qiao xing mobile communication (nasdaq: qxm) …...qiao xing mobile communication (nasdaq: qxm) memo...

Qiao Xing Mobile Communication (NASDAQ: QXM) Memo

Date Price 52w range Market Cap Ending Dec 31 (in $ ‘000,000) 2007 2008 2009 2010* 04/26/2011 $2.88 $2.10-‐$5.56 152.68M Revenue 31,410 21,548 16,329 TBA (05/02)

Growth (31.4%) (24.2%) TEV -‐161M EBITDA 7,613 6,467 317 TBA (05/02)

Debt/Equity 25.6 Growth (15.1%) (95.1%) P/E N/A Net Income (loss) 5,648 4,238 (2,503) (TBA 05/02)

Growth (25%) (159.1%) Short Interest (% of Float)

0.3% EPS 11.69 7.44 (7.07) (TBA 05/02)

*2010 will be released 05/02/11. A 2010 column is included because QXM fiscal year ended Dec 31 2010. Company Description QXM is a domestic manufacturer of mobile handsets and cell phones in The People’s Republic of China. The company manufactures cell phones based on the Global System for Mobile communications (GSM) and it markets its products primarily in China, although it has an international presence as well. The company’s products have been primarily marketed under the CECT brand name. QXM’s in-‐house research and development team is in charge of manufacturing the actual handsets, the mobile phone application software, as well as product interfaces. The company currently employs approximately 600 people. Qiao Xing Mobile communications spun off from its parent company Qiao Xing Universal Resources Inc. in 2007 as a standalone mobile phone manufacturer. Investment Thesis I believe QXM is a rare gem, in that it is a window into the Chinese mobile phone market from here in the USA-‐ due to the fact that it is the only Chinese mobile phone company listed on either the NYSE or the NASDAQ. We now have the ability to monitor the performance of a local company against industry giants present in China. I am proposing this as a short because QXM is a company founded solely to imitate trendy products; QXM is undoubtedly marred by shoddy business practices, and a reverse-‐thought-‐out business strategy that relies on the success of their competitors and QXM has very little transparency for a company listed on the NASDAQ. QXM puts itself out there, through pricing and marketing, to compete with industry giants and it will not succeed in doing so. Thesis / Key Points

o Lacks innovation: In an industry such as this that demands groundbreaking tech to keep up with market leaders, QXM not only lacks the innovation to be competitive but (1) The technology in their products is at least 7 years old and (2) QXM products look too much like already existing popular devices-‐ from Nokia, Sony Eriksson, even Apple! That is because many of QXM’s products are in fact designed to look like popular cell phones. Why? Because they have the potential to sell if they look familiar. But, the products that are most unique to QXM are their luxury phones-‐ adorned with crystals and sometimes coated in gold. This seems to be their appeal-‐ the look, yet the software in the phone is years old. Here is a cross analysis of a QXM product with some popular brands’.

Name (year) Veva S60 (2010) Samsung SGH-‐D500 (2004) Motorola Droid X (2010) RAM/FLASH 32MB/128MB 64MB/80MB 512MB/8GB Size (pixels) 176x220 px 176x220 px 854x480 px Price ~$300 (prepaid) ~$99 (in 2004) $199 ($569 w/o contract) Availability China Americas, Europe, Asia, Africa (discont.) Americas, Europe, Asia, Africa Generation 2G 2G 4G

o No competitive edge: Some manufacturers have looked for an edge by attempting to differentiate themselves from the most

popular brands but QXM loses any chance of having an edge when its products look suspiciously like other popular manufacturers’. It offers their products at prices that are not too much cheaper than the “original,” so consumers may probably end up preferring to pay a little extra for a brand name.

o Too small, too late: It comes as no surprise that QXM has recently found it difficult to generate positive earnings and cash flows. QXM went public in 2007, the same year the iPhone was released and revolutionized the mobile phone market. QXM will also find it hard to catch up-‐ with roughly 600 people employed (including their R&D team); it would be costly and impractical for QXM to bust out impressive mobile devices in the near future without draining all of its resources.

