Emerging Chinese Small Caps Index
posted by The Traveller on Sunday, April 18, 2010

The China Growth Stocks Board (formerly called Emerging Chinese Small Caps) is what I consider the best-managed message board for China Small Caps investors, and its focus is on value growth stock trading and investing. And that's exactly what this blog is about as well.

Back in November last year the CGS board decided to collect everyone's favourite long-term picks and turn the collective wisdom of the board into a stock index, the CGS (ECSC) Index. Every stock in that index was weighted by the number of individual lists it appeared on, so the final index did accurately represent the opinion of the CGS board at the time of inception (November 27, 2009).

It is important to know that those individual lists were not meant to include momentum or short-term picks, instead every CGS member was asked to name those 10 stocks that they considered most promising for the next twelve months: long-term value investments based on growth prospects and fundamental value and unrelated to short-term market developments.

Since inception the CGS (ECSC) Index has outperformed all possible comparables by a wide margin. The average return for the initial 15 stocks that made up the index is 43.96% since November 27, 2009. 13 stocks have gained from 2.7% (CCME) to 164% (LLEN), one is unchanged (CNYD) and just one stock (CSGH) is down. To put these 43.96% into perspective: the general US market as measured by the S&P 500 has gained 9.22% in this period, the average China Small Cap as measured by the Claymore China Small Cap ETF (HAO) is up 7.89%, and the Chinese domestic market in Shanghai (Shanghai Composite) gained a measly 1.09%.

We have decided to revise the index quarterly, always in the week after the deadline for quarterly and annual reports. And last week was the first revision (the deadline for delayed annual reports is April 15). As the China Growth Stocks Board received a lot of attention since last fall and attracted many new members, the number of individual lists more than doubled from November and the revised index is possibly even more influential.

New Additions after April 16 Revision:

BioPharm Asia (BFAR.OB)
China Ceramics (CCLTF.OB/CCLWF.OB)
New Energy Systems (NEWN.OB)
Renhuang Pharmaceuticals (RHGP.PK)
Sino Agro Food (SIAF.PK)
Skystar Bio-Pharmaceutical (SKBI)
SOKO Fitness & Spa (SOKF.OB)
Yongye International (YONG)

Returning Stocks:

Biostar Pharmaceuticals (BSPM.OB)
China MediaExpress (CCME)
China Kangtai Cactus (CKGT.OB)
China Yida Holding (CNYD)
China Sun Group (CSGH.OB)
Longwei Petroleum (LPIH.OB)
Lotus Pharmaceuticals (LTUS.OB)
China North East Petroleum (NEP)
Puda Coal (PUDA)
Telestone Technologies (TSTC)

Dropped from the Index:

China Power Equipment (CPQQ.OB)
China Recycling Energy (CREG)
Gulf Resources (GFRE)
L&L International (LLEN)
Yuhe International (YUII)

It should be noted that those five stocks that are no longer on the index have performed very well in the past 5 1/2 months. LLEN is up 164%, CREG +68%, YUII +58%, GFRE +33% and YUII +7%. The most likely reason why those stocks are no longer on the index is price appreciation and not that they have been bad picks.

Labels: , , , , , , , , , , , , , , , , , ,

Short Earnings Round-Up
posted by The Traveller on Sunday, April 18, 2010

Huifeng Bio-Pharmaceutical (HFGB) reported revenues and net income at the high end of their February guidance. Gross margin improved by 182 bps to a healthy 36.69%. The company seems well on track to achive their 2010 net income target of $5 million and has a forward P/E of barely 5 at current levels. Huifeng did not publish a press release.

New Energy Systems (NEWN) announced financial results in line with expectations: $6.4 million in adjusted net income on $26.4 million revenues. However, NEWN's 2009 numbers do not include any revenue or profits from the two major acquisitions, Anytone and NewPower. The company reiterated its 2010 guidance of at least $15.6 million net income or EPS of $1.23 based on 12.6 million fully diluted shares. This guidance calls for 67.5% net income growth based on pro forma consolidated 2009 net income of $9.3 million as stated in the 10-K filing, and the company has a very healthy balance sheet with no further dilution to be expected for 2010. With a forward P/E of 6.7 New Energy is trading well below its peers and with a Nasdaq listing being a safe bet for Q2/Q3 the stock should appreciate significantly from current levels. I see this one as a clear buy below $10.

