The folks at Hyperion Financial have a new China-focused newsletter that they’re promoting pretty actively now, which is certainly at least a little bit of a “contrarian” move — most of the China-focused newsletters have been pretty quiet lately, not having too much to brag about, and a few have even shut down entirely (notably Robert Hsu’s China Strategy and Asia Edge, which were early sellers of the heavily hyped China investment story, claiming tens of thousands of subscribers, but have now gone by the wayside).

This particular letter, China Stock Insider, is being helmed by Robert Morris. I don’t know if it has any track record at all, this is the first I’ve seen it advertised — they do have a “sample recommendation” on their website which would have had you buying RDA Microelectronics (RDA) just about a year ago, and if you had done so and held on through some ups and downs you’d be right back where you started, so we can’t read too much into that idea. I don’t even know if that was a real recommendation to subscribers, it’s just called a “sample.”

The idea of the newsletter, as you have probably guessed, is to profit from the economy of the world’s fastest-growing large country. China is still a growth story, though there are many, many folks who are very, very nervous about how much China will grow next year — that fear comes from their continued focus on massive state-fueled infrastructure projects, their current political transition, and a weak global economy that’s cutting some demand for Chinese exports, among other things … but they are still growing, and there is still a rapidly growing urban population that’s creating an expanding Chinese middle class.

So that’s the backdrop — what, then, is Robert Morris recommending as he teases us with his new service? The service will run you about $800 a year, so I won’t blame you for wanting to sniff around this teased idea before you decide to plunk down that kind of cash. And that is, after all, why we’re here — to sift through the clues and tell you what company they’re keeping “secret” so you can decide for yourself if it’s a buy.

The particular stock has something to do with smartphones — here’s a bit of his tease:

“This Chinese Smartphone Stock Is Poised To Soar….

“Smartphones have been around for a few years now, but they’re still one of the most sought after gadgets on the planet. Recent data show that these revolutionary devices are flying off the shelves at an ever-increasing rate.

“According to Gartner, global smartphone sales surged 46.9% year-over-year in the third quarter. An impressive 169 million units were sold worldwide. And the devices accounted for nearly 40% of all mobile phone sales during the quarter….

“… perhaps the most stunning sales projection comes from Credit Suisse.

“In a recent report to investors, the Swiss financial services giant said annual worldwide sales of smartphones will top the 1 billion mark in 2014. They cite “robust growth” in China’s smartphone market, which they believe will account for 22% of global sales by 2015.

“Clearly, smartphones are expected to continue selling at a rapid pace for years to come.

“However, the universal adoption of smartphones has also given rise to another trend. A trend that is born out of convenience but could be dangerous for unsuspecting consumers. I’m talking about the trend of storing valuable personal and financial data on your smartphone.”

So yes, if you’re thinking ahead here you’ve already guessed that he’s teasing a stock that has something to do with mobile security — keeping your smartphone and the stuff you do on it private and secure.

Then we get into a few hints about the actual stock he’s pitching:

“… consumers need to protect their smartphones from increasingly aggressive cybercriminals.

“This is great news for one Chinese company in particular.

“The company is the leading provider of mobile security and productivity solutions in China. And if they have their way, they will become the leading provider on the planet.

“In fact, they’re already off to a great start.

“At the end of last year, the company had over 146 million registered users from over 100 different countries. That’s up from just 35 million registered users at the end of 2009.

“The speedy growth in the company’s user base is due to its shrewd business model.”

And that “shrewd business model?” Apparently, it’s “Freemium” — the same thing that pretty much every publisher on the web, every security company, every smartphone app developer uses as their basic strategy: Give something away for free, charge more for continued access or better service or the “next level” of service.

Here’s how Morris describes it:

“… malware scanning, internet firewall, and anti-spamming services are all available free of charge. But virus library updates, account safety, anti-theft, and communication privacy services require a paid monthly subscription.

“By offering services at no charge, the company is able to rapidly add new users and create a loyal user base. This user base is then fertile ground for paid subscriptions to the company’s premium service offerings.”

