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.

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