China Kangtai Cactus Biotech (CKGT) reported 2009 EPS of $0.43 on very healthy gross margins at 40%. Their 2010 guidance calls for more than 30% growth and we can expect the EPS number to rise to $0.60 for the current year. With a price-to-earnings ratio of just 4.x the stock is still very cheap here and I view it as a China Small Caps core holding.

GC China Turbine (GCHT) reported their first ever quarterly profit but failed to publish a press release with their annual report. That is surprising given the slew of press releases the company put out in the First Quarter. Should the company decide to promote their numbers next week and possibly reiterate their very ambitious business plan, the stock price should take notice. Q4/2009 was the first one in GCHT's history with significant wind turbine sales. My calculations point to $2 million net income for the quarter or $0.03 per share. GCHT stated that 16 1.0 MW wind turbines were sold in 2009, that it started mass production in the second half of 2009, expects sales during every quarter of fiscal 2010, and has a current backlog of 140 such turbines.

That was a short round-up of earnings releases from our China Model Portfolio positions. I will post about other very interesting developments in last week's annual reports (CFMI, CSOL, CHBU) later today if I find the time.

Unrelated to earnings... our portfolio position China Electric Motor (CELM) reached my target price of $8 last week. The stock showed exceptional strength in a weak market and reached a new all-time-high on Friday. However, according to the portfolio rules our CELM position has to be closed now. I am selling 1000 CELM at Friday's close of $8.16 for a profit of $3,180 or 63.85%.

Labels: , , , , ,

Late Filers Set to Report This Week
posted by The Traveller on Wednesday, April 14, 2010

A large number of Chinese Small Caps, mostly OTC-traded companies, filed an extension to their annual reports by the end of March. All of them are now set to report by April 15, and there might be some good opportunities coming out of this. Remember that many of the following companies do not have a history of publishing a press release with earnings, so it would be wise to monitor SEC filings in the next 2 days.

Asia Cork (AKRK.OB)

Manufacturer and distributor of cork and cork products. I am expecting EPS of $0.09 for the year. Watch out for more detailed growth plans (incl. acquisitions) and news about the planned share offering. I like the stock at current levels.

BioPharm Asia (BFAR.OB)

The company is selling traditional Chinese medicine and other drugs. Very cheap at current levels, the company reported EPS of $0.15 in the last two quarters alone. High growth rates in the past two years. Watch out for hidden guidance in the 10-K as there probably won't be a press release.

China Growth Development (CGDI.OB)

CGDI owns six shopping malls and plans to acquire more. Consistently profitable and trading below book value. This one could double with a good report. Watch out for leasing rates, expansion plans and operating costs (power and heating).

China Agri-Business (CHBU.OB)

Sells organic fertilizer and bactericides to Chinese farmers. Plans to establish their own direct sales network. Stock rallied last week, about doubled for the year, so be careful here. There are faster growing companies in the sector, I'm not a fan here.

China 3C Group (CHCG.OB)

Electronics retailer in trouble. Promised to do everything necessary to turn the business around. Trading below cash at current levels. A return to profitability or just positive 2010 guidance would make this a clear buy at current levels below $0.50.

China Carbon Graphite (CHGI.OB)

After a TheStreet.com induced hype in March the stock fell back below book value. I'd like to see them reporting well above $1 million in net income for the Fourth Quarter, which could bring CHGI back on the radar screen of many traders.

China Industrial Waste Management (CIWT.OB)

Expect the filing for this one in a few hours as the company announced a conference call for later this morning. A very important industry for China, but the whole sector is underperforming so far this year. Not cheap based on past numbers, it all depends on future guidance.

China Kangtai Cactus (CKGT.OB)

One of my favourite picks in the China OTC space. Very cheap, high growth rates, several promising business segments, but apparently many US investors are only reluctantly investing in a cactus farmer. I'm confident that they will deliver this week.

China Organic Agriculture (CNOA.OB)

CNOA has several seemingly unrelated business segments in the agricultural/food area. Their newest one is blueberries. Just watch out for bottom line numbers, the stock is very liquid and many people are waiting for the annual report to jump in (or not).

China Shuangji Cement (CSGJ.OB)

The stock doubled over the past few weeks and I believe that this one has to report way above expectations just to keep its current levels. It doesn't have a history of doing so, but I am looking forward to getting surprised for once.

