1.3 mln XING shares at $11.80 directly for $15 mln. Guess he was throwing his millions blindly or he checked how the business is doing, checked the books and made a big investment anticipating a much higher share price in the coming months:
www.reuters.com/articl...

2007 Nov 21 06:54 AM

[wagnermr14:]

Any updates Alpha? XING has been struggling.

2008 Jul 13 08:30 PM

[gebby:]

a year later xing is 2. what is the status of this company?

Feb 26 09:57 AM