For NQ Mobile's (NYSE:NQ) shareholders, 2016 was a disappointing year due to two failed FL Mobile (FLM) divestment attempts. The main reason for the failures was that the China Stock Regulatory Committee (CSRC) put stricter regulations on mergers and acquisitions for China-listed public companies, especially for those involving overseas-listed companies, such as NQ Mobile.
On May 18, 2016, I published an article NQ Mobile: FL Divestment Milestone Achieved But Risks For CSRC Approval Overstated on Seeking Alpha. At the time of writing, I was very optimistic about CSRC's approval of the FLM-Prince deal. I had good reason for my optimism. Unfortunately, starting in June 2016, the foreign currency reserve in China deteriorated month after month. That put huge pressure and uncertainty on the FLM-Prince deal. After more than five months, NQ Mobile and Prince announced the termination of the deal on Nov. 2, 2016. After the announcement, NQ's share price dropped and stayed mostly in the range of 3.2-3.3.
Now we are in 2017. Let's take a look at NQ Mobile's New Year resolution, which consists of two important parts: One is FLM's divestment and the other is the growth of Link-Motion.
On Jan. 23, the company published an update for the FLM divestment. That press release is very concise but contains a lot of critical information. To summarize:
- The new buyer (a.k.a the Investor Group) for FLM has been identified.
- The Investor Group will buy FLM.
- The Investor Group will buy Showself.
- The Investor Group will invest $100MM to buy NQ stock at a price of $5.25.
- Within 20 business days, details of the deal will be finished.
From my point of view, the biggest surprise from that press release is that Showself will be included in the deal. If it is not sold, NQ's share price will not reflect any value from Showself, literally, zero.
Then how much will Showself's price tag be? Currently, the annual revenue run rate for Showself is roughly $150MM. The business has been profitable and is still growing at a fast pace. If we give a conservative PS of 2X, the valuation will be about $300MM.
Usually when an investor buys a large trunk of shares, the buying price is discounted. However, in this case, the Investor Group will buy $100MM worth of NQ stock at a market price ($3.28 as of Jan 20th) plus a ~60% markup. Apparently, it illustrates that the Investor Group believes very strongly that NQ's share price is significantly undervalued and is confident that it will go much higher in the near future.
The Investor Group consists of Dr. Shi and a private equity fund. That means the deal will not require any approval from CSRC. That was the biggest risk and uncertainty for the previous FLM divestment attempt. Therefore, for this latest FLM and Showself divestment, if the sales and purchase agreement (SPA) can be reached, it means close to a 100% chance that the deal can close successfully.
Last but not least, in the press release, it mentioned that the deal negotiation would be finished within 20 business days. My reading is that parties involved in the negotiation should already have the preliminary result and only minor adjustments are needed for the final SPA. Otherwise, they would not have given such a short period of time for negotiation, considering the scale and complexity of the deal.
Grow Link Motion Business
Link Motion is a dedicated automotive software and hardware integrated solution provider. NQ became its major shareholder (67%) in 2015. After the FLM and Showself business divestment is completed, Link Motion will be NQ's main focus of business.
2017 will be the first year that Link Motion brings in revenue and positive cash flow for NQ. I estimate Link Motion will reach a valuation around $500MM late in the year and will continue growing at a fast pace in 2018.
I'll publish another article to discuss the business for Link Motion after the earnings report for Q4'16 is released. I'll explain in detail how Link Motion can grow into a billion-dollar business by the end of 2018.
NQ's Cash Position after FLM and Showself Divestment
I believe that at a current share price under 4, NQ's stock is significantly undervalued. Cash value per share is one of the most intuitive indicators to justify how much a stock is undervalued. So, in this section, I'll run the numbers to calculate NQ's cash value per share.
To simplify the calculation, I'll just use roundup numbers. By the end of Q2'16, NQ had cash $252 MM and Q3 burned about $11MM. So, the baseline cash balance is $252MM-11MM-172MM (CB payback) = $70MM.
Baseline cash balance = $70MM (excluding 220MM cash received from the new CB offering)
Cash from FLM divestment = RMB 4,000MM = 4000/6.88 = $580MM
Cash from Showself divestment = $300MM * 65% (NQ owns 65% share) = $195MM
I'd like to be conservative, so I'll discount the number from divestment by 90%:
Total cash from divestment = $(580 + 195) * 0.9 = $698MM
Investment from the Investor Group = $100MM
Total cash = 70 + 698 + 100 = $868MM
Total number of ADR shares = 99MM + 19MM = 118MM
Cash/share = $868MM /118MM shares = $7.35/share
Back in March 2016, NQ announced that management would invest $100MM in NQ at the price of $5.25/share. Assuming NQ management exercises that option, the shares will be diluted by another 19MM shares, and meanwhile, $100MM cash will be added to the balance.
Cash/share = $(868+100)MM/137MM shares = $7.07/share
After the management exercises the option, NQ will have close to $1.2B cash, counting the $220MM cash from the new CB offering. So, it's highly probable that NQ will start a share buyback. This amount will be somewhere between $100MM to $200MM. That scale will certainly drive up the share price.
Of course, all these cash per share calculations are based on the assumption that the FLM and Showself divestment will be successful. At this point, I'd say NQ has an 80% chance to announce the official Sales and Purchase agreement around Feb. 20.
Based on my calculations, the very conservative estimate for the intrinsic value of NQ stock is about $10/share ($7 cash + $3 Link Motion). As of writing, NQ's stock price is about $3.80, so the stock has about 150% to 200% upward potential within the time frame of three to four months.
Disclosure: I am/we are long NQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.