GC China Turbine (GCHT.OB)

Wind turbines manufacturer just coming out of development stage. Their press releases with project agreements have been frequent, their guidance is astronomical, any reassurance that their business plan will be achievable could propel this one to much higher levels.

Huifeng Bio-Pharma (HFGB.OB)

Huifeng supplied the pharmaceutical industry with rutin and related plant-derived chemicals. The company issued very bullish guidance in February and is very cheap at current levels with a P/E of less than 5. Also plans to uplist this year. Watch out for guidance confirmation.

Jade Art Group (JADA.OB)

They are selling jade. We hear nothing from the company outside of earnings filings, so key here is to watch out for new sales contracts, and ideally for new customers. If they report any of that the stock should trade much higher, if not then I would avoid it here.

New Energy Systems (NEWN.OB)

Lithium-ion battery producer on the verge of uplisting to Nasdaq. Crazy cheap here compared to its peers. We get the first consolidated earnings report with their two big acquisitions. Expectations seem to be low.

Songzai International (SGZH.OB)

Another one of those Chinese companies that leave shareholders in the dark most of the year. A coal miner that was ignored in the Chinese coal rally. Huge potential with a good 10-K, even bigger potential with reignited uplisting chatter.

Labels: , , , , , , , , , , , , , , ,

RINO International - Highest Short Interest in the Street
posted by The Traveller on Sunday, April 11, 2010

Remember the Copenhagen climate conference last December? China has committed to the "binding goal", written into China's social and economic development plans, to lower its carbon dioxide emissions per unit of GDP by 40 to 45% by 2020 compared to the 2005 level. Rob Bradley, Director of the International Climate Policy Initiative at the World Resources Institute, testified last Friday before the US-China Economic and Security Review Commission that "China has shown no signs of walking away from these commitments. Rather, it has taken substantive action to reaffirm and move forward on them."

And there is more to China's environmental problems than emissions and the need for clean energy:
Wastewater treatment has always been one of the main environmental and infrastructural problems China is facing. Parallel with the population increase wastewater related problems shows increasing tendency. Statistics shows China generated 55.7 billion tons of wastewater in 2007, of which municipal wastewater and industrial wastewater account for 55% and 45% respectively. It is expected that total wastewater will continue growing due to rapid urbanization and industrialization, to reach 64 billion tons in 2010.

The 11th five-year plan seeks to control water pollution by raising sewage treatment and water reclamation rates, especially in the arid cities of the north, resulting in a large demand for related technology and equipment. During the 11th five-year plan period (2006 to 2010), the Chinese government is estimated to have made a total of RMB 1.4 trillion investments in the environmental protection industry. Of this, some RMB300 billion went to investments in sewage and water reclamation projects, and RMB100 billion for rehabilitation of the water supply network and infrastructure.
(Source: China Water Congress 2010)

As I wrote in a recent article about Tri-Tech (TRIT), the Chinese government has dedicated an estimated 1.35% of its gross domestic product, or approximately $205 billion, to environmental protection.
According to the 2009 Chinese Government Annual Report announced by Primer Wen Jiabao, the Chinese government will continue to focus its efforts on environmental protection in 2010. To improve its environmental management, and municipal sewage and solid waste treatment in key areas, China will increase its daily sewage treatment capacity by 15 million cubic meters and its daily solid waste treatment capacity by 0.06 million tons in 2010. Based on an average construction unit cost of RMB 1300 per cubic meter of treatment capacity, we believe that total spending on sewage treatment will reach RMB 19.5 billion.
(Source: TRIT 10-K)

If we look at the sector performance within the China Small Caps group we find a quite astonishing development. Coal Stocks are by far the biggest gainers this year with an average gain of a whopping 124.76% YTD, while Clean Energy Stocks are amongst the biggest losers with an average loss of 9%. There are plenty of opportunities for long-term investors in the Clean Energy sector at the moment, the whole range of industries from energy recovery to solar and wind power and alternative fuel is available for patient investors at attractive prices right now.

But I want to focus on the biggest losers in the China Small Caps space so far this year: Waste and Water Treatment Stocks. The group is down more than 11% year-to-date and the three biggest players, Duoyuan Global Water (DGW), RINO International (RINO) and Tri-Tech Holding (TRIT) are down 24%, 28% and 27% respectively. And this is where I believe you should keep your eyes on now.

