I am trying to figure out why Qiao Xing Universal Resources (XING, Financial) and its communication equipment subsidiary Qiao Xing Mobile Communication (QXM, Financial) are trading below their respective net-net value.
A host of China-based companies are traded like peanuts, especially the new ones who landed in the US stock exchanges via so called “Reverse Takeover” (RTO) process. But XING has been around NASDAQ since last century (1999) and it was the first private Chinese company got listed in the US through an proper IPO process. QXM is a relatively new issue, but it too went to public through an IPO process.
Looking at the price history chart of the stock, I realize that the misfortunes of the XING’s stock starts in 2007, just around the time QXM went to public. XING has declined 59% since it went to public in 1999. QXM, on the other hand, has lost 58% of its value since its debut in 2007.
Many factors contribute to XING and QXM’s poor performance. Some cite the fact that the companies do not provide timely disclosure as one of them. I am not sure about that. Yes, the companies are typically late in filing their annual report 20-F’s and they do not typically host quarterly conference calls. But the quarterly results are announced rather timely, and the company is diligent in informing the investors other things happening within the company. For example, one of XING’s most recent SEC filing happened on January 14, and it is entitled Qiao Xing Universal Launches New Corporate Website. Please check into the new website, and I let you be the judge to whether the site fulfilled the mission stated in the SEC filing:
So what happened in 2007 that made the market turned its back on the stock?
For one thing, there was a restatement for the financial statements and a class action lawsuit happened in the year.
On July 16, 2007, XING filed its annual report 20-F for the year ended on 2006. At the beginning of the annual report, Page 3 to be exact, before the Table of Contents section, it contains a page entitled “RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS”. Here are the top two paragraphs:
Item 5 of the 2006 20-F contains the financial statement for each of the year of 2005, 2004 and 2003. In the following table, I tally the affected revenue and net income numbers so you can see the impact of the restatement.
You know what I think? I think the communication equipment business XING and QXM are engaged in sucks. You can have all the revenue in the world, but the competition is so fierce that by the end of the year, when all the accounts are reckoned, you do not have much left to show to the investors. After a good year in 2005, the company lost money in 2006, made a killing in 2007, and then lost money for three years in row in 2008, 2009, 2010:
Shortly after the restatement, a class action lawsuit was filed. The case was settled a year later. A website, www.qiaoxingsecuritiessettlement.com, was set up by the law firm, dedicated to settlement of the case. Here is the summary of the case:
XING paid $2.4 million to settle the case without admitting any wrong doing. The insurance company footed $0.3 million of the $2.4 million bill. So the company only had to pay $2.1 million, immaterial to the company's financials.
The real loss for XING during the drama is not just the money it had to pay. The company’s reputation has since been tarnished, and stock price has been falling since then. Nowadays, it is trading at about half of its net-net value.
About two and half years have passed since the settlement, the memory still lingers and the market has not forgiven the company yet.
It will take some time, some more time. In the meantime, it doesn't hurt for value investors to dig deeper into the company.
A host of China-based companies are traded like peanuts, especially the new ones who landed in the US stock exchanges via so called “Reverse Takeover” (RTO) process. But XING has been around NASDAQ since last century (1999) and it was the first private Chinese company got listed in the US through an proper IPO process. QXM is a relatively new issue, but it too went to public through an IPO process.
Looking at the price history chart of the stock, I realize that the misfortunes of the XING’s stock starts in 2007, just around the time QXM went to public. XING has declined 59% since it went to public in 1999. QXM, on the other hand, has lost 58% of its value since its debut in 2007.
Many factors contribute to XING and QXM’s poor performance. Some cite the fact that the companies do not provide timely disclosure as one of them. I am not sure about that. Yes, the companies are typically late in filing their annual report 20-F’s and they do not typically host quarterly conference calls. But the quarterly results are announced rather timely, and the company is diligent in informing the investors other things happening within the company. For example, one of XING’s most recent SEC filing happened on January 14, and it is entitled Qiao Xing Universal Launches New Corporate Website. Please check into the new website, and I let you be the judge to whether the site fulfilled the mission stated in the SEC filing:
The new site reflects the Company’s focus on the molybdenum-mining business as well as its growing scale in the resources industry. The new site provides a comprehensive overview of XING’s resources operations, as well as an extensive gallery of photos of its molybdenum and lead-zinc-copper mining operating businesses. In addition, the new site provides the most up-to-date corporate profile and investor presentation as well as a dedicated section focused on the newly acquired Aolunhua Copper-molybdenum Mine, one of the largest open-pit molybdenum mines in Asia.And it quotes the Chairman and CEO of the company saying:
We are excited to launch our new website which has been designed to better serve investors, customers, shareholders and the public,” commented Mr. Ruilin Wu, the Company’s Chairman and Chief Executive Officer. “The new website outlines the progress we have made in the execution of our strategy to grow our resources business, and it reflects our commitment to increasing corporate transparency and to creating long-term value for all our stakeholders.”Go ahead and check the site out. Afterwards, I hope you agree with me that the company can use some talent in website development. I hope you also agree with me that launching a website is minor event – yet the company had a SEC filing for it.
