Seeking Alpha

bettercorporate...'s  Instablog

bettercorporategovernance
Send Message
I'm a investor focused on China and technology. I do on the ground checks with various parties in the ecosystem of the companies I research.
  • NQ Mobile (NQ): Paying 5x P/E For Feiliu Is Too Low To Be Credible. 13 comments
    May 1, 2013 10:29 AM

    As I previously analyzed, NQ's security business doesn't generate much free cash flow (after all the acquisitions) despite strong revenue growth and high margin. That is fact. And interviews in China show no users of NQ security software there. That is an incomplete observation, but stands in big contrast to NQ's 60-70% market share claimed for China. And you are encouraged to check with your own Chinese friends. The new 20F shows that one distributor, Tianjin Yidatong, brought in 47% of China consumer security revenue, up from 46% in 2011.

    Now that Feiliu enters the picture, can it change NQ? Mobile game platform business is supposed to have high growth, high margin and real cash flow in China.

    Exactly how big is Feiliu's revenue? In NQ's 20F filing, it indicated that Feiliu only started to get mobile gaming revenue in 2012 (it was previously a mobile appstore), and its contribution in 2012 was $664K in revenue (for Dec), which equates to $8M, if multiply by 12 months. The actual 2012 mobile game revenue of Feiliu is likely <$8M since the revenue probably grew throughout 2012.

    For 2013, NQ management forecast Feiliu to be $25-$28M. So that's 3x-4x 2012 amount. Very strong growth! And mobile game platform is supposed to have high margin. 40% on the net margin should not be too much for such a business. So this will be about $10-11M in net income.

    For this high growth high margin mobile game business, how much did NQ pay? How about $51M, or 5x 2013 net income? $51M is NQ's stock price at the time of acquisition in Nov ($6.4) times 6.2M ADS paid (including earnouts) for 78%.

    Feiliu's founder is a good friend of NQ's founder. After all, NQ owned part of Feiliu for a long time. And the two companies were exposed by CCTV together in its 3.15 consumer rights report. And maybe Feiliu's founder believe that NQ's stock can easily be a 3 bagger. But that will still imply a 2013 P/E of 15x for the acquisition price, for a company whose revenue will nearly be 3-4x of 2012 in 2013, supposedly with high margin (like NQ) and actual cash flow (unlike NQ). Can Feiliu's founder be so generous?

    A mobile game studio founder in China (funded by a top 3 silicon valley VC firm) observed that Feiliu is not a top 5 iOS game platform in China. That's just one input and it's qualitative, but it's from someone who is obsessed with marketing ROI for his games. Also, note that >50% of iPhones in China are jailbroken and get their apps from stores not owned by Apple while Feiliu depends heavily on Apple store for traffic. These qualitative observations don't mean Feiliu cannot grow 3x its revenue in 2013. But I will come back with more quantitative comments when I get those.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Back To bettercorporategovernance's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (13)
Track new comments
  • Trade Star
    , contributor
    Comments (603) | Send Message
     
    Tianjin Yidatong - source/page? I dont see 47%. I see 22%, possibly 30% if you take some liberties and assume Tianjin Yidatong applies only to consumer mobile. Possible, but not probable. Anyhow, whats your point?

     

    theres a flaw with your valuation argument. Earnouts are used for a reason, to allow the seller to maximize value and allow the buyer to minimize risk. The upfront portion of the purchase price sufficiently discounts a nascent business that is just starting to generate revenues (hence your 5x P/E). Your analysis fails to consider the earn-out duration of 4yrs and subsequent increase in value NQ share price would incur as Feiliu's earnings accrete EPS. Assuming feiliu hits its numbers, that should drive value for NQ's share price, thus increasing the relative consideration paid for Feiliu. If their targets are not hit, then NQ ultimately pays less for an underperforming asset.

     

    $25-28M revenue target is aggressive. However, NQ hit their nationsky numbers. And Feiliu is on an earnout so if they dont hit 25-28M, then NQ does not pay as high a valuation for Feiliu. Also, look at pg 41 of the 20f. Almost all of their popular titles were launched in the 3rd/4th quarter of 2012. Thats where your growth is coming from. Whether or not they hit their #'s is tbd. However, thats why earnings are released every quarter. We can track progress and re-assess accordingly.