I've made the case already for Tri-Tech, so let's look at RINO today which seems to have fallen completely out of fashion. The stock is sitting on the $20 mark, down 43% from its December high at $35.15 and back to the level where it traded most of February. It's fairly easy to find a reason for the drop: the company reported fully diluted 2009 EPS of $2.22, which translates into a trailing P/E of 9, but expectations for 2010 are low with no income growth and only EPS of $1.90 due to the higher share count.

That sounds bad, but as I pointed out before there should be plenty of business out there for RINO and peers, for 2010 and many years ahead. Given the huge environmental problems the country is facing with water supplies and especially wastewater treatment it is unthinkable that public spending in the area will be cut, quite the opposite. As Rodman & Renshaw pointed out in their latest note, RINO failed to communicate their prospects properly:
Today’s earnings call left a lot to be desired. We believe management needs to revisit the manner in which it communicates with investors. Much useful information that could have provided comfort to investors over the company’s prospects in 2010 and beyond, in our opinion, could not be effectively discussed.
(Source: Rodman & Renshaw, April 1, 2010, Outperform, Target: $40)

I would expect the company to announce new contracts throughout the year which should lift the stock back to its highs at some point. There might be further short term weakness due to the lack of immediate catalysts, though. But here's why I am adding a full position to the China Portfolio today. RINO has the highest short interest of all Nasdaq stocks, a staggering 60% of the float is short. This is the setup for a massive short squeeze with the next positive company development, and as I pointed out: the future for this industry is bright!

Adding 500 RINO at Friday's close of $20.00 with a 6-12 month target of $35.00.

Labels: , , , ,

Introducing the Score Portfolio
posted by The Traveller on Sunday, April 11, 2010

Seven weeks ago I have started an experiment! All the 200+ China Small Caps in our China Tracker are getting a SCORE assigned. The Score is computed automatically and based only on past numbers that were reported by the company in SEC filings. The idea is to track the fundamental strength of a company by assigning it Score Points if it met certain criteria in the always latest quarterly or annual report. Most important for the final Score though are the current growth rates, both sequentially and annually, for revenue and net income, and the current ratios for price-to-earnings, price-to-book and price-to-sales.

There are several problems with that approach which I will cover later in this post, but for now let's picture the ideal company that would get the highest score. It would have a small number of shares outstanding, a good amount of cash on the balance sheet, no problem with collecting receivables, and insignificant long-term debt. Sequential revenue and net income growth would be at least 10% and annual growth greater than 30%. For annual sales and net income I use a projection from the always last two reported quarters to better reflect short-term developments. The ideal company would have a P/E ratio in the single digits and a Price/Sales and Price/Book ratio below 1.25. All the details of how the Score is determined can be found here.

To test the validity of this approach I have started a Score Portfolio on February 19. The theory is that growth stocks with a higher Score will outperform their peers and the general markets. All transactions in the Score Portfolio happen automatically at the close of every trading day. The portfolio started with $100,000 capital and 20 equally weighted positions of $5,000 each.

The biggest changes in a company's Score can happen when a new set of data is added, means when a new quarterly or annual report is filed. Outside reporting season the only thing that moves the Score is price action. When the stock price goes up all of the ratios as P/E or P/B will go up as well which could lead to a lower Score. The Score Portfolio is revised at the end of every trading day. Every stock with a Score of 6 or less at the end of the trading day is automatically removed from the portfolio at the closing price. A new position is added immediately after this if the cash balance of the Score Portfolio is $5,000 or higher and there is at least one stock that has not yet been added with a Score of 8 or higher.

Now after seven weeks we can make a first evaluation of the Score Portfolio. Since February 19 the portfolio value has climbed by 27.86% to $127,868, it has outperformed both the general markets (S&P 500: +7.68%) and the Chinese Small Caps Sector by a wide margin. Further encouraging is that most of the closed positions, stocks that have been automatically sold as their Score dropped due to price appreciation, are now trading significantly lower than when we sold them. All in all this is an excellent start for this experiment.

