Shares of Qiao Xing Universal should benefit from continued strong growth in China's cellular subscriber base, a shift in the company's sales mix toward its higher margin CETC-branded mobile phones, and an extremely attractive valuation.
As readers might have noticed from some of my previous articles, I'm quite bullish about the prospects of domestic Chinese companies that cater to the nation's rapidly growing middle class. In the past, I've primarily written about well-known "red-chip" plays like China Life
Before proceeding any further, I want to emphasize that Qiao Xing Universal is not an investment for those with a low risk tolerance or an allergy to volatility. After all, this is an emerging market company that has a market capitalization of just over $400 million, has only recently begun issuing detailed quarterly reports, and boasts a share price that has moved 3% or more six times since the beginning of the year. Furthermore, Qiao Xing has no analyst coverage beyond Dutton Associates, an independent research firm that the company has been paying for coverage since May 2005.
How's that for a de facto warning label?
Despite these risk factors, I like Qiao Xing's prospects because of the continued growth in China's mobile subscriber base, a shift in the company's sales mix toward its higher margin "CECT" cellular phones, and the fact that shares are quite attractively valued.
Let's take a quick look, shall we?
As we all know, the Chinese cellular market is huge. According to the Ministry of Information Industry, there were over 461 million mobile subscribers in China at the end of 2006, up 17% since the beginning of the year, as Chinese providers like China Mobile and China Unicom
Qiao Xing, the fourth-largest domestic manufacturer of mobile phones, addresses this booming demand through a two-pronged sales strategy of offering its "CETC" branded phones at the high-end of the market and targeting its "COSUN" branded phones at the mass-market level. The effectiveness of this strategy is illustrated by the company's most recent results for the third fiscal quarter ended Sept. 30, 2006. Qiao Xing reported revenue of $108 million, operating income of $21 million, and diluted earnings per share excluding one-time items of $0.43 per share.
While an apples-to-apples comparison isn't possible since the company didn't release quarterly results last year, I believe the positive nature of this trend can be extrapolated from the fact that third-quarter sales would have represented 29% of total fiscal 2005 revenue, while gross margins of 22.5% and operating margins of 19.5% in the quarter were up from of 17% and 13.7%, respectively. This trend is likely to continue, given the fact that the Chinese government is expected to issue long-awaited 3G licenses to mobile operators later this year.
While the cellular market will remain Qiao Xing's primary driver of growth for the foreseeable future, I'd be remiss not to mention the fact that the company is also the largest domestic provider of fixed-lines phones in China -- a market that reached 369 million lines in September of last year and is growing at an annual rate of 6% -- as well as being involved in the manufacture of VoIP phones, PDAs, and other consumer electronic products. While these business lines contributed less than 10% of revenues in the most recent quarter, they do represent a bit of diversification, and the growth potential of VoIP phones down the line could be significant.
I don't know about you, but having a position in the only U.S.-listed domestic Chinese company with exposure to these markets is pretty intriguing ... especially when you consider Qiao Xing's valuation.
At a recent price of $17.34 per share, Qiao Xing trades at roughly 7 times fiscal 2007 estimates of $2.53 and sports a price-to-sales of around 1.1. Now, I'll grant you that this estimate is put out by the previously mentioned Dutton Associates, but their analyst, Stanley Ng, has been dead-on with most of his calls, and I'm willing to give him the benefit of the doubt. With such attractive valuation metrics and anticipated earnings growth of above 28%, I'm inclined to believe that investors willing to walk on the "wild side" should call up Qiao Xing's financials and take a look.
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Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than, reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback. He does not own shares in any of the companies mentioned above.