Wednesday, January 13, 2010

Still Bullish on Chinese Microcap Stocks

In April 2008, I recommended a portfolio of nine Chinese small-cap stocks. (See “Bullish on Chinese Microcaps” at If you had invested an equal amount of money in each of these stocks, you would have realized a 39% gain during this period. In comparison, the S&P 500 declined 18% over the same time frame.

My biggest gain came Universal Travel (UTV), a web-based Chinese travel company, which I sold right before its move to the NYSE. I accumulated UTA at prices ranging from $1.41 to $9.75 and eventually sold at $14.90. I don’t hold any shares of it currently, but it looks increasingly attractive after its pullback to the $10 range. I continue to hold China Agritech, which actually fell below $1.00 per share before reaching the current price of $35. As these examples make clear, some explosive gains were available in these little-known stocks.

And what about today? I remain bullish on Chinese microcaps, and anticipate that this may be one of the best performing sectors of the stock market over the next year. US investors are looking for more foreign exposure, and the valuations on these stocks remain very attractive.

Here are my five favorite picks for the year, each of which I hold in my personal portfolio:

SINO AGRO FOOD INC (SIAF.PK Current price =$1.37): Sino Agro is a diversified organic food company with a top notch CEO and strong ties to the Chinese government. This company is projecting $.32 EPS in 2010, but the share price is only $1.37. Can you really buy a growth stock in a hot economy at a PE level of under five? Yes, you can, and this is exactly why these microcaps are the place to be in 2010.

CHINA PHARMA HLDGS (CPHI Current price = $4.05): I like Chinese healthcare stocks, because they are not dependent on exports to the US and Europe—dicey in the current environment—but rather serve home-grown consumers, with their rising standards of living. China Pharma sells pharmaceutical and nutritional supplements, and recently reported 23% growth in sales year-on-year, and a 70% growth in EPS. Yet the PE ratio is under ten.

CHINA ARMCO METALS (CNAM.OB Current price = $4.00): This company is expanding from its metal distribution business into metal recycling. The PE ratio here is also under ten, while 2010 promises to be a year of accelerating growth.

CHINA NEPSTAR ADS (NPD Current price = $7.31): China Nepstar is the largest drugstore chain in China. The company is expanding rapidly, both via acquisitions and organic growth, and pays a dividend—a sign of its shareholder friendly attitudes.

TIANYIN PHARMACEUTICAL (TPI Current price = $4.81): This is another Chinese microcap that pays a dividend, and generates a 3% yield, in addition to solid prospects for price appreciation. The company received approvals to sell two more drugs from the Chinese government just this week, and looks poised for another record year.

Friday, April 18, 2008

Time to Load Up on China Microcaps

I have been investing for more than 25 years. And with quite a bit of success, I might say. I have a MBA from a name US school, and a degree in economics from Oxford across the pond. I have traveled widely, and know the world. I have taken a company public myself, and understand the stock game both from the perspective of the insider and the outsider.

Above all, I am not easily impressed. I tend to be skeptical by nature, especially when it comes to investing. However, the opportunity I see right now in Chinese micro-caps is the single most attractive play I have ever encountered in my many years of following the market.

Can I believe my eyes? Can I really fill up my shopping cart with a diverse portfolio of growth companies selling at PE ratios in the low single digits? Are there really companies reporting huge increases in sales and profit, expanding rapidly, and holding almost no debt . . . and selling, in some instances, for less than the net current assets on their balance sheet? Can I really purchase a company that is growing 30% or 40% or 50% or more, year-on-year, for an amount equal to the total EPS for the next eight quarters? Is it really possible to invest in the fastest growing economy in the world at a 75% discount to what a sluggish, no-growth stock sells for in the US?

The answer is – surprisingly! – yes. Here is the portfolio I have been accumulating over the last several months.

China Organic Agriculture (CNOA.OB)
Lotus Pharmaceuticals, Inc. (LTUS.OB)
China Agritech Inc. (CAGC.OB)
China 3C Group (CHCG.OB)
Universal Travel Group (UTVG.OB)
China Sun Group High-Tech (CSGH.OB)
China BAK Battery, Inc. (CBAK)
Eternal Technologies Group Inc. (ETLT.OB)
General Steel Holdings (GSI)

Okay, so the conference calls are awkward. The companies don’t know how to talk to analysts. They are lousy at giving guidance on earnings. But honestly? Check out these details . . .

China Organic Agriculture (CNOA.OB) Net sales were up fourfold last year, and the company is a leading supplier of rice to China. Rice is hitting new price highs all the time. Yet this company is selling for 5 times trailing earnings. Go figure . . .

Lotus Pharmaceuticals, Inc. (LTUS.OB) Revenues for the year were up 72%. The PE is less than 5 times trailing earnings.

Eternal Technologies Group Inc. (ETLT.OB) Revenues were up 24% last year. But you don’t need to focus on the growth story here. Just look at the net current assets on the balance sheet. These are substantially more than the market cap. If you did a LBO of this company, you could pay for the whole thing with the current assets, and get the business for nothing.

China Agritech Inc. (CAGC.OB) This company is situated in the very fast growing organic fertilizer market. Reveues increased 33% and net income was up 59% last year, but the trailing PE is 7.5.

China A 3C Group (CHCG.OB) This Chinese retailer and distributor of consumer electronics grew EPS by 83% last year. But the PE ratio is less than 4.

China Sun Group High-Tech (CSGH.OB) This company showed year-on-year growth of 167% during the last quarter. It’s product mix is focused on fast growing energy and commodity segments of the economy. And it’s PE ratio is 7.

Universal Travel Group (UTVG.OB) Jim Rogers recently highlighted tourism as one of the fastest growing industries in China, and the Olympics will only give it a greater boost. Universal Travel just reported revenue growth for the year of $44.3 million – up 342% versus the previous year. What kind of PE does that deserve? Let’s see . . . net income of $8.7 million in the year just finished, and market cap is $56 million. Oh, yawn . . .

China BAK Battery, Inc. (CBAK) This company is well situated in the fast growing battery market, building relationships with Hewlett-Packard and a bunch of other high potential customers. This company is poised to generated .29 cents in EPS next year, even without factoring in the potential for hybrid battery sales to Western automakers, which is the huge upside there. Share price is still under $4.00 as I write.

General Steel Holdings (GSI) In the last year, this company grew revenues from $139.5 million to $772.4 million. Yes, you read that right – a 450% increase in revenues. Does that get you a PE of 50? 100? Nope, it’ selling for a forward PE of less than 10.

Are these companies phony? Are they scams? I doubt it . . . I have done business in China, and these enterprises are by no means atypical of businesses flourishing in that fast-growing economy.

Investors always dream of those great opportunities that come around once in a lifetime. Perhaps you read how John Templeton became rich. In 1939, he borrowed $10,000 from his boss to purchase one hundred dollars worth of each of the 100 stocks listed on the NYSE selling for under a buck per share. A few years later he paid back the debt, and saw the average stock in his portfolio increase 400%.

These stocks represents a similar buying opportunity. If you are waiting for a better opportunity . . . be prepared to wait a long time. For my part, I am not going to miss this chance to buy and hold a portfolio of fast-growing companies in a fast-growing economy selling at PE ratios in the low single digits. A chance like this may not come around again.

By the way, the PE ratios of these stocks tend to double or triple immediately when they move to a major exchange. A couple of the stocks on my list have already made the move. The other ones are no doubt planning to do the same.

You can write to the Bull in a China Market at