However, a company's Score does not always accurately reflect fundamental strength. If you would want to make an investment decision solely based on Score then I would strongly encourage you to first look at every individual company in detail. That Score seems to work for a group does not mean it works for every individual stock and here's why:

The Score criteria are the same for every company in every industry, but certain industries are highly seasonal and it is totally normal if sales and earnings do not show sequential growth every quarter. Negative sequential growth will lead to a lower Score even if year-over-year growth is stellar. You should also remember that Score is based only on quarterly and annual reports (6-K, 10-Q, 10-K). It does not reflect any of the following events that might have been announced outside of those filings: dilution (secondary offerings, warrants redemption, debt conversion), announced restatements of past filings, earnings warnings or company guidance, and many more.

Basically all current events that might be highly relevant for the performance of a stock but have not yet been filed in a quarterly or annual report, or that are not reflected in any of the data used for computing the Score, will have no impact on the Score. A good example for this is current Score Portfolio holding Fuqi International (FUQI), which is down 30% since it announced accounting errors and upcoming restatements. FUQI still has a high Score of 11, which might be misleading as there have been no new reports filed with the SEC since the announcement which led to the sell-off.

Labels: , ,

China Model Portfolio Changes
posted by The Traveller on Sunday, April 04, 2010

Biostar Pharmaceuticals (BSPM.OB) reported good numbers last week and raised revenue and income guidance for FY 2010. However, during the conference call it became clear that the company will do a public offering soon and the share count might increase by 6 million this year. The stock is cheap here but I am lowering my target slightly from $8.20 to $7.80 or roughly 12x expected EPS for 2010. I believe Biostar is a must hold at the current level and Thursday's pullback is unwarranted with an uplisting being expected for the next six weeks.

China Electric Motor (CELM) reported their first quarter as a public company last week. The company delivered good numbers and very nice guidance with net income of $18.5 million (midpoint of guidance) expected to increase by 60% over 2009 numbers. However the share count has risen much faster and higher than I have expected. With 20.7 million shares outstanding as of March 29, that 60% increase in net income would not translate into any EPS growth. That's not what investors want to see. I'm reducing the target for our China Model Portfolio position from $10 to $8 or roughly 9x expected EPS for the current year.

Lotus Pharmaceuticals (LTUS.OB) disappointed investors with a lousy guidance and the stock sold off hard on Thursday. The company expects EBIT to grow by 15-20% this year and while the stock is very cheap here I do believe that this kind of growth does not justify high multiples. I am reducing the price target for our portfolio position from $3.60 to $2.70 or roughly 6x 2010 EPS. I am fully aware that this is a very low multiple but it was back in early 2007 when LTUS has last seen such a price level.

Orient Paper (ONP) was one of the best performing stocks overall in 2009, not just among the China Small Caps. The stock barely missed our target price of $14.50 this winter and unfortunately we lost out on big gains, instead find our portfolio position now in the red. One main reason for the lousy performance this year is the dramatic rise in shares outstanding. The share count rose from 11.3 million at the beginning of 2009 (split adjusted) to now 18.3 million after the recent offering. The offering price of $8.25 could be the floor for the stock and I've decided to keep it in the portfolio for now but reducing the price target from $14.50 to $12.00 based on 12x my projected 2010 EPS of $1.00.

L&L Energy (LLEN) is one of the biggest winners in the small cap China space this year, and the stock is rapidly approaching my price target of $13. It seems overbought at current levels and - with ONP in mind - I have decided to take action and reduce our LLEN position from full to half, raising the price target for the remaining 750 shares from $13 to $15. Selling 750 shares from the China Model Portfolio at Thursday's close of $12.23 for a 98.86% gain or $4,560.

Labels: , , , , ,

Five Forgotten Book Value Plays
posted by The Traveller on Sunday, April 04, 2010

There are many OTC-traded Chinese micro caps hardly anybody has ever heard of. Some of them might be ready for big rewards later this year and follow the likes of JADA and CCGY. I've compiled five of the most promising stocks that currently trade far below book value. Please keep in mind that all of those bear significant risks and you should only invest a small part of your portfolio in this group.

Sino Gas International Holdings (SGAS.OB)
Current Price: $0.95 | Book Value per Share: $2.05 (115.8%)

Sino Gas owns local natural gas distribution networks in small and medium-sized cities in China. The company earns money from connection fees and the resale of natural gas it acquires from large state-owned companies. For 2009 Sino Gas increased revenues by 28.64% from 2008 levels, connected 32,681 new customers to their network and sold 21% more gas. Gross margins were stable in the 34% range overall and up to 72.3% for the connection fees. Net income improved by 152.9% from 2008 fully diluted EPS was $0.14 (FY 2008: $0.05).

