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.

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