Excellent Buying Opportunities

Last week we saw a broad sell-off in US-listed Chinese companies with the average stock as measured by the Emerging Chinese Small Caps Index dropping about 15%. While OTC-listed stocks were holding up relatively well - our China OTC Index is about flat for the year - we saw the biggest declines in Chinese stocks listed on senior exchanges. Our China Main Index is down a staggering 13.3% year-to-date and closed Friday at new year lows. I believe value investors should now focus on those bigger names in the China small caps space as the depressed price of many of those stocks presents excellent buying opportunities, both for swing traders looking for a bounce and long-term growth-oriented investors who can now gobble up quality stocks at a fraction of their former valuations.

Even if Chanos, Faber and Rogoff are right about an inflated Chinese real estate market and a more or less imminent correction there, many of the US-listed Chinese names should continue to show impressive results and deliver on their promise of high growth in the quarters and years to come. Before I will present you a few ideas, let's have a more detailed look at last week's damage. I will focus solely on Nasdaq, NYSE and Amex stocks in this article, but you will find many more stocks on the OTC.

Stocks that printed a new 2010 low on May 6 or May 7: ABAT, ADY, AMCF, AOB, APWR, BEST, CADC, CAGC, CALI, CBAK, CEU, CGA, CHGS, CHLN, CMFO, CMM, CNTF, COGO, CPSL, CREG, CRIC, CRTP, CSKI, CSR, CTC, CVVT, CWS, CXDC, DEER, DGW, DHRM, FEED, FUQI, GFRE, GRRF, GSI, GU, HOGS, HPJ, HQS, JRJC, NEP, NKBP, ORS, RCON, RINO, SIHI, SKBI, SORL, SUTR, TPI, TRIT, TSTC, TXIC, UTA, VISN, WATG, WH, WUHN, XIN, YONG, ZSTN

Stocks that have retreated 50% or more from their 2010 highs: AMCF, APWR, AUTC, CADC, CAGC, CALI, CBAK, CDII, CEU, CGA, CHGS, CHIO, CHLN, CJJDD, CMM, CNAM, CNET, CNTF, CREG, CSKI, CSR, CWS, DGW, FUQI, GFRE, GRRF, HPJ, KNDI, NEP, ONP, ORS, RINO, SBAY, SCOK, SIHI, SUTR, TBV, TPI, TRIT, TSTC, TXIC, VISN, WATG, WUHN, ZSTN

You can sort through more detailed numbers on our new performance screen.

Now let's have a look at some individual stocks. We want to avoid unnecessary risks now with so many stocks trading at depressed levels, so we will ignore the following sectors that are related to a possible real estate "bubble" and look more vulnerable to more tightening measures by the Chinese government: construction, steel, finance, real estate, exporters and utilities.

China Armco Metals (CNAM)

The stock is down 59% from its March 5 high at $11.10 and trading 30% below the level of its recent equity offering at $6.50. The development of Armco's business is extremely positive and the company guided for net income to exceed $12 million in FY 2010 which translates into 2010e EPS of about $0.85 with all signs pointing at sustainable strong growth in the years ahead. The stock is trading at a P/E of 5 and offers a tremendous buying opportunity at current levels.

Skystar Bio-Pharmaceutical (SKBI)

Skystar lost more than 30% from its January high at $12 and is trading in the low $8 range at the time of writing. The stock price is depressed for a long time already as the company has announced to reorganize their business to include a new product segment, resulting in low growth rates for 2010. But what investors tend to forget is that SKBI's business should take off in FY 2011 and that is not so far ahead as it seems. Rodman & Renshaw's quite ambitious expectations call for SKBI to earn $2.51 per share in 2011 which would mean you can buy the stock now for just roughly 3x 2011 earnings.

SinoHub (SIHI)

Their new contract manufacturing business for mobile phones seems to be taking off now. The company expects to reach full capacity utilization by June and guided for 40% revenue growth in 2010. SIHI reported EPS of $0.48 for 2009 which gives it a trailing P/E of 5 at current levels. The stock is currently trading at 2008 levels and with 20% EPS growth in 2009 and projected 40% revenue growth in 2010 this seems plain silly. The one analyst I know of, Canaccord Adams, has a $6 price target on the stock.

Rino International (RINO)
Tri-Tech Holding (TRIT)

I have talked about both these water companies a lot already, yet their stock prices keep falling. RINO and TRIT are now trading 59% and 57% below their 2010 highs, respectively, and valuation is down to 7-8x 2010 earnings. Yet both companies are very well positioned to benefit from the massive government programs dealing with two of the most dramatic problems China is facing today: pollution and urbanization. Three analysts are covering RINO with Buy ratings and targets between $34 and $40. Piper Jaffray initiated coverage on TRIT in late April with a price target of $20.

ZST Digital Networks (ZSTN)

ZSTN has been beaten down with the whole telecommunications sector (TSTC, GRRF), but I believe this is not at all justified. Analysts (Rodman & Renshaw) are calling for 2010e EPS of $1.20 and 2011e EPS of $1.52, but it seems the market is not believing them or the company's own guidance as the stock is currently trading below $6. ZSTN is expected to report Q1/10 earnings on May 13 and the first quarter is usually the weakest due to the Chinese New Year holidays and other factors. If you are risk avoidant you want to buy this after earnings have been released and the company reaffirmed its 2010 guidance for net income between $13 million and $15 million.

Overall the China Small Caps sector provides many excellent buying opportunities here. There is of course no guarantee that the current correction in the general markets and especially in more risky US-listed emerging market stocks will not continue next week, but as a value investor you might find yourself thrilled with being able to buy high growth stocks at such low valuations now already. Greece and Portugal, the European currency, the Chinese real estate markets and a possible revaluation of the Yuan have little or no impact on those companies' growth prospects. If you don't believe in doomsday scenarios like a double-dip recession triggered by a breakdown of the Euro or a massive crash in China, then you shouldn't be afraid of putting some money to work here.

Most of the companies mentioned here will report Q1/2010 earnings over the next two weeks and in many industries the first quarter will be impacted by seasonal effects like cold weather and the Chinese New Year break. You might want to wait until the companies you are watching have reported their numbers, but given the current valuations you might find yourself buying in at a much higher level then.