The stock is currently selling below the value of their biggest asset, the pipelines. Those are not yet connected to the main China pipelines and the company has to refill their storage tanks with gas from trucks. To change this SGAS wants to build upstream connections as soon as possible and this will require a lot of money. The company also plans to build more local distribution networks (more funds needed) and while all those plans will eventually lead to higher margins and growth it is very likely that SGAS will have to access the US capital markets more than once to finance all of this.

China Growth Development (CGDI.OB)
Current Price: $0.43 | Book Value per Share: $0.83 (93.0%)

CGDI owns six shopping malls in Taiyuan City (twin city of Nashville, TN), the capital of Shanxi province with a population of about 4 million. The company is generating revenues from management services and leasing commercial space within these malls. The 2009 annual report is not yet filed but for the first nine months of 2009 the company reported a 6% increase of revenues but a 16% decrease of net income compared with 2008. Lower income was caused by a much higher tax rate which caused income tax expenses to increase by $1 million for the first nine months.

For the next 3 years the company plans to acquire 2 additional shopping centers. The value of their current malls is with ~$80 million much higher than the market capitalization ($15 million). The success of CGDI's business model depends basically on domestic consumption and all indicators point to the Chinese consumer to spend money at a record breaking pace with no signs of a slowdown. There might be some problems with an urbanization project of the Taijuan City Council that involves most of CGDI's operations, we should learn more about the possible impact with the upcoming annual report.

Shengtai Pharmaceutical (SGTI.OB)
Current Price: $1.50 | Book Value per Share: $2.46 (64.0%)

Shengtai is the market leader for pharmaceutical grade glucose in China with about 40% market share. The company also produces other corn-based products for the food and beverage industry. For the most recent quarter SGTI's revenues increased by 92.7% and the company posted a net income of $1.05 million or $0.05 per share, compared to a loss in the 2008 period. Gross margins increased slightly despite higher corn prices. Corn is the raw material for practically all of SGTI's products and high corn prices from increased demand for the alternative fuel production are the biggest cost factor.

Asia Cork (AKRK.OB)
Current Price: $0.39 | Book Value per Share: $0.55 (41.0%)

Asia Cork is a Xi'an based manufacturer and distributor of cork and cork-based products as cork floors. The company is a cost leader in the industry and plans to substantially increase production capacity (also through acquisitions) and sell their products in China and internationally by their own sales network. To finance all that AKRK has currently a big share offering open which will lead to significant dilution of current shareholders but rewards could be huge.

The annual report is delayed because of the offering but for the most recent quarter the company reported revenues increasing by 13% offset by higher selling expenses (36%) which lead to a 12% decrease in net income. Still the company is set to report EPS of about $0.09 for the year, giving it a P/E ratio of just 4.x. AKRK expects higher revenues and operating margins for the fourth quarter and beyond. One possible risk for future earnings is that a Yuan revaluation might cut into Asia Cork's cost advantage and export margins.

China Runji Cement (CRJI.OB)
Current Price: $0.28 | Book Value per Share: $0.34 (21.4%)

China Runji is a cement producer in central China. It has a strong market position in its province and a secure supply of high quality raw materials for the next 40 years. The share price is depressed because the company has a huge liquidity problem and working capital deficit, although should the company be able to obtain new financing the business outlook is very promising.

For the most recent quarter CRJI reported net income of $1.2 million or $0.02 per share. For the yet to be reported fourth quarter of 2009 and beyond, the company's new waste heat power generator system will be in operation and is expected to save about $4.6 million per year in electricity costs, significantly improve margins and reduce reliance on outside power sources. China Runji is also entitled to receive a government reward of $880k for this environmental friendly project.

Labels: , , , , ,

OTC-listed China Small Caps Outperforming in the First Quarter
posted by The Traveller on Friday, April 02, 2010

OTC-listed China Small Caps Outperforming in the First Quarter

A couple of weeks ago I noticed that there is no proper way of tracking the performance of US-listed China Small Caps as a group. At least not in the way I want to track them. So I have created two China indexes, one for stocks that are listed on a national exchange (NYSE, NYSE Amex or Nasdaq) and a second one for OTC/BB-listed China stocks (not pink sheets). Each index is composed of the 40 stocks with the highest market capitalization in their respective groups.

