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 (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.

From Lehman Brother's collapse on September 15th, 2008, until March 9th of this year, the S&P 500 and stocks in general were in a massive free fall seldom witnessed in the market's history. The SPY S&P 500 ETF (SPY) closed at 68.11 on that day, its lowest point since September of 1996! Since then, the market has rebounded strongly, and SPY is up an impressive 46%, closing last Friday at 95.08. Consumer confidence has improved, housing is showing signs of stabilization, banks are again reporting profits, and overall the worst appears to be behind us.

Nearly all investors have performed well, but Magic Formula investors in particular have really benefited, especially those that focus on small cap picks. This makes sense, of course. Small cap, value based stocks are the best performing class of stocks over the history of the market. The inherent volatility in small cap stocks provides investors ample opportunity to buy them at a discount, and in market downturns these stocks get significantly cheaper than the perceived "safer" large-cap companies. Of course, a low stock price more than mitigates these "risks", in many cases.

Magic Formula Investing, invented by Joel Greenblatt in The Little Book that Beats the Market, is designed to find stocks with two attributes: A high earnings yield (indicating a cheap price), and high returns on capital (indicating a good business). However, if you look at the official screens regularly, it becomes apparent that often several stocks within an individual industry sector will all appear around the same time. This indicates that the sector, not necessarily the individual stocks, is out of favor with investors.

This is important for two reasons. First, buying into sectors out-of-favor is a good contrarian strategy for value investors. The market is one of cycles, and when one industry sector is up, others are down... but you can be sure they will reverse places in time. For example, oil and gas stocks were all the rage just a year ago as crude prices soared, but today sell for 40% or more less than they did at this point in 2008.

Every so often, MagicDiligence compiles a list of Magic Formula stocks sorted by their dividend yield, price-to-sales ratio, and price-to-book ratio for investors that like to use those metrics. The result is a list of attractive value stocks for additional research. Here are the top 10 in each of the three metrics listed above:

Dividend Yield

Qiao Xing Mobile (QXM) is a holding company which conducts its business through CEC Telecom, or CECT, an operating unit located inside the People's Republic of China (PRC). The company is one of the largest domestic makers of cell phones in China, where effectively all revenues originate from.

The company sells under two brands: "CECT" is the legacy and low-end brand, while "VEVA" is a high end, smartphone-like brand launched last May. The majority of units are sourced through third party manufacturers, although a fair number (15% in 2007) were self-manufacturedץ. This figure should rise as QXM opened a new plant in January of last year. In all, Qiao Xing sold about 3.8 million handsets in 2007, the last full year of data.

