Qiao Xing Mobile Communication Co., Ltd. (Public, NYSE:QXM)
I just finished listening to the 2008 Q2 Earning Conference Call for Qiao Xing Mobile Communication (symbol: QXM). If you have an opportunity, you should listen, too, because it contains lots of interesting information. The last analyst put QXM’s management on the hot seat, so don’t turn off the conference call before the end (1 hour 10+ minutes).
GOOD NEWS
1. The market share of local mobile telephone manufacturers (i.e. Chinese, including QXM) is increasing; the market share of international big names such as Nokia is declining.
My analysis: I believe this statement. The average Chinese person knows who controls the world now. Moreover, Chinese are a proud people. Why would they buy foreign brands when they have good Chinese brands available?
2. In general, QXM’s CEO and CFO seemed very “transparent”. They presented these details about future plans:
• New VEVA Gold website in October to increase Internet sales
• VEVA specialty stores in Hong Kong by the end of 2008
• VEVA specialty stores in Taiwan in 2009
• (less specific) In discussions with a 3rd party for international expansion of the VEVA brand
3. QXM provided a believable explanation for changing their auditor on September 11, 2008.
QXM’s parent company, Qiao Xing Universal Telephone (symbol: XING), has used the new auditor, referred to as “Horwath” (actually “Grobstein, Horwath & Company LLP”), for many years. XING needed to perform an audit of their subsidiary QXM, so naturally, XING used Horwath. “Territorial” hassles arose with QXM’s previous auditor, KPMG. Moreover, as a foreign company, KPMG was much more expensive. Therefore, KPMG was dismissed.
My analysis: “Grobstein, Horwath & Company LLP” doesn’t exactly sound like a **local** company to me, but maybe they are cheaper.
BAD NEWS
1. If you want to see where the international Mafia got its hooks into QXM, look no further than those May 2008 convertible notes.
QXM’s CFO made these less-than-comforting statements in relation to the notes:
• Due to conditions in notes that XING previously issued, XING and its subsidiaries (such as QXM) can only raise funds from the current note holders;
• QXM will pay a penalty (presumably to their note holder) for failing to register the new shares that QXM issued during the recent conversion. Of course, this penalty will appear in the 2008 Q2 balance sheets after “operating results”, which is the last line item that QXM reported in their earnings press release.
My analysis: Would you like to bet that QXM intentionally failed to register the new shares?
• QXM’s CFO uttered these words: Due to conditions in the May 2008 convertible notes, if QXM’s share price goes up, QXM’s profit will take a hit. (If you don’t believe me, listen to the conference call.)
2. Well, the 2008 Q2 earnings press release may state “We are optimistic that our operating results in Q3 and Q4 2008 will be better than the same periods last year”, but…
QXM’s CFO specifically said during the conference call that net income for Q3 and Q4 2008 will NOT be better than the corresponding quarters in 2007.
3. QXM has 2.8-2.9 billion RMB in cash. QXM’s CFO listed these probable uses of the cash:
• VEVA specialty stores
• VEVA Gold website ([sarcasm] Wow, there’s a big expense)
• (Initially vague) Discussions with a 3rd party. (Later) Discussions with a 3rd party for international expansion of the VEVA brand.
My analysis: It must mean an acquisition of an international mobile telephone manufacturer or distributor.
• Due to the bad world economy, QXM wants to conserve cash.
My analysis: QXM never needed to issue those convertible notes. They had sufficient cash on hand already.
Forget about a share repurchase program. QXM’s CFO did not list a repurchase as a possible usage of the cash. (Moreover, if you haven’t figured it out yet, the whole purpose of the May 2008 convertible notes was to dilute the normal shareholders.)
4. In the near future (end of 2008-early 2009), QXM will have eight different VEVA models on the market. Moreover, during the conference call, I heard the CFO say at least 10 times (seriously)—“We are positioning the VEVA brand as a luxury accessory—like a handbag or shoes—for professional females.”
My analysis: Maybe 300,000 units of the first VEVA model (S60) were shipped during 2008 Q3. I certainly would not expect those same numbers for every VEVA model in every quarter. In addition, I don’t remember QXM ever previously limiting the VEVA market to females. If you’ve been calculating future sales potential for VEVA based on 1.3 billion Chinese, you probably need to divide your results by 2.
SUMMARY
QXM relinquished control over their destiny with those convertible notes. Absolutely anything is possible with QXM now. If the note holder says “Trash your company”, QXM’s management will dutifully scuttle the ship.
However, I’m a little more optimistic. My wildest prediction: Look for an **earthshaking** acquisition of an international mobile telephone manufacturer. QXM is going global.