So what happened in 2007 that made the market turned its back on the stock?
For one thing, there was a restatement for the financial statements and a class action lawsuit happened in the year.
On July 16, 2007, XING filed its annual report 20-F for the year ended on 2006. At the beginning of the annual report, Page 3 to be exact, before the Table of Contents section, it contains a page entitled “RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS”. Here are the top two paragraphs:
Qiao Xing Mobile Communication Co., Ltd. (QXMC), a consolidated subsidiary of the Company, has recently become a U.S. listed company through an initial public offering, or IPO. In connection with the audits of QXMC’s financial statements, certain misstatements for the years 2005, 2004 and 2003 were identified that were not initially detected through the Company’s internal control over financial reporting.
As a result, management has decided to restate the Company’s consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 for the items discussed below. These items resulted in adjustments that reduced net income by Rmb 3,798,000 in 2005, Rmb 21,458,000 in 2004, and Rmb 16,287,000 in 2003.
Item 5 of the 2006 20-F contains the financial statement for each of the year of 2005, 2004 and 2003. In the following table, I tally the affected revenue and net income numbers so you can see the impact of the restatement.
| SelectedData of XING Restatement | |||
| (Rmb '000) | |||
| Year | 2003 | 2004 | 2005 |
| Revenue | |||
| Originally Reported | 1,843,282 | 2,019,081 | 2,874,336 |
| Restated | 1,783,760 | 1,720,389 | 2,635,184 |
| Net Income | |||
| Originally Reported | (7,730) | 22,874 | 248,697 |
| Restated | (24,017) | 1,416 | 244,899 |
You know what I think? I think the communication equipment business XING and QXM are engaged in sucks. You can have all the revenue in the world, but the competition is so fierce that by the end of the year, when all the accounts are reckoned, you do not have much left to show to the investors. After a good year in 2005, the company lost money in 2006, made a killing in 2007, and then lost money for three years in row in 2008, 2009, 2010:
Shortly after the restatement, a class action lawsuit was filed. The case was settled a year later. A website, www.qiaoxingsecuritiessettlement.com, was set up by the law firm, dedicated to settlement of the case. Here is the summary of the case:
Lead Plaintiff alleges that by publishing financial statements that both overvalued CECT and led to other issues that were the subject of the Restatement, Qiao Xing issued materially false and misleading statements to the investing public in 2003, 2004, and 2005, in violation of the Exchange Act, and had knowledge of the events giving rise to the Restatement by at least April 17, 2007. Lead Plaintiff alleges that these misstatements caused the price of Qiao Xing common stock to be artificially inflated, and had the market known of the true financial condition of Qiao Xing at that time, Lead Plaintiff and the other Settlement Class Members would not have traded their Qiao Xing securities during the Class Period at the artificially inflated prices at which they did, and would not have suffered losses when the inflation was removed from the stock. Hence, Lead Plaintiff alleges Settlement Class Members were damaged when the stock price dropped on July 17, 2007.
Defendants have vigorously denied, and continue to deny, that they have committed any violation of the federal securities laws or other laws, and have vigorously denied and continue to deny all allegations of wrongdoing or liability whatsoever with respect to the allegations above, including any and all claims of wrongdoing or liability alleged or asserted in the allegations above. Defendants state that they are agreeing to this Settlement solely because it will eliminate the substantial burden, expense and uncertainties of further litigation and the concomitant distraction of resources and efforts from their businesses.
XING paid $2.4 million to settle the case without admitting any wrong doing. The insurance company footed $0.3 million of the $2.4 million bill. So the company only had to pay $2.1 million, immaterial to the company's financials.
The real loss for XING during the drama is not just the money it had to pay. The company’s reputation has since been tarnished, and stock price has been falling since then. Nowadays, it is trading at about half of its net-net value.
About two and half years have passed since the settlement, the memory still lingers and the market has not forgiven the company yet.
It will take some time, some more time. In the meantime, it doesn't hurt for value investors to dig deeper into the company.