And apparently it’s working — here are a few tidbits about the company’s actual performance, just to make sure we have plenty of fuel to shovel into the Thinkolator …

“Revenues grew nearly eight-fold from 2009 through 2011. And after posting net losses in 2009 and 2010, the company generated a respectable profit in 2011.

“What’s more, revenues are expected to more than double this year and then grow by a hefty 69% in 2013. And after a slight increase this year, earnings are projected to surge 61% next year….

“… the shares are trading at just 6.5x the 2013 earnings estimate. Its price to book is a mere 1.62. And the stock’s PEG ratio is a paltry 0.24.

“I think these shares could easily double in value over the next year.”

So what is this Chinese smartphone stock they’re teasing? Well, we toss all those goodies into the Mighty, Mighty Thinkolator and we get our answer back in a flash: This is NQ Mobile (NQ)

NQ Mobile was previously known as NetQin Mobile, they’ve been teased a few times before in their short life as a public company (including a couple times over the last year by Keith Fitz-Gerald, starting at prices near today’s)– and it’s been bumpy as well as short, the stock has only been trading for about a year and a half but has already provided investors with the opportunity to enjoy both 60% losses and 200% gains, depending on when you happened to buy and sell … it’s been below $4 and above $12 in just the past year or so, and right now trades at just about $6 a share. The IPO price back in May of 2011 was just under $10, and the stock fell instantly following the IPO.

NQ is not a big company, they have a market cap of around $300 million now and a lot of cash, that low price/book ratio is largely because they have $126 million in cash on the books and no real debt. That’s better than $2.60 per share in cash, so if you do their PE ratio “ex cash” as folks do sometimes, that would be a trailing PE of about 20 (much less if you use the ex items numbers, apparently, analysts are expecting 60 cents in earnings for 2012) and a forward PE of 3 or 4 on the expected 90 cents or a dollar of earnings per share in 2013. So it’s absolutely cheap on those earnings metrics.

And they are a Chinese company, which certainly makes folks wary to some degree and usually brings a discount valuation these days, but they’ve been expanding pretty well outside of China and diversifying their business to some degree — they now get more than half of their consumer business from outside China, and they have made investments in a couple other mobile companies recently to diversify their revenue sources. The biggest was the acquisition of a controlling interest in enterprise mobile company NationSky in the middle of the year, which they expect to give them a bigger entree into the “managed handset” business — managing and securing mobile devices for big enterprise customers, like multinationals with thousands of connected Chinese employees. This acquisition is dropping their margins, since NationSky is also a handset reseller with low margins in that part of the business, but it should give much expanded access to mobile security and “upgrade” customers.

You can see NQ’s latest quarterly results and conference call transcripts here, they are continuing to project substantial growth in revenues, thanks both to continued overseas expansion (they’re going through wireless resellers in the US, Australian and UK markets to pitch their security/antivirus core products) and to their acquisitions — so they expect to have more than $150 million in revenue in 2013, which would be an increase of more than 50% of 2012. They don’t seem to provide guidance on margins or profits, but analysts have been reasonably close in their guesses for recent quarters — but the stock prices is really discounting something very disturbing in NQ’s future — growing stocks in growing sectors don’t trade at a forward PE of 6 or 7 unless investors are worried that results will disappoint, or that the company is hiding something nasty. Or, of course, if they’re just plain worried about everything and not taking any risks on anything that sounds like it’s Chinese.

I admit that I have no idea how important or effective NQ’s product is — it is the only antivirus product I ever hear about for smart phones, but we also clearly haven’t gotten to a point in the consumer culture in the US, at least, where there’s any real concern about smartphone security (other than loss or theft). I expect that will change, and security offerings and the hacking attempts to exploit them will change, too, but it’s still very early days on that front. They do appear to have substantially more traction in their home market in China, and they say all the right things on their conference call about building the business, but it’s hard to say whether the cheap valuation is a sign of a hidden opportunity that no one’s thinking about, or a hidden risk that everyone’s worried about. If you’d like to read a more detailed bull case on NQ, there was a good piece in SeekingAlpha last week following the third quarter earnings call.