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Internet

• Chinese online business platform operator Alibaba.com Ltd. (ALBCF.PK) said its third-quarter net profit rose 48.9 percent from a year earlier to 308.6 million yuan (US$45.2 million), driven by growth in its domestic trading services. Alibaba Chief Executive David has seen no sign of a slowdown in the company's business so far in the fourth quarter. The listed unit of Alibaba Group, in which Yahoo Inc. (YHOO) holds a 39 percent stake, said its revenue rose 36.8 percent. The company said its top priority is expanding its user base, not profit growth. Alibaba's international marketplace had 43,852 paying members at the end of September, up from 35,486 a year earlier.
• Alibaba.com Limited has gained go-ahead from its board of directors to buy back shares worth of HK$2 billion (US$258 million), through the end of 2009. The share repurchase plan will be carried out in line with the authorization from its shareholders at the annual general meeting held on May 5, 2008 and specific market conditions. The program, which will remain in effect until the end of 2009, signals board directors' confidence in the growth potential of Alibaba.com. Alibaba.com, whose cash and bank deposits reached more than 6.1 billion yuan (US$894 million) by far, will spend part of the cash on business expansion. Alibaba Group, parent of the e-commerce company, plans to provide Japan-made products for Chinese customers from 2009 in cooperation with Japan-based Softbank Corporation (SFTBF.PK).
• China's 51Job Inc. (JOBS) posted better-than-expected quarterly results but said that its fourth quarter results would be hurt by the slowdown in the global markets and cooling of China's economic growth. The company, which publishes a weekly newspaper and runs a namesake jobs web site, expects non-GAAP fourth-quarter earnings of 6 cents to 9 cents per ADS and revenue of $27.2 million to $28.7 million. Analysts, on average were expecting the company to earn 13 cents per ADS on revenue of $31.7 million, according to Reuters Estimates. For the third-quarter, the company earned 15 cents per ADS, while analysts were expecting 12 cents per ADS. Revenue stood at $30.8 million, For the third-quarter, the company earned 15 cents per ADS, while analysts were expecting 12 cents per ADS. Revenue stood at $30.8 million, down 5.1% percent year-on-year or 3.4% quarter-on-quarter, against analysts' estimate of $30.65 million. 51job saw print advertising revenues drop 27.1% year-on-year to US$12.2 million during the quarter, while online recruitment service revenues grew 6.4% from the year-ago period to US$11.4 million. The company had 62,023 unique employers using its online recruitment services in the third quarter, up 4.8% from the third quarter of 2007.
• Sina (SINA), China's leading online media company and information service provider, announced that its net profit in the third quarter of this year reached US$22 million, up 28% from the same period of last year, but 13% lower than that of the previous quarter. According to the quarterly financial report, its operating revenue in the quarter totaled US$105.4 million, 64% higher than US$64.3 million in the same period of last year and 15% higher compared with US$91.3 million in the second quarter of this year. From July to September, revenue from advertising amounted to US$76.2 million, up 66% year-on-year and 17% quarter-on-quarter. Non-ads sales revenue climbed 58% to US$29.2 million from a year earlier, up 11% compared with the second quarter of this year. The company attributed the ads revenue growth to the growing budget for online advertising of domestic companies and the positive effect of 2008 Beijing Olympic Games. The company forecasts its sales revenue will reach US$98-101 million in the fourth quarter of this year.
• NetEase.com Inc. (NTES), China's second- biggest online games provider, said third-quarter profit rose 20 percent after online advertising sales gained. Net income rose to 313.3 million yuan (US$46.1 million), or 2.42 yuan  (US$0.36) per American depositary receipt, from 260.2 million yuan (US$38.3 million), or 1.99 yuan (US$0.29), a year earlier. NetEase was expected to report profit of 328 million yuan, according to the average of four analysts' estimates compiled by Bloomberg. According to research analysts, NetEase delivered strong 3Q08 top-line growth and exceeded both revenue and operating profitability expectations, although the company's EPS was US$0.02 light due to a significant FX loss caused by the euro/dollar fluctuation in the quarter. Outperformance in the quarter was driven by the continued strength in the company's online games business, while the advertising business was essentially in line. Though NetEase does not provide guidance, the company said that its business is poised to show solid growth despite the fears of an economic slowdown. Importantly, management believes that its advertising business should benefit from the recent investments in branding and should outperform the overall ad market in China.

Software

• Microsoft Corp. (MSFT) will spend more than US$1 billion in China over the next three years on research and development. The research spending does not include the US$300 million the company has already committed to build a new research and development facility in Beijing. Even before the new investment, China represented one of Microsoft's largest research and development areas, trailing only the U.S. Microsoft will invest US$100 million in Chinese software companies and provide another US$100 million in software development services and projects.
• CDC Corporation (CHINA), a global enterprise software and new media company, announced that it has again increased its Adjusted EBITDA guidance for the second half of 2008. It now expects adjusted EBITDA from continuing operations to be in the range of US$16.0 million US$18.0 million, an 88 percent increase based on the midpoint range from the guidance previously-issued back in August 26, 2008, where Adjusted EBITDA from continuing operations estimates were in the range of US$8.0 million to US$10.0 million. CEO Peter Yip said that the company’s confidence stems from the highly recurring revenue stream from its installed customer base, including maintenance revenues, the popularity of its existing and new online games and successful cost-cutting initiatives launched earlier this year.

Semiconductors

• Semiconductor Manufacturing International Corporation (SMI) has selected Datang Telecom Technology Co., Ltd. as a strategic investor. SMIC has clinched the partnership with the telecommunications equipment producer recently, disclosed sources close to the company on November 10, declining to give further details. There were widespread reports that the to-be-strategic investor would possibly buy new shares from the chipmaker for a stake. SMIC, which filed related proposal to the Hong Kong regulators on November 6, is likely to make the strategic cooperation known soon. The Beijing telecom equipment developer will have to pay at least 2 billion yuan (US$293 million), if it seeks a 20 percent-plus ownership, predicted Mo Dakang, a semiconductor industry observer. In addition to Datang Telecom, China Electronics Corporation (CEC), one of the country's state-owned information technology conglomerates, was rumored to show interest in SMIC.

