Ugh.  These are Chinese reverse merger stocks.  (A reverse merger is a ‘bootleg’ method for companies to quickly get listed on US exchanges.  For whatever reason, most reverse merger stocks are frauds.  I haven’t seen any insiders get thrown into jail due to the complications of international law.  Regulators and exchanges shouldn’t allow this… but they do.)

The history is that originally XING IPOed an interest in its cell phone business in an IPO (which is QXM).  Later on, the stock price of QXM tanked and there was a lawsuit over the accounting practices at QXM (the financials had to be restated to show that QXM was not profitable in its early years).  Oh yeah… insiders steal from this company… read the related party transactions.  When XING was trading below the value of its ownership stake in QXM, insiders decided to merge XING with a mining company owned by the chairman.  Now if you read the financials carefully… you’ll notice that they capitalize the stripping costs of the mining operation.  This is rather inappropriate as stripping costs should be expensed; capitalizing them inflates earnings and EBITDA in the short term.  Management points out the EBITDA figure when XING bought the mine… but EBITDA is a terrible method for valuing any mining asset.  The most appropriate method would be Net Present Value (though it is easy to fudge NPV values).  Projections of expected production, grades, and free cash flow over the expected mine life would also be appropriate (though few people ask for these figures).

Riu Lin Wu and Real Gold (HKG:0246)

Riu Lin Wu is the former chariman of XING (he has now been replaced by his eldest son).  Real Gold is another Riu Lin Wu-related entity (Riu Lin Wu is the majority shareholder and pretty much controls the company).  There is a huge ongoing scandal with Real Gold because it has been secretly lending money to Riu Lin Wu’s companies.  The interest rates that it has been charging were presumably insufficient to compensate for the credit risk involved.  The auditors at Real Gold have resigned.

Now back to QXM and XING.  QXM is a cash rich company… so why do its financials show that it is borrowing money?  To be fair, there might not be anything shady in this department.  But I am a paranoid kind of person.

There are a lot of shenanigans going on with the various convertible debentures at XING and QXM.  The related party ones have been terrible deals for XING/QXM shareholders.

The underlying business

Unlike other Chinese reverse mergers, I believe that there is a real company here.  (Though I can definitely be wrong.)

VEVA makes high end cell phones.  There are user reviews of their cell phones on the Internet.  Here is one of their infomercials:

The infomercials are pretty slick actually.  The one above features Pace Wu (Pace who?), who is apparently a minor star in China (read the Wikipedia entry for her).  Veva has also hired Zhang Ziyi, who is definitely a star inside and outside of China.

QXCH (owned by XING, not QXM) makes indoor phones.  It has been losing money (or “losing” money) and has been sold.

Why I am long QXM and XING, not short

My original thesis was that insiders would try to pump and dump these stocks onto institutional investors, similar to how QXM was originally IPOed.  It seemed to make sense at the time because insiders sold the mine to XING for shares, not cash.  XING was also going to perform a take-under (or fake takeover?) of QXM, but this proposed transaction failed.  Unfortunately, insiders have not been trying to pump and dump these companies and the stock prices of both have fallen by about three quarters.  The websites for both companies are badly outdated and there has been little communication with shareholders.

Shah Capital Management is a major shareholder of both companies and has not been pleased with management (read their unhappy letter to the QXM board).

I have been in a world of pain because of these two stocks.

One thought on “QXM and XING

  1. Pingback: Portfolio Update March 2012 | Glenn Chan's Random Notes on Investing

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