Qiao Xing Universal Resources, Inc. is a Chinese company headquartered in Huizhou, Guangdong Province, China. It is traded at NASDAQ under the symbol of “XING” since 1999, as one of the first Chinese companies traded in the US.
In the past, XING had been a leading players in the telecommunication-terminal product business in China. In 2007, the Company made the strategic decision to diversify into the resources industry. Since then, the Company has made several acquisitions in that area. In the meantime, it divested its fixed-line and budget mobile phone businesses. To reflect this change, the Company changed its corporate name to Qiao Xing Universal Resources, Inc., effective January 28, 2010.
The Company continues to evaluate acquisition opportunities in the resources. Just in the past 30 days, the company announced two acquisitions of mining assets in China: one on December 24, 2010 and another on January 5, 2011.
At the same time, XING is also working to divest its remaining mobile-phone business through the proposed privatization of its Qiao Xing Mobil Communication subsidiary, to become a pure-play resources company.
Enter the Qiao Xing Mobil Communication (QXM, Financial).
In 2002, XING spun off its mobile communication business as “Qiao Xing Mobil Communication” and listed it under the ticker “QXM” in NYSE. XING has retained 61.1% of QXM’s shares.
Apparently, the business for QXM is not doing too well these days. In 2009, QXM lost $37 million and in 2010 it continued to lose ground.
Easy money has been made in the telecommunication equipment industry, even in China. Has it ever been easy? XING's management cannot be more timely in making its strategic shift.
They Are Both Net-Net Companies
So why I am interested in the Chinese company pair XING/QXM?
First of all, currently, both companies shows up in the GuruFocus Benjamin Graham Net Current Asset Value Screener, the company is the selling at the deepest discount to its net current asset value, as defined by Father of Value Investing Ben Graham himself.
XING is traded around $2.65. With 92.7 million shares outstanding, it has a market cap of $239 million. As of September 30, 2010, the company listed on its balance sheet $532 million in cash, $61 million in Account Receivables, $19 million in inventory. Its total liability was $171 million.
GuruFocus calculates that it is traded at 54.9% of its Net-Net current asset value.
QXM, on the other hand, is traded around $4.77. With 52 million shares outstanding, it has a market cap of $252 million. As of September 30, 2010, the company listed on its balance sheet $424 million in cash, $58 million in Account Receivables, $19 million in inventory. Its total liability was $134 million.
GuruFocus calculates that it is traded at 70% of its Net-Net current asset value.
Remember XING owns 61.1% QXM, so QXM’s book got consolidated into XING. In other words, QXM’s cash, A/R, inventory, and liability becomes that of XING’s equivalent entry proportionally. The fact that QXM is in investor’s dumpster partially makes XING in the same situation, except XING is sold at an even deeper discount to its Net-Net value.
The Deal
Cash is cash, everyone understands it, especially XING, the parent company of QXM. That brings up the second reason why I am interested in looking in to the XING/QXM pair.
In order to gain access to the cash and deploy it in the possible acquisitions in the mining industry, XING proposed to take QXM private with cash and stock.
Here are the terms, according to XING’s announcement on September 8, 2010:
After three months and ot without hesitation, the Independent Board of Director Committee formed by QXM issued the a statement on January 6, 2011:
You call read the full statement, essentially the independent committee agrees to put the proposal forward for the minority shareholders to vote but offered no opinion. The minority shareholders are left to make up their own mind.
At the current price of $2.65, 1.9 shares of XING’s common stock plus US$0.80 equals to $5.83. Yet the QXM shares are trading at $4.77.
Investment Discussion
Investors buying at $4.77 per share for QXM are positioned to gain 22% if the deal consummates at XING’s current price. If you believe the deal will go through, you can buy for each one share of QXM to short 1.9 shares of XING to protect your profit.
As Ben Graham believes, when a company is selling below Net-Net value, one way or another, somehow the value will be unlocked.
XING's proposed price is much closer to the Net-Net value of QXM than its current price.
XING’s situation is a bit more interesting. Currently, it is a Net-Net company, selling at deep discount, even deeper than that of QXM, which seems to suggest a good bargain.
But as I mentioned earlier, the company is in the middle of a transformation into a mining company, its balance sheet items are shifting around. For instance, in the two deals acquisitions announced during the past 30 days, the company has committed about $116 million to purchase mining assets. Depending on the paces it takes to deploy the cash, it may not stay as Net-Net company for long.
But then, it should be evaluated as a mining company, which is a topic for another day.
There is no assurance that a company will be able to reap as much cash as it originally put in.
For more Net-Net companies, click on GuruFocus Benjamin Graham Net Current Asset Value Screener.
In the past, XING had been a leading players in the telecommunication-terminal product business in China. In 2007, the Company made the strategic decision to diversify into the resources industry. Since then, the Company has made several acquisitions in that area. In the meantime, it divested its fixed-line and budget mobile phone businesses. To reflect this change, the Company changed its corporate name to Qiao Xing Universal Resources, Inc., effective January 28, 2010.
The Company continues to evaluate acquisition opportunities in the resources. Just in the past 30 days, the company announced two acquisitions of mining assets in China: one on December 24, 2010 and another on January 5, 2011.