The main index has a cap of $1 billion as most of the higher capitalized Chinese companies as PTR, SHI or all the solars have very different trading patterns and attract a very different group of investors. The most important requirement for both indexes is that all stocks included must have been profitable for at least the last two reported quarters. If a stock no longer meets all those criteria it will be removed from the index with the next quarterly revision.

If we now take a look at both indexes after the first three months we get very surprising results. OTC-listed China Stocks outperformed those listed on main exchanges by a wide, wide margin. The OTC Index is up a whopping 24.13% in the First Quarter with 25 of the 40 stocks posting gains. The Main Index however only rose by 3.17% since the start of the year, partly due to the huge sell-off in well-known China names last Thursday. 26 out of the 40 stocks dropped in price. To put these numbers into perspective: the general markets (S&P 500) are up 8% this quarter and China's main exchanges are higher as well, but just under 2% (Hong Kong and Shanghai). There has been significant accumulation in OTC-traded stocks in the last three months and if we look at Thursday's numbers (Main Index down for the day, OTC Index higher), this trend seems to continue.

Here is an overview of the First Quarter highlights:

Main China Index (NYSE, NYSE Amex or Nasdaq)
- 1031.71 (up 3.17% in the First Quarter)
- 14 stocks are up, 26 are down

Top Five
  • SinoCoking Coal (SCOK) +87.32%
  • China Agritech (CAGC) +64.44%
  • China Integrated Energy (CBEH) +48.86%
  • AutoChina International (AUTC) +42.44%
  • China Valves Technology (CVVT) +41.55%
Bottom Five
  • Fuqi International (FUQI) -39.11%
  • China Sky One Medical (CSKI) -32.66%
  • Telestone Technologies (TSTC) -24.00%
  • RINO International (RINO) -23.40%
  • China XD Plastics (CDXC) -22.66%
OTC China Index
- 1241.32 (up 24.13% for the First Quarter)
- 25 stocks are up, 15 are down

Top Five
  • China Swine Genetics (CSWG.OB) +153.16%
  • Jingwei International (JNGW.OB) +147.50%
  • China Jo-Jo Drugstores (CJJD.OB) +137.61%
  • China HGS Real Estate (CAHS.OB) +115.55%
  • L&L International (LLEN) +89.61%
Bottom Five
  • Changda International (CIHD.OB) -38.42%
  • China Organic Agriculture (CNOA.OB) -29.63%
  • Emerald Dairy (EMDY.OB) -28.34%
  • China Medicine (CHME.OB) -22.80%
  • China Kangtai Cactus (CKGT.OB) -22.51%
Quarterly Revision (Second Quarter)

Both China indexes are revised at the beginning of each quarter, actually on the first weekend of the quarter as I have time to process it then. Stocks that do no longer meet the requirements are being removed. Reasons could be posting a loss in the most recent quarter, uplisting to a higher exchange or just a huge decline in share price. Following is a list of all changes for both indexes.

Main China Index (NYSE, NYSE Amex or Nasdaq)

  • Century 21 China Real Estate (CTC)
  • China Hydroelectric (CHC)
  • China Lodging Group (HTHT)
  • China Recycling Energy (CREG)
  • L&L International (LLEN)
  • Shengkai Innovations (SHE)
  • Agfeed Industries (FEED)
  • China Education Alliance (CEU)
  • China TransInfo Technology (CTFO)
  • Noah Education Holdings (NED)
  • Telestone Technologies (TSTC)
  • Tiens Biotech (TBV)
OTC China Index

  • China Baicaotang Medicine (CNBI.OB)
  • China Environmental Protection (CNVP.OB)
  • China Linen Textile (CTXIF.OB)
  • China New Media (CMDI.OB)
  • China Shuangji Cement (CSGJ.OB)
  • China TMK Battery Systems (DFEL.OB)
  • China Gengsheng Minerals (CHGS, uplisted)
  • China Recycling Energy (CREG, uplisted)
  • China Runji Cement (CRJI.OB)
  • Huifeng Bio-Pharma (HFGB.OB)
  • L&L International (LLEN, uplisted)
  • Subaye (SBAY, uplisted)