Telecommunications

• Bright Oceans Corp, which is engaged in telecom, IT, energy and investment in China, has secured the contract of building the business to business (B2B) e-commerce system for China Mobile (CHL). Pursuant to the terms of the contract, Bright Oceans will provide the mobile operator services such as software and hardware integration, development of application software as well as supplier enablement, etc. for the B2B project. China Mobile reportedly revealed winners of the Phase II TDSCDMA bidding, which includes Datang Mobile Communications Equipment Co Ltd, ZTE Corp. (ZTCOF.PK) and Huawei Technologies Co Ltd, etc.
• China Telecom (CHA) and Microsoft signed a strategic cooperation agreement on joint development of instant communication software - Messenger in China. Messenger is based on service platform of the new generation of Windows Live which is developed by Microsoft. The cooperation will help popularize Windows Live services in China. Two parties started cooperation in the field of internet search in 2006. Microsoft and China Telecom will jointly develop, promote, and operate the new brand of Messenger in China to provide new internet services to the 120 million family clients of China Telecom.
• China Mobile Communications Corp. has revealed to vendors the results of its second tender for equipment for its new third-generation mobile network. China Mobile is building a network based on locally developed technology TD-SCDMA, or Time Division-Synchronous Code Division Multiple Access. Datang Telecom Technology & Industry Group, a key developer of TD-SCDMA, won 35 percent-40 percent of the total tender. Shenzhen-based ZTE Corp. won 28 percent, down from 50 percent in the previous tender, while cross-town rival Huawei Technologies Co. won 17 percent-18 percent.

Hardware

• Huawei announced that it still has no timetable for the sale of a US$4 billion share in its terminals business. The company postponed its plans to sell a major stake in its wholly-owned devices subsidiary over concerns that bidders would struggle to raise the necessary capital given the uncertain economic environment. Among the short-listed bidders for what could have been one of China's largest ever private equity deals was Bain Capital. The private equity firm's global reach would help broaden the handset unit's international scope. Huawei is not looking to bring in expertise to support the design and development of new handsets, but to help the company improve the operational structure of the division to enable it to work more closely with the networks business. Femtocells are designed and owned by the networks business, despite being customer premises equipment (CPE), like its home gateways – products which do come under the jurisdiction of the terminals division.
• Huawei will cut into the smartphone market in the first half of next year by launching mobile phones powered by Symbian OS and Google's (GOOG) Android platform. Huawei is scheduled to showcase such 3G handset prototype in the GSMA to be held this month. The Chinese equipment maker did not disclose details on the models it plans to produce or even how many phones it will be launching, but confirmed it would be working with Symbian and Android. The first such Huawei smartphone will appear during the first half of 2009, but will not carry the Huawei brand. Rather, it will be the operators which will brand the devices with their logos. So far, Huawei has made only a single smartphone, which is powered by Windows Mobile. Other than that, it is known as an entry-level handset maker and its entrance into the higher end of the market will certainly be a good thing for consumers. Huawei has plans on launching in North America in the next five years.
• Qiao Xing Mobile Communication Co., Ltd. (QXM), one of China's leading domestic manufacturers of mobile handsets operating its business primarily through its subsidiary, CEC Telecom Co., Ltd. announced its unaudited third quarter results for the three months ended September 30, 2008. Revenue was RMB607.9 million (US$89.5 million), representing a decrease of 26.9% from the corresponding period of 2007 and an increase of 58.4% from the second quarter of 2008. Handset shipments were approximately 629,000 units, representing a decrease of 45.1% from the third quarter of 2007 and an increase of 11.1% from the second quarter of 2008. Net income was RMB150.0 million (US$22.1 million), representing an increase of 8.5% from the corresponding period of 2007 and an increase of 12.5% from the previous quarter.

Media, Gaming and Entertainment

• Giant Interactive Group Inc. (GA) reported net revenue of 265.2 million yuan (US$38.9 million) for the third quarter ended September 30, 2008, plunging 34.6 percent year on year. Gross profit reached 212.5 million yuan (US$31.1 million) and gross profit margin hit 80.1 percent. Net income plummeted 53.8 percent, with a net income margin of 50.6 percent. Average and peak numbers of concurrent players of the company's games hit 543,000 and 1,578,000, up 9 percent and 70.4 percent year on year. But the number of active paying accounts (APAs) went down 31.6 percent year on year to 937,000. Average revenue per user (ARPU) decreased 4.4 percent to 282.1 yuan (US$41.33). The business decreased partly due to its strategic modification conducted in July, when it reduced the number of the paying items in its flagship game named ZT Online, as an effort to encourage players to accumulate their ordinary points, instead of betting too much on special activities.
• Chinese digital advertising company Focus Media Holding Ltd (FMCN) reported a quarterly profit that missed analysts' expectations, hurt by higher operating expenses, and forecast fourth-quarter results below estimates. Chief Executive Officer Tan Zhi said that the recent global financial turmoil and slowdown in consumer demand in the U.S. and European markets have had a significant negative impact on the Chinese economy as well as on the mindset of corporate decision makers in China. In particular, the company’s Internet advertising business saw online advertising spending slowing after the Beijing Olympics. Total revenues grew 63.7% year-over-year and 6.2% quarter-over-quarter to US$224.8 million v.s. the US$231.7 million consensus. GAAP net income for the third quarter was US$51.3 million or US$0.53 per share. The company also issues downside guidance for Q4 with EPS of US$0.45 - US$0.46, excluding non-recurring items, vs. US$0.57 consensus and Q4 revenues of US$190 - US$200 million vs. US$248.44 million consensus.

