JQW (LSE: JQW) is one of those companies you either love or hate. The company provides aB2B 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 Chinas eCommerce sector expanded by more than 20% in 2014, with B2B sales the largest contributor. Whats more, analysts predict that Chinas $2tneCommerce market is set to double in size over the next three years. Other figures suggest that Chinese B2B e-commerceand 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 changingits business model, contractingout an increasing amount of business throughexternal agents. Unfortunately, this change is hitting margins. For example, while revenue increased by 12% during the first four months of 2015, JQWs gross margin contracted as of commissions paid to agents ate away at profitability. With margins coming under pressure, JQWs net profit contracted by 10% during the first four months of the year.
Still, JQWs management believes that the companysprofit for the full year should beof a similar magnitude to last year.
Sudden halt
Its disappointing that JQWs 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 companys market cap. is a tiny 20.2m. Furthermore,based on JQWs full-year 2014 results, the company is trading at a historic P/E of only 1.3.
Clearly, judging by JQWs current valuation, the market believes that the company doesnt have a future. But the company is profitable andtrading below the value of the cash on its balance sheet. For deep value investors, JQW could be a top pick.
Trust issues
However, theres one issue thats 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, theres 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 arent for the faint of heart you can often end up losing all of your investment. Butfor those willing to take the plunge the potential reward cansometimes be enormous.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.