Value investors should take a close look at China-based Qiao Xing Universal Resources (XING, Financial) and the subsidiary it is trying to taking private -- Qiao Xing Mobile Communication (QXM, Financial).
XING was the first Chinese private company to be listed on NASDAQ in 1999. It has always been in telecommunication equipment manufacturing business since its inception. As the competition in the sector grew fierce, the company announced its plan to enter the resources industry in November 2007.
According to company’s SEC 6-K filing as of September 30, 2010, the company reported cash and equivalents of $515 million, account receivable of $61 million and inventory of $19 million; on the liability side of the balance sheet, the company reported a total liability of $170 million. If you take credit for 75% of the A/R and 50% of the inventory, while assuming you have to pay the debtor every penny you owe, you arrive at a so called “net-net” value of $400 million.
The calculation does not include any of the company’s non-current assets, including $102 million worth of proven and probable reserves in the mines the company has acquired so far.
Yet at today’s close price of $2.36 per share, the company claims a market cap of $214 million, trading at a deep discount (53.5%) of its net-net company.
Much of the company’s cash and liquid asset is tied to its 61.1%-owned Qiao Xing Mobile Communication (QXM) subsidiary, which by itself is a net-net company. At today’s close price of $4.63 per share, QXM is selling at 71.2% of its net-net value, see the Ben-Graham’s Net-Net screener for details.
Manufacturing of mobile handsets is a tough business to be in these days. QXM faces tough competitive environment. Its revenue has been shrinking and its losses are widening.
According to the 3Q2010 results that QXM announced on December 7, 2010, its quarterly revenue was RMB286 million compared to RMB 417.7 million in 3Q2009; Operating loss was RMB42.4 million compared to RMB7.7 million in 3Q09; Net loss attributable to holders of ordinary shares was RMB52.9 million (US$7.9 million) compared to RMB83.8 million in 3Q09.
Right now it is hard to pin down exactly what XING is going to do with the mobile phone subsidiary. But one thing is certain, the parent company wants to take QXM private by buying out shares from the minority shareholders as the first step in divesting the business. On September 8, 2010, XING extended an offer to the minority shareholders of QXM. For each shares of QXM, XING is offering 1.9 shares of its own stock and $0.8 in cash.
Based on today’s closing prices, the risk spread of buying QXM and shorting XING is about 14%. I checked with my brokerage house, currently there is no more XING stocks one can borrow to short, if one wants to invest in the two stocks, one had to take long positions.
If one buys into QXM, he is buying paying for 71% of the net-net value; or when the buyout deal goes through at today’s prices, he can acquire XING shares at a 14% discount.
If one buys into XING, he is buying into 53% of the net-net value.
The risk buying QXM is that the minority shareholders reject the buyout offer, the stock may drift toward it pre-announcement prices of around $2 per share. The question then becomes how long the money-losing subsidiary can sustain the kind of loss it is experiencing now.
Of course, the parent company XING will not allow the situation to continue the loss forever. One way or another, the parent company will cut the cord.
There are institutional investors, however, investing in both entities. Shah Capital Management is one of them. Shah has recently filed a 13-F HR form, which shows it owned 4.25 million shares of QXM and 2.0 million shares of XING as of December 31, 2010. The firm reported a total of $186 million asset under management. Investment in the two companies alone accounts for about $23 million, a heavy weighting of the portfolio.
At the quarter end of 3Q2010, it owned 3.96 million shares of QXM and 2.54 million shares of XING. So the firm is shifting money from XING towards QXM, betting the buyout deal will go through.
QXM and XING each has 15.5 million and 44 million shares floating. So Shah’s holding is a significant portion of the shares floating, especially in the case for QXM the acquired company. Since Shah owns 4.35 million shares of the 15.5 million that XING is trying to buying out, one can speculate that Shah is in a position of deciding the voting results.
After taking QXM and divesting it, XING will be evaluated as a mining company and it may fetch a better multiple to its book value.