o No target market: QXM sells two types of mobile devices that I will call (1) “ordinary devices” and (2) “extraordinary devices.” The “ordinary devices” are affordable and although not what the company is famous for, is the largest revenue generator for the firm. These are the “look a-‐likes.” The “extraordinary devices” are not very affordable and are usually coated in gold and covered in Swarovski crystals. QXM cannot effectively reach a target population with just these two options it offers consumers. For the “ordinary devices,” QXM has to account for the fact that more reliable options (from your name brand mobile phones-‐ Nokia; Motorola) and for the “extraordinary devices,” QXM needs to find a population that would afford the devices; willingly sacrificing the usual functions similar devices of the same price would have (e.g. will I want a +$400 phone without a high

Date: 04/26/2011 Analyst: Alexander Abosi Company: Qiao Xing Moblie Communications

Qiao Xing Mobile Communication (NASDAQ: QXM) Memo resolution camera and a 3G/4G network?). QXM hasn’t found any specific target market yet.

o QXM is losing money Q/Q: QXM primarily sells its products in mainland China and Hong Kong. It’s outdated & sometimes overpriced devices do not have significant market potential to make possible a sizable increase in its sales in years to come. Because it will still incur the same sort of operational costs, I anticipate it will continue to experience declining and negative returns. But, QXM’s sales manager for imports and exports, Bob Lee, said himself that because the demand for Android phones and iPhones is greatly increasing in China he expects QXM’s phones to do fine as well. Maybe not.

o Financial Statements: QXM hasn’t officially released its 2010 4Q (and 2010 annual) results yet, and it is also missing its 2010 Q1 and 2009 Q4 results. After inquiring they stated that they would release 2010 4Q on April 11th but recently have changed the date to May 2nd. I do not anticipate a positive revenue growth since 3Q, although I anticipate much worse.

o Management: On December 21st 2010 QXM’s CEO, Dr. David Li, was fired from his post by the board of governors and they appointed Mr. Zhiyang Wu as his successor in the hopes of getting the company back on the right track.

o Litigation: QXM faced some controversy over one of their CECT models (the CECT i68, also known as the “iPhone clone” or “HiPhone”). It is another one of its phones that look similar to a famous brand’s but this time its Apple’s popular iPhone. QXM stated that it officially does not market the i68 as one of their products although it carries the QXM brand “CECT.”

o XING: Qiao Xing Mobile Communications (QXM) should not be confused with Qiao Xing Universal Resources (XING). XING used to be the parent company of QXM till it later spun off on its own. Although QXM is its own independent company now, XING still owns a plurality equity interest in QXM and therefore QXM is a “controlled company.” Although QXM may be a controlled company it still faces competition from XING in the mobile industry since XING still manufactures mobile devices of its own; as well as a range of other products/services.

o Wu Family: The Wu family is the majority shareholder of QXM and XING. Yang Wu and Lin Wu both are executives in both companies. While they compete in the same market, a conflict of interest arises when the Wu family does business every day. Since holders of QXM stock are not holders of XING stock, are Yang Wu and Lin Wu’s interests in making money for XING or QXM investors? QXM recently fired their CEO, David Li, replacing him with current XING executive, Zhiyang Wu (Li’s son).

Misperception o Chinese phones are cheap: Some investors might value this company because it is an alternative to the mainstream brands-‐

which tend to be expensive. Chinese products have been proverbially cheap and although QXM does manufacture a few cellphones at affordable prices, its most popular brands are its jeweled phones which tend to be very expensive-‐ even more so than mainstream devices.

o Chinese phones are popular in Asia: Are Chinese phones popular in China, Japan, Korea and other Asian countries? Many people believe so. Yet a lot of the people I spoke to, who are natives of Korea and Japan specifically, had no idea Chinese brand cell phones even existed. The natives of China who I spoke to were aware of Chinese brand cell phones but suggested that people usually opted for Chinese brands when they are looking for very cheap alternatives. QXM is the only Chinese mobile company listed on an American stock exchange. Because of this, prospective investors in QXM (especially from the West) might buy into the idea that QXM is (1) a new company with growth stock potential (2) has a significant presence in China and Asia (emerging markets) (3) there are plenty of QXM products sold in Northern America because of its NASDAQ listing. From my VAR I have discovered that (1) Chinese brands are not even as popular as people think (2) QXM is losing money every quarter because of international competition (3) there are no retailers (as far as I have researched) in America that offer QXM products.