     

    Your "buddy" argument of feiliu and NQ getting "busted" on cctv was debunked previously. They were exonerated by 3rd party testing sponsored by the central government. I dont know why you insist this is still an issue, but its not.

     

    Your anecdotal evidence from "A mobile game studio founder" is about as valid as my uncle's, cousin's, daughter's, friends, friend's, acquaintance on the street next to a street vendor saying that NQ is the most popular app on the market. Try again with some substantiated reference.

     

    Earnings are in a few weeks. I hope you change your self imposed disclaimer at the bottom to long instead of short as your short window passed last week.
    4 May 2013, 11:21 PM Reply Like
  • bettercorporategovernance
    , contributor
    Comments (89) | Send Message
     
    Author’s reply » Read my writing in full pls. 47% of "China consumer security revenue". Ok?

     

    My $51M valuation at $6.4/ADS already includes earnout.

     

    Who debunked the CCTV expose? NQ themselves. They said CCTV issued an apology of some sort, but I couldn't find it.

     

    I don't want to disclose names, because of the risks. I know it makes my words less credible than press releases, to certain people.

     

    I don't doubt if they can report good P&L, or even some cash generation (after M&A payments). But as long as its China consumer security market presence remains hard to detect, it will manifest itself sooner or later.
    6 May 2013, 04:11 PM Reply Like
  • Trade Star
    , contributor
    Comments (603) | Send Message
     
    Yes. I read your post in full and I dont see how you get to 47%. please provide a page you find that on. Besides, what is your point.

     

    Your $51M valuation assumes zero share appreciation and all valuation reached upfront. Do you even know how an earnout works? Its amazing to me how misinformed your comment is. If Feiliu hits its target, there will be significant share appreciation on NQ's part. Think about it conceptually, NQ is at $9.17 today. That means for the earnout portion of purchase consideration, ithe shares it can get for hitting its targets have already appreciated +40% in value.

     

    Seriously. the cctv issue is so old news. Its a sign of desperation on your part. Even if there was any lingering issues to that, it was priced into the stock a long time ago. This is not news. You are worse than Donald Trump and his birther theories.
    6 May 2013, 05:33 PM Reply Like
  • bettercorporategovernance
    , contributor
    Comments (89) | Send Message
     
    Author’s reply » The guide to 47%: take China revenue as disclosed (A), take YDT revenue as disclosed (B), (B)/(A) = 47%. Got it?

     

    Even the $51M is a 2x from NQ's own valuation of Feiliu at end of Nov 2012. 20F, pg F-21: $5.568M elimianted due to acq of NQ. This $5.568M represented the 25% of Feiliu previously owned, and marked to market as of nov '12. That means Feiliu was val'd at $22M as of Nov '12, and then boom getting acquired for $51M in Nov assuming earnout achieved.

     

    I guess you mean Feiliu may end up getting acq'd for $26M if it doesn't achieve earnout, right? Well, $25-28M in 2013 revenue vs. $664K in Dec 2012 or $8M annualized for '12 is not too shabby and since NQ guided to $25-28M, they certainly won't miss it (it's a company that always beats rev by a big amt). Achieving this guidance and still miss the earnout will mean selling Feiliu for $26M for delivering $25-28M in 2013 revenue, all at 40% margin. 1x P/E for the masterful acq. Gets weirder, doesn't it?

     

    CCTV news is old, but it's valuable. Not all old things are worthless, don't u agree? Plus, I brought it up just to remind u that Feiliu and NQ are buddies, close buddies.
    8 May 2013, 12:15 PM Reply Like
  • bettercorporategovernance
    , contributor
    Comments (89) | Send Message
     
    Author’s reply » Oh, why is 47% important? If a company derives nearly 1/2 of its revenue from one non-descript partner who has no other known business activity, it's a bit scary to say the least, to most sensible investors. Maybe u r ok w it.
    8 May 2013, 12:17 PM Reply Like
  • Trade Star
    , contributor
    Comments (603) | Send Message
     
    Old data is usually priced into a stock. Markets are fairly efficient, especially when it comes to data that is over 2yrs old.