Patient investor should look into the deal and there might be good money to be made here.
XING was the first Chinese private company to be listed on NASDAQ in 1999. It has always been in telecommunication equipment manufacturing business since its inception. As the competition in the sector grew fierce, the company announced its plan to enter the resources industry in November 2007.
According to company’s SEC 6-K filing as of September 30, 2010, the company reported cash and equivalents of $515 million, account receivable of $61 million and inventory of $19 million; on the liability side of the balance sheet, the company reported a total liability of $170 million. If you take credit for 75% of the A/R and 50% of the inventory, while assuming you have to pay the debtor every penny you owe, you arrive at a so called “net-net” value of $400 million.
The calculation does not include any of the company’s non-current assets, including $102 million worth of proven and probable reserves in the mines the company has acquired so far.
Yet at today’s close price of $2.36 per share, the company claims a market cap of $214 million, trading at a deep discount (53.5%) of its net-net company.
Much of the company’s cash and liquid asset is tied to its 61.1%-owned Qiao Xing Mobile Communication (QXM) subsidiary, which by itself is a net-net company. At today’s close price of $4.63 per share, QXM is selling at 71.2% of its net-net value, see the Ben-Graham’s Net-Net screener for details.
Manufacturing of mobile handsets is a tough business to be in these days. QXM faces tough competitive environment. Its revenue has been shrinking and its losses are widening.
According to the 3Q2010 results that QXM announced on December 7, 2010, its quarterly revenue was RMB286 million compared to RMB 417.7 million in 3Q2009; Operating loss was RMB42.4 million compared to RMB7.7 million in 3Q09; Net loss attributable to holders of ordinary shares was RMB52.9 million (US$7.9 million) compared to RMB83.8 million in 3Q09.
Right now it is hard to pin down exactly what XING is going to do with the mobile phone subsidiary. But one thing is certain, the parent company wants to take QXM private by buying out shares from the minority shareholders as the first step in divesting the business. On September 8, 2010, XING extended an offer to the minority shareholders of QXM. For each shares of QXM, XING is offering 1.9 shares of its own stock and $0.8 in cash.
Based on today’s closing prices, the risk spread of buying QXM and shorting XING is about 14%. I checked with my brokerage house, currently there is no more XING stocks one can borrow to short, if one wants to invest in the two stocks, one had to take long positions.
If one buys into QXM, he is buying paying for 71% of the net-net value; or when the buyout deal goes through at today’s prices, he can acquire XING shares at a 14% discount.
If one buys into XING, he is buying into 53% of the net-net value.
The risk buying QXM is that the minority shareholders reject the buyout offer, the stock may drift toward it pre-announcement prices of around $2 per share. The question then becomes how long the money-losing subsidiary can sustain the kind of loss it is experiencing now.
Of course, the parent company XING will not allow the situation to continue the loss forever. One way or another, the parent company will cut the cord.
There are institutional investors, however, investing in both entities. Shah Capital Management is one of them. Shah has recently filed a 13-F HR form, which shows it owned 4.25 million shares of QXM and 2.0 million shares of XING as of December 31, 2010. The firm reported a total of $186 million asset under management. Investment in the two companies alone accounts for about $23 million, a heavy weighting of the portfolio.
At the quarter end of 3Q2010, it owned 3.96 million shares of QXM and 2.54 million shares of XING. So the firm is shifting money from XING towards QXM, betting the buyout deal will go through.
QXM and XING each has 15.5 million and 44 million shares floating. So Shah’s holding is a significant portion of the shares floating, especially in the case for QXM the acquired company. Since Shah owns 4.35 million shares of the 15.5 million that XING is trying to buying out, one can speculate that Shah is in a position of deciding the voting results.
After taking QXM and divesting it, XING will be evaluated as a mining company and it may fetch a better multiple to its book value.
Patient investor should look into the deal and there might be good money to be made here.