At the same time, XING is also working to divest its remaining mobile-phone business through the proposed privatization of its Qiao Xing Mobil Communication subsidiary, to become a pure-play resources company.
Enter the Qiao Xing Mobil Communication (QXM, Financial).
In 2002, XING spun off its mobile communication business as “Qiao Xing Mobil Communication” and listed it under the ticker “QXM” in NYSE. XING has retained 61.1% of QXM’s shares.
Apparently, the business for QXM is not doing too well these days. In 2009, QXM lost $37 million and in 2010 it continued to lose ground.
Easy money has been made in the telecommunication equipment industry, even in China. Has it ever been easy? XING's management cannot be more timely in making its strategic shift.
They Are Both Net-Net Companies
So why I am interested in the Chinese company pair XING/QXM?
First of all, currently, both companies shows up in the GuruFocus Benjamin Graham Net Current Asset Value Screener, the company is the selling at the deepest discount to its net current asset value, as defined by Father of Value Investing Ben Graham himself.
XING is traded around $2.65. With 92.7 million shares outstanding, it has a market cap of $239 million. As of September 30, 2010, the company listed on its balance sheet $532 million in cash, $61 million in Account Receivables, $19 million in inventory. Its total liability was $171 million.
GuruFocus calculates that it is traded at 54.9% of its Net-Net current asset value.
QXM, on the other hand, is traded around $4.77. With 52 million shares outstanding, it has a market cap of $252 million. As of September 30, 2010, the company listed on its balance sheet $424 million in cash, $58 million in Account Receivables, $19 million in inventory. Its total liability was $134 million.
GuruFocus calculates that it is traded at 70% of its Net-Net current asset value.
Remember XING owns 61.1% QXM, so QXM’s book got consolidated into XING. In other words, QXM’s cash, A/R, inventory, and liability becomes that of XING’s equivalent entry proportionally. The fact that QXM is in investor’s dumpster partially makes XING in the same situation, except XING is sold at an even deeper discount to its Net-Net value.
The Deal
Cash is cash, everyone understands it, especially XING, the parent company of QXM. That brings up the second reason why I am interested in looking in to the XING/QXM pair.
In order to gain access to the cash and deploy it in the possible acquisitions in the mining industry, XING proposed to take QXM private with cash and stock.
Here are the terms, according to XING’s announcement on September 8, 2010:
HUIZHOU, China — September 8, 2010 — Qiao Xing Universal Resources, Inc. (Nasdaq: XING, the “Company” or “XING”), an emerging Chinese resources company headquartered in Huizhou, Guangdong Province, today announced that it has proposed to acquire all outstanding shares of Qiao Xing Mobile Communication Co., Ltd (QXM) that it does not currently own…
The Company has proposed to issue 1.9 shares of its common stock plus US$0.80 in cash per share to shareholders of QXMC other than the Company (the “Minority Shareholders”). …
After three months and ot without hesitation, the Independent Board of Director Committee formed by QXM issued the a statement on January 6, 2011:
Beijing, China (January 6, 2011) —Qiao Xing Mobile Communication Co., Ltd. (NYSE: QXM — News) (the “Company” or “QXM”), a manufacturer of mobile handsets in the People’s Republic of China, today announced that, at a meeting of QXM’s board of directors (the “Board”) held on 31 December 2010, the Board authorized that a Scheme of Arrangement (the “Scheme”), proposed by QXM’s parent company, Qiao Xing Universal Resources, Inc. (“XING”), pursuant to which XING would acquire all of the outstanding ordinary shares of QXM other than those shares held by XING (the “Minority Shares”) in exchange for 1.9 shares of XING’s common stock plus US$0.80 in cash for each Minority Share (the “Scheme Consideration”), be put forward by the Company to the holders of the Minority Shares (the “Minority Shareholders”) for their consideration.
You call read the full statement, essentially the independent committee agrees to put the proposal forward for the minority shareholders to vote but offered no opinion. The minority shareholders are left to make up their own mind.
At the current price of $2.65, 1.9 shares of XING’s common stock plus US$0.80 equals to $5.83. Yet the QXM shares are trading at $4.77.
Investment Discussion
Investors buying at $4.77 per share for QXM are positioned to gain 22% if the deal consummates at XING’s current price. If you believe the deal will go through, you can buy for each one share of QXM to short 1.9 shares of XING to protect your profit.
As Ben Graham believes, when a company is selling below Net-Net value, one way or another, somehow the value will be unlocked.
XING's proposed price is much closer to the Net-Net value of QXM than its current price.
XING’s situation is a bit more interesting. Currently, it is a Net-Net company, selling at deep discount, even deeper than that of QXM, which seems to suggest a good bargain.
But as I mentioned earlier, the company is in the middle of a transformation into a mining company, its balance sheet items are shifting around. For instance, in the two deals acquisitions announced during the past 30 days, the company has committed about $116 million to purchase mining assets. Depending on the paces it takes to deploy the cash, it may not stay as Net-Net company for long.
But then, it should be evaluated as a mining company, which is a topic for another day.
There is no assurance that a company will be able to reap as much cash as it originally put in.
For more Net-Net companies, click on GuruFocus Benjamin Graham Net Current Asset Value Screener.
