Full Position: Skystar Bio-Pharmaceutical (SKBI)
posted by The Traveller on Sunday, November 29, 2009

Skystar Bio-Pharmaceutical
Ticker: SKBI (Nasdaq)
Share Price: $10.43
Market Capitalization: $72.63 million
Cash: 20.37% of Market Capitalization
EPS: $1.55
P/E: 6.73

Skystar is a leading producer and distributor of veterinary medicines, vaccines, microorganisms and feed additives in China. Skystar has four product lines and over 170 products, with over 40 additional products in the developmental stage. Skystar has formed strategic sales distribution networks covering 29 provinces throughout China.

Recent Developments:

- Brean Murray Carret & Co. China Growth Conference Presentation

November 19-20, 2009: Skystar is the only US-listed Chinese veterinary medicine supply company. The company has an aggressive growth strategy in place: in the highest margin product line of veterinary vaccines the company has a new production facility under construction which is projected to increase capacity by 2,300% and tenfold revenues and gross margin in 2010 for this segment to $14 million and $8.4 to $9.8 million.

- Company Reports Record Quarterly Revenue of $12.78 Million and Adjusted Net Income of $4.25 Million; and Adjusted EPS of $0.61 per Share

"We are on track with our expansion initiatives to increase our vaccine and micro-organism production capacity by the end of the year. With plans to begin production late in the fourth quarter, we expect that in 2010 we will effectively increase our vaccine revenue to $14 million with 60-70% margins and increase our micro-organism revenue by $2.7 million with gross margins of approximately 70%."

- Company Announces Two-for-One Stock Split

"In line with our anticipated growth, we approved a forward stock split earlier this month, which we believe will increase liquidity and offer an optimal entry point for investors as we continue to grow our business and create additional shareholder value"

Investment Thesis:

I am adding a full position to the China Portfolio. China is the world's largest producer of poultry and livestock and Skystar's products are covering all segments of the animal farming industry. SKBI has a proven high-growth and high-margin business and with two new production facilities coming on-line this quarter 2010 should be a record year for the company by a wide margin.

SKBI is trading on Nasdaq since June 2009 and the company has already completed a public offering for gross proceeds of $21 million in July which leaves Skystar with plenty of cash on its books to finance the aggressive expansion. I am calculating with 2010 net income of at least $14 to $15 million and although a fair earnings multiple for such a high growth business would be more in the 15-20 range, my initial target for this position is $20.00, based on a multiple of just below 9.

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Full Position: China Sun Group High-Tech (CSGH)
posted by The Traveller on Sunday, November 29, 2009

China Sun Group High-Tech
Ticker: CSGH (OTCBB)
Share Price: $1.72
Market Capitalization: $91.89 million
Cash: 12.42% of Market Capitalization
EPS: $0.16
P/E: 10.75

CSGH is the second largest producer of cobalt and lithium-ion battery component materials in China. The company owns a proprietary series of nanometer technologies that supply state-of-the-art components for advanced lithium ion batteries. Leveraging its state-of-the-art technology, high-quality product line and scalable production capacity, the Company plans to create a fully integrated supply chain from the primary manufacturing of cobalt ore to finished products, including lithium ion batteries.

Recent Developments:

- CSGH Signs LOI to Jointly Produce Finished Li-Ion Batteries for Electric Vehicles

"Two of China's leading battery producers have successfully completed testing of li-ion batteries using CSGH components. The companies are now demonstrating a prototype battery to electric vehicle manufacturers to facilitate sales of finished li-ion products. In addition, China Sun Group has 21 customers undergoing technical testing of its new li-ion product. The goal of our strategic agreement with Beijing Zhongxinlian is to accelerate the commercialization of our green, li-ion battery product to the global electric vehicle manufacturing market. With the production of finished li-ion batteries, China Sun Group looks forward to expanding its business worldwide as a complete, end-to-end battery product manufacturer."

- CSGH Forms Key Academic & Government Alliances

"China Sun Group has received 600,000 RMB or approximately $87,900 USD as a technology subsidy from the Municipal Government of Dalian. ... CSGH's li-on products, lithium cobalt oxide and cobaltosic oxide, were designated as a "Priority Choice of Government Procurement". The Dalian municipal government's financial and administrative support has been very impressive. [Subsidiary] DLX is now preparing an application for a subsidy from the State to continue to bring new energy, li-ion products to market. We believe li-ion can make cleaner, high-efficiency, low power energy sources economically viable in China. We look forward to updating our shareholders on the future progress of these government and academic efforts."

Investment Thesis:

I am adding a full position to the China Portfolio. Lithium ion batteries are primarily used in portable devices such as notebooks, MP3 players and mobile phones. But this market is set to expand significantly into electric and hybrid vehicles in the near term. China is expected to be the leading growth market for electric vehicles in the coming decade. CSGH's products seen strong government support with patents and awards such as "Priority Choice of Government Procurement" and "Key Product Promoting the High-Tech Industry". China Sun Group looks well-positioned in this market and has plenty of cash on its books.

