I first started covering Junlei (Nasdaq: Xnet) in November of 2017 when the stock was trading at $24.05 and I thought it was a short that would “reverse soon”. the stock fell later 90%, which was quite a sharp decline till Aug 2022, I felt it had fallen too far and hence rated it a strong buy based on profitability and cash position. The stock is now up 32% since that call.
Today, at the request of several readers, I want to quickly update my stance on the company. Much of what I said in the other article is still true in general, although the specific numbers need today’s refresh.
Xunlei is a Chinese company that is partially followed and covered in the US There is not much information available in the English language to help investors understand the company and its operations. I believe the best English description of the company’s operations is given in its annual 20F SEC filing. To wit (with all my emphasis):
We operate a powerful Internet platform in China based on cloud technology to enable our users to quickly access, store, manage and consume digital media content over the Internet. In recent years, we have expanded our products and services from partially PC-based devices to mobile devices Pre-installed acceleration products in mobile phones To further expand our user base and provide a wider range of access points to our users. We provide a wide range of products and services Cloud acceleration, blockchain, shared cloud computing and digital entertainment To provide an efficient, smart and secure Internet environment.
To overcome the shortcomings of digital media transmission on the Internet in China, such as low speed and high delivery failure rate, we provide users with quick and easy access to online digital media content through the main products and services listed below:
- Xunlei Accelerator, our most popular and free productwhich enables users to accelerate digital transmission over the Internet and is approximately 48.0 million monthly unique visitors in December 2021, as per our internal records; And
- cloud acceleration subscription servicesOur products, which are distributed through Green Channel, and provide premium services to users for speed and reliability.
In addition to our core product, Junlei Accelerator, we have also developed cloud computing and other Internet value-added services to accelerate corporate development and keep pace with the latest industry trend and changing needs of users. These value-added services and products mainly include live streaming services and online game services.Which provide us synergy in our business operations.
Our mobile initiatives also benefit from our relationship with Xiaomi, one of our previous strategic shareholders. Since 2014, we have made a pre-install service agreement with a company from Xiaomi Group, which manufactures Xiaomi phones, a well-known brand of smart phones in China. According to the agreement, we agree to provide our mobile Junlei acceleration plug-in, and mobile phone manufacturers agree to install such plug-ins on their phones free of charge. Such pre-installment arrangements provide mobile phone users with access to our acceleration services, which we believe enhances our ability to generate more user traffic. Our mobile acceleration software has been officially adopted by Xiaomi’s operating system and the software is installed on Xiaomi phones sold in China, including both new phone shipments and system upgrades from existing Xiaomi phones.,
Another important part of our strategies is to continue our innovation in crowdsourcing idle bandwidth capacity and potential storage from users of our cloud computing hardware devices so that we can continuously provide computing resources to third parties such as Internet content providers through our CDN services. Can , We began generating revenue in the third quarter of 2015 by selling crowdsourced uplink capacity collected from users of our cloud computing services to third parties. To further develop our cloud computing business, we launched OneThings Cloud, our decentralized cloud computing product, in 2017. , OneThings Cloud is essentially a cloud-based storage and sharing device that allows users to share their idle internet bandwidth and storage resources with our content delivery network., Third parties that purchase our cloud computing services primarily include Internet content providers such as iQiyi and Xiaomi. In 2020, we launched our own bounty program, which allows users of OneThing Cloud to crowdsource passive uplink capabilities and share external storage with us in exchange for a small amount of cash rewards.
latest financial results
As I mentioned in my previous article, XNET was attractive not only for its cash position (which we’ll look at below) but also because its revenue and earnings were growing. Recent results bear out this trend.
Coming to the November 2022 earnings release, we find that third quarter revenue grew 12.8% sequentially and 47.1% year-over-year. This performance was the result of the following numbers across the company’s three reporting segments (with my emphasis):
Revenue from cloud computing was US$29.1 million, representing an increase of 2.7% from the previous quarter. Cloud computing was the main reason for the increase in revenue Increased demand from our key customers For our cloud computing service…
Subscription revenue was US$25.0 million, a decrease of 1.7% from the previous quarter. The number of customers as on September 30, 2022 was 4.37 million, while the number as on June 30, 2022 was 4.46 million…
Revenue from live streaming and other IVAS was US$34.2 million, representing an increase of 39.4% from the previous quarter. The increase in live streaming and other IVAS revenue was primarily driven by growth in the number of paying users of our live streaming products, which launched in 2021, and our increased monetization potential,
This increased revenue (which is a record for the company) also drove net income for the quarter to a new all-time high. The chart below helps to visualize this.
In other words, the company is doing very well.
money in hand
The company’s performance continues to strengthen its balance sheet, with cash and short-term investments once again rising.
With 66.5M ADS outstanding, the Company has approximately $3.75 ($251M/66.5M) in cash and short-term investments per ADS. This is 178% of the share price with the stock trading at $2.12. This explains why the company still sports an appreciably negative enterprise value of ($85.8M).
Being profitable and having a negative EV is a good reason to engage in stock buybacks because each purchase is favorable to book value and cash on hand. The company understands this, therefore:
Since authorizing the $20M share repurchase plan in March 2022, the company had utilized $4.3M of this as of September 30, 2022. This is the result:
Given the company’s profitability and extremely strong cash position, I expect it to continue with its share repurchases, eventually using the entire $20M that has been authorized and perhaps following it up with another authorization. doing.
Because it has a negative enterprise value, XNET doesn’t get a meaningful rating on any metric, including EV, but in fact all those metrics are incredibly strong. With that in mind, here is a summary of Seeking Alpha’s valuation metrics.
I believe the valuation numbers with so much cash in hand and growing revenue fully justify a “strong buy” rating on XNET. Nonetheless, Seeking Alpha does not provide a Quant rating on this particular ticker, possibly because there is no analyst covering the company. However, this under coverage, is another factor contributing to XNET currently being misrepresented by the market.
XNET trades options but they are not particularly liquid. Because my positions have been short, I was able to enter the stock through naked puts and shares taken away only by the covered calls I wrote against my position. I may try to replicate this strategy going forward.
The risks here are twofold, first that the company fails to execute, and second, the same ones I identified in my previous article:
In my opinion, the biggest risk with XNET is the same that affects most Chinese stocks, ie the company is a VIE and thus the shareholders are not actually owners of the company. Here is a good link describing this risk.
In my opinion, these risks are mitigated somewhat by XNET’s strong cash position and its growing revenue and earnings. However, as is the case with all Chinese stocks, I have taken a much shorter position on this name than I would have if I were in the US.
Summary and Trading Plan
I believe that XNET is currently providing us with a buying opportunity that arises primarily because the company is very undervalued and unknown. There are no Wall St analysts on it, it’s hard to gather public information (in English) and it doesn’t require funding. But all this can be beneficial for small investors. I recently exited my position, but plan to get back into the stock, perhaps buying a bit at today’s prices, but only if the stock trades below $1.75 (which is above short-term resistance). If does then am trying to get the full position.