     

    See post on Treasure Hunter's article on why your analysis is still flawed. Fundamentally, you are looking at the deal backwards.

     

    1/2 of their CHINA revenues. So what. Its not unusual to have one primary payment processor. Lots of companies rely on square, paypal, 99bill, QFPay, YeahKa, etc etc. as their primary payment provider. This is no different. The mobile payment provider segment in the US is already crowded. China is even worse.
    8 May 2013, 05:13 PM Reply Like
  • bettercorporategovernance
    , contributor
    Comments (89) | Send Message
     
    Author’s reply » Yidatong's only business is to "bill" the carrier for NQ. Can you say the same for Square, 99Bill, Paypal?
    9 May 2013, 12:33 PM Reply Like
  • Trade Star
    , contributor
    Comments (603) | Send Message
     
    Can you confirm this? Source? Yidatong's only customer is NQ?

     

    Would you rather they go with a different payment processor? Someone has to process the payment.
    9 May 2013, 01:44 PM Reply Like
  • bettercorporategovernance
    , contributor
    Comments (89) | Send Message
     
    Author’s reply » It's a company that has no Internet presence, nor a consumer name. Paypal, Square, or other generic payment processor are all well known, and their business model leads to that (facing mass consumer)
    9 May 2013, 02:54 PM Reply Like
  • Trade Star
    , contributor
    Comments (603) | Send Message
     
    Thats interesting. They need to use a payment processor one way or another. If its not yidatong, then its another vendor. Its worth asking IR to see if there is more information on that vendor. However given how fragmented the payment processing industry is in China, I'm not sure it will mean much.
    9 May 2013, 04:20 PM Reply Like
  • ml1234
    , contributor
    Comments (27) | Send Message
     
    Have you altered your opinon of NQ and yidatong? thanks
    6 Nov 2013, 03:45 PM Reply Like
  • Trade Star
    , contributor
    Comments (603) | Send Message
     
    No. I think YTD is a legitimate as evidenced by the cash flowing into NQ. I ran some DSO analysis on another website http://bit.ly/16GPkKV

     

    Where you can clearly see NQ collecting on cash. Whats particularly relevant is the pre FL/Nationsky time frame. DSO's were consistently in the ~130 range for quite a while and only recently spiked in late 2012/ early 2013. The ability to work that AR down in 2q13 and likely 3q13 will only further validate my belief. Having CASH verified at standard charter basically puts a nail into the MW thesis.
    6 Nov 2013, 03:52 PM Reply Like
  • bettercorporategovernance
    , contributor
    Comments (89) | Send Message
     
    Author’s reply » Payment processing is not fragmented - Alipay dominates as non-bank processor, followed by 99Bill, with others immaterial. Banks form another camp.

     

    The MPS they referred to are not the same as Ali or 99Bill. These MPS are usually run by certain relatives or buddies of provincial mobile carrier bosses. Their business model is to collect tolls from content providers like NQ, KONG simply by monopolizing the billing gateway to the carriers. They flourished in the Chinese WVAS boom market (as KONG, LTON went public) before China Mobile started cracking down on illegal fee deduction (via these MPS), and sent some big boss to jail amidst consumer backlash (too many incidences of mysterious fee deduction). MPS is a dinosaur as a standalone business model, and Yidatong is an MPS whose only client is NQ, it appears to me.

     

    Will be very eye opening to me if Yidatong has other clients.
    10 May 2013, 03:35 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

  • HTC (a $NQ partner) suing employees for stealing IP to propose a smartphone venture with two NQ heads. http://bit.ly/19zGp1N
    Dec 31, 2013
  • A leading voice on $NQ and successor to Treasure Hunter. Ladies and gentleman, Justin Giles. http://linkd.in/1gfTnkq
    Nov 26, 2013
  • $NQ after debating here on orange flags of NQ, I want to reiterate the big red flag - no known user in China. Any bull can counter w facts?
    May 3, 2013
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.