In order to secure future growth with a stable supply of cobalt ore, the company has purchased interest in a cobalt mine in Congo and plans construction in the first half of 2010. I see this as a risky endeavour for such a relatively small company as Congo is a country of high corruption and political crisis, even war. But it shows that CSGH is willing to take all necessary steps to secure and improve its position in the high-growth li-ion market.

I am very optimistic about the battery market and especially CSGH's performance in 2010. Revenue growth of 40% should be achievable for the company and with test results for their new li-ion product coming in by Q1/2010 we could see new orders and developments that work at catalysts for the stock price. It is difficult to project an EPS number for 2010 as construction costs for the Congo mine will eat off some of the profits, but with CSGH's current cash position, financing should not be a problem. The stock price came down from a high of $2.10 after last quarter's results were basically just in line, but there is a good chance that CSGH will retest this level near term again.

My initial price target for CSGH is $2.50.

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Full Position: China Kangtai Cactus Biotech (CKGT)
posted by The Traveller on Saturday, November 28, 2009

China Kangtai Cactus Biotech
Ticker: CKGT (OTCBB)
Share Price: $2.14
Market Capitalization: $39.40 million
Cash: 8.63% of Market Capitalization
EPS: $0.44
P/E: 4.86

CKGT is a market-leading grower, developer, manufacturer, and marketer of cactus-based products, including nutraceuticals, nutritional food, health drink and liquor, extracts, livestock feed & fish feed.

Recent Developments:

- New Product: Patented Cactus Hog Feed to be launched in Fourth Quarter 2009

"China is the world's largest hog producing country having slaughtered 625 million hogs in 2008, compared to approximately 100 million hogs in the U.S. China also has the world's largest consumer base for pork consumption. Over 65% of all meat consumed in China is pork. The cactus hog feed market shows huge growth potential. Hog producers are constantly seeking ways to improve the health and productivity of their livestock. Our cactus products are proven to enhance pork production."

- Patented Cactus-based Low Tar, Low or Zero Nicotine Cigarettes to be launched in Fourth Quarter 2009

"The cactus cigarette market shows huge potential for growth in China. China has about 390 million smokers, accounting for 30% of global smokers. Our revolutionary product can not only capture a significant portion of smokers, but also promote consumer consumption in our other health products such as nutraceuticals, nutritious food, health and energy drinks, beer, wine and liquor. We expect the launch of our cactus health-preserving cigarettes also will improve the brand name and reputation of our company."

- Q3 Revenue Up 32% to Record $8.2M; Net Income Up 71% to $3.0M, EPS $0.15

Investment Thesis:

I am adding a full position to the China Portfolio. Both revenue and earnings growth have been excellent and seem sustainable. The stock seems very cheap at current levels which could be the result of Western investors being skeptical about or not understanding the rather obscure cactus business. However, the company's execution so far proves that cactus-based products have a market in China and likely also in neighboring countries. CKGT's longer-term strategy is to expand its market beyond China into South Korea, Singapore, Taiwan and other southeastern Asian countries. Organic growth has been strong and a bunch of new products (green animal feed, cactus cigarettes) could - if successful - accelerate both revenue and earnings growth further.

I am expecting CKGT to earn at least $0.60 per share in 2010 and a conservative multiple of 8x earnings seems achievable. Financing measures for the planned expansion in more products and markets could lead to dilution, although the company's cash position is sufficient for the current business. Should the company's execution go as planned in 2010 it seems likely that CKGT will be eligible to uplist to a major exchange without a reverse split.

My price target for CKGT is $4.68.

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China Model Portfolio
posted by The Traveller on Thursday, November 26, 2009

I have set up a model portfolio with US-listed Chinese small and mid cap stocks. The concept is very simple: I am trying to identify companies which are profitable, financially sound, and who will likely have strong and sustainable growth in the coming quarters and years. If I consider such a company undervalued by the market I will add them to the portfolio under the assumption that Chinese stocks will not for much longer being treated inferior to the general US-listed company and deserve multiples around their industry's average.

Basic Portfolio Rules:

  • New positions are added with a mid- to long-term investment horizon. This is not a trading or swing-trading portfolio.
  • New positions will only be added on weekends at Friday's closing price.
  • All positions will be re-evaluated only on weekends and bought or sold only at Friday's closing price.

    Important: this portfolio is not an investment advice. You have to - especially with foreign stocks - do your own research and base your investments on your own, educated opinion. You should never invest all your money into one sector, industry or generally type of stocks (here: Chinese stocks). This portfolio is not a real money portfolio. I might personally own any, all or none of the portfolio positions.

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