Risks / What Signs Would Indicate We Are Wrong? o Acquiring available markets: QXM has the capacity to find a target market if it invests in lower-‐level cheap phones. It can realize

profits and a turnaround if it decides to scrap its jeweled phones and invest in a market in China that is poor and needs mobile phones.

o Merger/Acquisition/Privatization: If the arrangement for XING to buy the remaining QXM shares finally comes through, QXM may be saved from future dire straits or possible failure.

o Consequences of possible oversold QXM stock: One reason why QXM declined sharply these few months (especially this month) may simply be that the stock could have been “oversold.” If so, this may mean that the stock has fallen too far too fast and may be due for an upward rally soon.

o There is a future with little debt: The stock is currently selling for its Cash minus Total Debt. With little debt, and enough cash on hand, QXM shouldn’t struggle to pay its immediate creditors. With the P/B ratio of 0.3, the stock is fairly cheap.

How It Plays Out o There are little to no analysts covering this stock; there are no official earnings predictions to beat. o Only benchmark QXM has is its years before. There has been no revenue growth; only decline since its inception in 2007. o When (if) Q4 and 10K are released on 05/02/2011, the revenue trend (decline) should continue because:

• QXM has no target market it sells to (phones are too expensive with too few functions-‐ therefore it has no loyal buyers) • QXM is too small/not well known enough to compete with other brands in China/worldwide • Growth in smartphone popularity will not be the fuel but the extinguisher to QXM

o If QXM is not bought out by XING it may fail to continue business o IFEVER QXM becomes popular in the West it would have to answer for its cellphone clones and look a-‐likes from mainstream

brands o QXM simply doesn’t have the resources to compete in the international mobile market (600 employees & a 150M market cap)

Qiao Xing Mobile Communication (NASDAQ: QXM) Memo VAR Name Organization Contact

Angela Yan Qiao Xing Universal Resources [email protected]

Christopher Gustafson Paine PR (212) 618 1978

Mobilecity desk, Chinatown New York, NY

Mobilecity Chinatown (212) 964 444

David Rudnick CCG Investor Relations Strategic Communications

(646) 833 3416

Mabel Zhang CCG Investor Relations Strategic Communications

(310) 954 1353

Tess Stynes Dow Jones (212) 416 2481

Elliot Staffin Securities and Exchange Commission

(202) 942 2990

NASDAQ -‐ (212) 401 8700

*Investor Relations* Qiao Xing Mobile Communications (86) 10 8219 3706

Bob Lee Qiao Xing Universal Resourses (86) 75 2282 0257

Sales Representative Seibu Department Stores (Japan) (03) 3989 0111

Korean, Chinese and Japanese community

University of Virginia -‐


QXM MARKET CAPITALIZATION (ABOVE)/ ENTERPRISE VALUE (BELOW)


*(Above) The only major Chinese Smartphone share is within Microsoft Windows Mobile (19%) - Chinese Manufacturer HTC Mobility 2011 mobile phone brand usage results for the Republic of South Africa (data compiled from mybroadband.co.za) Brand Current Usage % Future Usage % Brand Momentum

(future/current) Nokia 51 48 (U=45; R=42) 0.95

Samsung 28 12 (U =10; R=14) 0.42

LG 5 2 0.37

Blackberry 3 24 (U=29; R=20) 6.10

Motorola 4 1 0.37

Sony Ericsson 2 3 1.31

HTC 1 2 1.96

iPhone 1 3 (U=5; R=1) 4.74

Other (including other Chinese brands)

5 5 0.97

U= Urban; R= Rural *There has been a significant presence of Chinese mobile phone brands (excluding HTC) in Southern Africa and South Africa respectively, since 2003

qiao xing mobile communication (nasdaq: qxm) …...qiao xing mobile communication (nasdaq: qxm) memo...

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