JQW (LSE: JQW) is one of those companies you either love or hate. The company provides a B2B e-commerce platform focused on connecting Chinese buyers with Chinese sellers, a market that has exploded in size during the past few years.
Indeed, data released last March from iResearch found that China’s eCommerce sector expanded by more than 20% in 2014, with B2B sales the largest contributor. What’s more, analysts predict that China’s $2tn eCommerce market is set to double in size over the next three years. Other figures suggest that Chinese B2B e-commerce and B2B electronic payments will amount to $1.4trn and $140bn respectively, in 2015.
However, this explosive growth is attracting a wave of competitors from both inside and outside the country. As a result, established companies like JQW are on the defensive and need to come up with new ways to retain customers.
JQW itself is in the middle of a transition. The company is changing its business model, contracting out an increasing amount of business through external agents. Unfortunately, this change is hitting margins. For example, while revenue increased by 12% during the first four months of 2015, JQW’s gross margin contracted as of commissions paid to agents ate away at profitability. With margins coming under pressure, JQW’s net profit contracted by 10% during the first four months of the year.
Still, JQW’s management believes that the company’s profit for the full year should be “of a similar magnitude to last year.”
Sudden halt
It’s disappointing that JQW’s growth has come to an abrupt halt this year, but while the company is no longer a growth play, it ticks all the boxes as a value play.
According to the figures supplied by the enterprise, at year end 2015 JQW had around RMB 394.7m, roughly £40.8m at the end of December last year. This cash balance was reported after dividend payments totalling RMB 114.4m during the year.
This indicates that, at present levels, JQW is trading for less than the value of cash on its balance sheet. At time of writing, the company’s market cap. is a tiny £20.2m. Furthermore, based on JQW’s full-year 2014 results, the company is trading at a historic P/E of only 1.3.
Clearly, judging by JQW’s current valuation, the market believes that the company doesn’t have a future. But the company is profitable and trading below the value of the cash on its balance sheet. For deep value investors, JQW could be a top pick.
Trust issues
However, there’s one issue that’s overhanging JQW.
Certain Chinese companies have gained a reputation over the past few decades for falsifying accounts, misleading investors and taking advantage of poor corporate control by government. That said, there’s currently no indication or proof that JQW is misleading investors, but you can never be too careful.
Even at the best of times, deep value plays like JQW aren’t for the faint of heart — you can often end up losing all of your investment. But for those willing to take the plunge the potential reward can sometimes be enormous.