In this kind of bear market, the phrase “throwing the baby out with the bath water” gets used quite frequently. However, there are some stocks that are truly worthy of this claim. Small caps in particular present some intriguing values with shares of profitable companies trading at a discount to tangible book value. Why consider buying opaque financial assets at pennies on the dollar when there are real companies, with little to no debt, that can be purchased at similar markdowns?

Our screens found five companies, in different industries, that are currently priced at significant discounts to tangible book:

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Internet

• Alibaba Group (ALBCF.PK) is likely to march into the online game market in the future. China Yahoo, one of the units of Alibaba, has contacted with a large-sized online game developer in the nation, expecting to dip toe into the online game market like Internet giant NetEase.com Inc. (NTES). China Yahoo participated in the sixth China Digital Entertainment Summit Forum on July 16, 2008, revealed an online game company executive, noting that the company was possibly taking the opportunity to approach online game developers.

July was a volatile month for the U.S. markets. The Dow Jones Industrial Average started the month with some big losses, even closing below 11,000 for the first time in two years on July 15th. But since then, the index has reclaimed some of the losses after a pair of strong rallies, fueled by declining oil price. For the month, the Dow rose a meager 0.25%, the NASDAQ rose 1.42% and the broader S&P 500 index declined just about 1%.

During the month, the Shanghai Composite Index (^SSEC) showed some signs of life, briefly going over the 2,900-point mark early in the month before settling at 2,775.72. That’s a gain of 1.45%. The Hang Seng Index (^HSI) also recovered from the deep drop in June, gaining 2.84% in July.

Comparing to what happened to Chinese stocks listed on U. S. stock exchanges, the drop in major U. S. equity indexes is minor, though the Dow Jones Industrial Average did lose more than 10% in just one month (10.19%). During the same time period, the NASDAQ dropped 9.12% and the S&P declined 8.57% as jitters in the financial sector continued and there was no sign that the housing market has bottomed. In fact, the loss in June was the severest monthly loss since the Great Depression.

However,  if you are investing heavily in Chinese ADRs (like me), then I am sure you feel even more depressed when looking at your stocks’ performances last month. Of the 82 Chinese ADRs I track regularly, only 6 of them ended the month in the positive territory. All other 76 stocks dropped, and they dropped like a rock: 30 stocks lost more than 20% and 10 more than 30%.

Qiao Xing Mobile Communication Co. Ltd. (NYSE: QXM) is an often overlooked China cell phone company that was spun off from parent Qiao Xing Universal Telephone Inc (NASDAQ: XING). The company offers a compelling valuation for a variety of reasons. First is the P/E ratio based on future earnings expectations. The 2007 estimates are for an earnings per share of $1.40 for the full year. At the current levels, this gives the stock a P/E of just above 6 with an industry standard P/E that is between 15-22 (companies including Nokia). Qiao Xing Mobile also posted a robust year over year revenue growth of 28.3% in the previous quarter (Q3 2007).

The company's balance sheet remains extremely strong with approximately $281.46 million in cash and only $109.35 million in debt. ($3.20 per share net cash)

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.

China's Longtop Financial Technologies Ltd (LFT) shares soared 85% in their U.S. stock market debut on Wednesday. US investors continue to show the strong demand on the Chinese stocks. Recent Chinese IPOs have performed extremely well, with an average return of 72% from their IPO prices. The best performer is China Oriental Education & Technology (EDU), up 404%, and worst is Xinhua Finance Media (XFML), down 46% from its IPO price. focus.com.

Listed below is the performance of all Chinese IPOs since September 2006. The current price is the close price of October 24, 2007.

click to enlarge

The biggest winner so far is New Oriental Education (EDU) with more than 230% gain. Actually, I am not surprised by how well EDU has been doing since its IPO. EDU’s main business is test preparation. As tens of thousands of Chinese students taking foreign language tests (such as TOEFL and GRE) every year, EDU has enjoyed tremendous growth since it was founded in 1993.

All quotations are from the companies' most recent S-1 filings with links provided.

INTERACTIVE BROKERS GROUP, INC. (IBKR)
Business Overview (from prospectus)