On Friday I purchased 1500 shares of  Qiao Xing Universal Telephone, Inc (XING) at $1.91/share with my TradeKing account, so my brokerage fee was $4.95. Despite the name, Qiao is not a telephone company any more. They have recently focused their business to mining operations and are divesting themselves of their phone subsidiaries.

In their words,”Qiao Xing Universal Telephone, Inc. is an emerging Chinese resources company headquartered in Huizhou, Guangdong Province, China. The Company was previously one of the leading players in the telecommunication terminal products business in China, but made the strategic decision to diversify into the resources industry in 2007. In April 2009, the Company acquired 100% equity interest in China Luxuriance Jade Company, Ltd (“CLJC”). CLJC, which, through its wholly owned Chinese subsidiaries, owns the rights to receive the expected residual returns from Chifeng Haozhou Mining Co., Ltd. (“Haozhou Mining”), a large copper-molybdenum poly-metallic mining company in Inner Mongolia, China. Since then, the Company has further refined its strategy to become a pure resources company and is actively seeking additional acquisition targets in the resources industry.”

Tread cautiously with this company, there is lots to be fearful about. So let me start with the risks before I get to why I bought XING.

First, it is a Chinese company and reporting standards are different. Only unaudited “press release” financial statements have been released since the 2008 year end report filed with the SEC. This increases uncertainty. The longer a company takes to report, the more suspicious investors get. You cannot rely on their 2008 year end financial statements, but must piece together other info from press releases.

Second, Wu, the chairman seems to be a self serving Chariman and CEO, issuing himself millions of  shares, for his genius. This was a big dilution in 2009 and in my mind is another great reason to be cautious.

Third, XING’s new Moly mining operation is untested, with little information on the true status of the acquisition of CLJC and exactly what that means to the bottom line.

Fourth, The proposed divestiture of its low end Phone business Qiao Xing Communication Holdings Limited (“QXCH”) may not occur or not in a timely fashion.

Fifth, They may not distribute QXM stock as promised.

Sixth, XING may have incurred substantial losses while the transition to a raw materials company is occuring that may not be offset by the divestitures.

Why I bought this stock:

First, it is a net net stock. Xing’s NCAV value is approx. $3.50/share, so despite the risks there is a substantial upside and more importantly a healthy margin of safety.

Second, I wanted to diversify my holdings outside of the United States. If you believe Bill Gross on the subject of the new normal being pretty tepid, one needs to look for opportunity outside of the U.S, not just the United States.

Third, Xing owns QXM stock which recently appreciated, closing today at $4.52/share. XING shareholders are entitled to .43 QXM shares per share of XING owned. Based on my 1500 shares I should receive 645 shares of QXM valued at $1.94/share of  XING shares leaving the sale of QXCH a bonus. This is really all part of the Net Net Value, but a tangible way of looking at it.

Fourth, I have been interested in taking a position in a raw materials Chinese based company to profit from the potential upside of continuing strong demand in that market for raw materials. “Moly” is used in the production of steel and is a potentially a resource that should track well if China continues its heady growth.

Fifth, The catalyst here is that as XING divests its former telecom subsidiaries, the stock price should appreciate.

Your mileage may very. This is definitely not an investment for the timid. And probably not a great investment for a beginning investor. But if you are a small money investor looking for an opportunity in China this may be interesting to you.

Disclaimer: Please be clear on a few items. I own shares of XING stock. I could buy or sell shares of this security at any time and not disclose immediately. More importantly, I am not a financial expert, I am a television and film Producer. IF the analysis above makes sense, you should do your own further research. Verify everything. DO NOT buy or sell any investment because someone on the internet tells you it is a good idea. If I am lucky and someone discovers a mistake to my analysis they will send me an email or comment.

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