Company Background
Borqs Technologies (NASDAQ:BRQS) , headquartered in China and with offices in India, Taiwan and the U.S., is a second tier player in the global IoT, portable devices and 5g markets; its market capitalization peaked in 2018 when its sales reached the $130 million mark, at a time when it could brag about having among its investors SK Telecom (SKM), Intel Capital (INTC) and Qualcomm Ventures (QCOM), but they disposed of their investments in Borqs in the following two years. Unfortunately, things didn’t go well for the company since then and, with declining revenues year after year, it never managed to show a profit in its books; its market cap therefore shrank by almost 96% and, after years navigating out of sight and in muddy waters, as of February 2023 it is in microcap territory, valued only $10 million.
The company, given these premises, today represents little more than a risky bet on its ability to gain some market share in the rapidly growing 5G and Internet-of-Things sectors, with a focus on India, where Borqs’ R&D team and sales team are working closely with partners and customers to build the 5G ecosystem, including the development of phones, gateways and other portable devices for residential and business premises. It has recently renewed licensing agreements with Qualcomm that enable the use of Qualcomm’s technology in their products. Borqs has shipped more than 10 million wireless devices in India, including phones, tablets, wireless routers, and IoT products and currently employs 70% of its workforce there.
Holu Hou Energy Stake
Setting Indian affairs aside, what makes it more interesting in the short term is related to its 51% ownership of Holu Hou Energy (HHE), a U.S. private company, considered as of this writing, to be one of the top ten suppliers of photovoltaic panels and energy storage solutions in Hawaii; it recently announced that it had received multiple purchase orders for its HoluPower XP solar energy storage systems for installation at homeowner locations in the Greater San Diego area in California, the largest market in terms of size of available opportunity.
Regarding this matter, Borqs Technologies has received a letter dated December 13, 2022, from the U.S. Department of the Treasury – on behalf of the Committee on Foreign Investment in the United States (CFIUS) – stating that it is required to negotiate with the CFIUS to fully divest its ownership interests and rights in Holu Hou Energy LLC , due to its solar energy storage system and EnergyShare technology for Multi-Dwelling Residential Units being deemed a critical technology and therefore a potential national security risk.
While I personally consider this episode highly debatable and that it has little to do with actual security threats and more to do with economic warfare and growing international tensions, according to the U.S. Government, Holu Hou Energy has been increasing its dominant market share and is expected to grow at an exponential rate, focusing on multi-family dwelling units which are common in military housing. Due to Borqs’ IoT software development and hardware sourcing capabilities in China, the CFIUS is concerned that through Borqs, the People’s Republic of China could gain significant visibility and exert influence over HHE’s business operations and get access to critical technology. Therefore, the CFIUS is requiring Borqs to design a plan to mitigate all identified national security risks to the satisfaction of CFIUS and eventually forfeit its stake.
Borqs has announced that it intends to comply with these requirements; the plan to divest its majority ownership of Holu Hou Energy will engage a…
…nationally recognized investment bank with experience in administering competitive sales and auction processes” and Borqs believes that “this voluntary mitigation will enable the tremendous inherent value of HHE to be realized and that the divestment will result in a profitable transaction for Borqs’ shareholders.
The Precedents
This is not the first time that the CFIUS orders Chinese entities to divest their investments in the U.S. and in both instances the transaction resulted in hefty profits. In 2020 the Trump administration ordered Beijing Shiji Information Technology to sell its stake in the Hotel services group stayntouch Inc, which resulted in a profitable transaction; that same year and following a similar demand from the CFIUS, Chinese gaming giant Beijing Kunlun sold its stake in gay dating app Grindr for about $608 million, which it bought in 2016 for $93 million.
Potential buyers and valuation
If Borqs wants to up its chances of finding a prospective buyer for its equity, it shouldn’t look very far as two public companies immediately come to mind: Hawaiian Electric (HE) , the islands’ largest supplier of electricity, which is committed to increasing its renewable energy sources, and Sunrun (RUN) , one of the leading U.S. residential solar and storage vendors, that already has an established business in Hawaii. Both may be interested in buying solar assets at a likely discount from a seller that is forced to give them away and has a deadline to comply.
From a valuation standpoint, Holu Hou reported to have signed contracts in 2022 worth $140 million in Hawaii alone, and has filed an application for its HoluPower xP system to be listed as an approved product by the California Energy Commission, where it claims it has a growing pipeline approaching half a billion dollars. If we consider that the average price to sales ratio of public solar companies is 5, we can assume that Holu Hou energy is worth north of $500 million based on 2022 sales alone, without taking into account the upcoming projects in California; this means that we can safely value Borqs’ stake at $250 million.
If we want to play it even safer and assume that Borqs will not be able to command a fair price given his recently acquired status as an “undesired guest” and will be forced to sell its interest at a steep discount, we can still evaluate that at worst it will be able to cash in at least $100 million, that is $3 per share, as there are 35 million shares outstanding. Borqs is currently trading for $0.35 as of this writing so it seems incredibly undervalued in light of this sale.
Risks
So where’s the catch? Is this too good to be true? Are there any risks we don’t have covered or we can never know about?
Investing in public companies always presents the chance of losing some if not all the money invested and this is the more true when speaking of Chinese companies; there are hundreds of them and most are small or microcaps, doing businesses overseas and with often hard to understand prospects, policies and quarterly filings; some of them have been exposed reporting faked revenues, such as once beloved Luckin Coffee (OTCPK:LKNCY), others – with great IPO prospects – have miserably failed, such as Missfresh (MF). So it is no surprise that companies like Borqs are basically unknown, unfollowed, unloved and considered untrustworthy by the average investor and that related news are practically ignored; yet, their stake in Holu Hou Energy is a fact and Holu is an American company doing a bricks-and-mortar business in the U.S. and thus we should be quite confident that its reported sale numbers are real. As an additional risk we have to take into account that Borqs may be required by the U.S. and/or China to pay fat taxes on its windfall profits and this will impact the bottom line numbers. Moreover, Borqs’ stake in HHE may still be shunned by investors as it has until now, or there may be other aspects, regulations, undisclosed agreements or possible litigations related to the sale of which I am unaware and that may cause the stock price to remain stuck at current levels or even decline further. Also bear in mind that Borqs’ shares are thinly traded and subject to greater volatility, making it difficult to exchange them at the desired price.
Conclusions
If the numbers don’t lie, it is likely that Borqs will sell its 51% stake in Holu Hou Energy for a significant profit, that even in the worst case scenario is not reflected in the current share price, which may at least double from these depressed levels in the coming weeks or months, once the details of the sale will be made public; nevertheless I would still be cautious, after all they never reported a profit and have been burning cash, so my suggested strategy is to allocate in Borqs no more than 5% of your portfolio as there is still the possibility that the stock will fall even further due to unexpected events.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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