“This Chinese Smartphone Stock Is Poised To Soar”

Our first look at a China Stock Insider teaser

By Travis Johnson, Stock Gumshoe, November 26, 2012

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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.

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19 Comments on "“This Chinese Smartphone Stock Is Poised To Soar”"

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john arnold
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john arnold
November 26, 2012 3:11 pm

I was really surprised to learn from you that Robert Hsu’s China Strategy and Asia Edge are defunct. Were they doing that poorly? Any idea what he’s doing now? Thanks, Travis,.

Dave
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Dave
November 26, 2012 3:53 pm

John, I was surprised too! Looking around w/ google, I see no announcement or post-mortem. Ah well, natural selection at work. Robert was at his best when all boats were rising. Unfortunately, that circumstance never lasts for very long.

Bill D
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Bill D
November 26, 2012 3:38 pm

I recently got an email on my McAfee account asking if I wanted to sign up for their new smartphone virus protection service. Do you know if this is the same one or does McAfee have it’s own? That would be serious North American competition.

kip klein
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0
kip klein
November 26, 2012 3:44 pm

Beware of Chinese stocks, I’ve been burned by picks before and not sure the newsletter was all to blame. They seem to play by different rules and “cook the books” when it is to their advantage. Owned FEED and CRTP in the past and both went back and revised previous quarters revenue figures drastically. Hard to pick a winner when you are not sure your information is correct. Not sure they have any real consequences from stock exchanges for reporting false information, other than delisting.

John Harris
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John Harris
November 26, 2012 4:44 pm

Yes Hsu had us by CTRP which looked great for a while – seemed like the real deal and one of his best choices but eventually even his China picks that initally did well went down in flames.

phil m
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phil m
November 26, 2012 4:04 pm

I am a new-be in trying to control/manage the little money ($100,000) i have left from my 401.
Thanks to Gumshoe I have decided to cancel Stansberry and any other newsletter I got sucked into.
(my stupidity)
It appears they are all in bed together deciding what to promote & tease for $$. They should be investigated and thrown in jail.
I had my 401 rolled into an IRA and have the funds with Scottrade doing nothing.
Is there any newsletter etc that has integrity without the lies and up-sale

herbalix
Irregular
98
November 27, 2012 7:28 am
Hi Phil, why don’t you try Gummi. I am an Irregular for about 1 year and have been reading Stock Gumshoe newsletters for free for about 2 years now. This is the Best in the West. Have only great experiences with Gummi and even in this crazy market lots of great picks that can make some real money. Back in September I was up 18% and I am new to this game as well. At present i went down to about 7% gain! Hey I am glad I am up at all. But I tell you without the Gummi I… Read more »
John Harris
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John Harris
November 26, 2012 4:40 pm
I was a subscriber to Hsu’s China Strategy newsletter for the last number of years. At first when all markets were doing well in 2009 and 2010 his reco’s seemed good. Looking back the only picks of his that did well were American companies like Starbucks or Yum or Apple that did a lot of business in China. But I can’t remember one chinese stock that did well. He had us buy a lot of reverse merger companies that before long started to be prime targets of short sellers who even on false rumors made those stocks crash. Some were… Read more »
Alain
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Alain
November 28, 2012 3:30 pm
I bought China Mobile on his recommendation and I made a mint on that one. I just checked the chart I could have sworn that I sold it above $100 but that doesn’t look to be the case. He had a couple other Chinese based companies that did well. Mindray Medical has done pretty well. I bought it at 18$ and still hold it. New Oriental Education & Technology Group did really well out of the gate but has been a bit of a roller coaster after its first rum up. For a while anything China related was almost guaranteed… Read more »
John Harris
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John Harris
November 28, 2012 5:45 pm
Hsu advised us to sell China mobile (CHL) at $51, when I had bought at $65. He had been recommending a buy on it as high as $90 and when it went back down he sold for a loss for anyone who bought in as I did perhaps after the intitial reco. Same deal with Mindray (MR) bought at $35 after his intial reco but still when he said was still a buy, and he sold at $27 (then had us buy again a year later at $34). And these were among his best picks??. What you did not mention… Read more »
Franklin
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Franklin
November 26, 2012 6:38 pm

This has nothing to do with Chinese stocks, Travis, but does anyone know why AOIFF went
into the dumper today?

bkkben
Member
8
November 27, 2012 2:34 am

Yup, I am well curious too – I bought in a while back – and while I was not part of the big jump upwards previously in the year, I was still up 10% – but after yesterday now down 10% – with no news to find? Cheers!

herbalix
Irregular
98
November 27, 2012 7:37 am

Hi everybody,
I am also very curious about African Oil going down 20% isch. What I find completely crazy is that on the night ( Reuters 2:00 a.m.)before the downturn there was actually good nows on African Oil.
Perhaps I am a bit quick on the draw, but i could not resist to buy some more. Anybody has any idea what is happening?

john arnold
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0
john arnold
November 26, 2012 6:43 pm
John, Kip and Dave: appreciated your comments on Hsu. I stuck with him in the early days but gave up Asia Edge and then China Strategy as they weren’t working. I was surprised when no one came after me to re-subscribe to either; poor marketing….I did appreciate his insight on Chinese business and politics before virtually anyone else was in position to talk knowledgably about this. Phil m: Over the years, I’ve subscribed to a number of Newsletters. The only one with whom I’ve continued is Travis’; I appreciate his in depth analyses. He’s always impressed me as a no-bullhockey… Read more »
who noze
Guest
0
November 26, 2012 9:54 pm

astansbury w// their hundred diff. newsletters acct for most of my losses good thing i i bght some stuff w/o their guidance so im still ahead suggest you look at mags do your as always do your own evaluation

Thomas russell
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Thomas russell
November 27, 2012 12:20 am

Well I for one maze 36% on NQ from January to Feb. 15th 2012 thanks go Fitz Gerald.
Will buy in again in late December.

herbalix
Irregular
98
November 27, 2012 11:42 am

just found out that some analysts believe the new drilling results wasn’t that great for African Oil. Some do and some don’t.
Herbert

apl16
Irregular
0
November 28, 2012 1:52 pm

From what I’ve read, The drilling results and comments from the company were positive but the reality was that the original oil strike was of 100m and this hole was to test the depth of strike in the same oil pool but the 30m of oil in this hole was expected to be larger…………long story shorter, less oil reserves than originally thought.

I would like any other news out there, John

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