Four Names for a China Stocks Trend Reversal

Shanghai, the leading stock market in mainland China, is on the verge of breaking the months-long downtrend. The Shanghai Composite Index has appreciated by 10.5% from the lows in early July and with rising volume it could be up for something big. U.S.-listed China small caps have also stabilized here with the big board China names performing better than the general U.S. markets in the past few days.

There is a good chance that momentum will find its way back to China stocks in the second half of 2010. I have picked four stocks that should benefit from such a scenario and outperform the sector into 2011. You can buy all four stocks for a 2010e P/E-ratio of less than 5, and they all have no exposure to exports (currency risks) and troubled industries as steel or real estate.

Skystar Bio-Pharmaceutical (SKBI) is currently trading at $6.00, down 40.60% for the year and down 49.80% from its March 31 high at $11.95. The Trading China Tracker Score is 9 (Buy).

SKBI is a Chinese producer of feed additives, animal health medications and vaccines. The company is on track to achieve EPS of $1.35 for the current year and analyst estimates for FY 2011 go from $1.64 to $1.75 for 25% EPS growth. The stock is currently trading at year lows with a 2010e P/E of just 4.5. Both Hudson Securities and Rodman & Renshaw have the stock BUY rated with price targets of $14 and $15.

Universal Travel Group (UTA) is currently trading at $5.99, down 40.93% for the year and down 45.10% from its March 5 high at $10.91. The Trading China Tracker Score is 10 (Buy).

UTA is an online travel service, selling plane tickets, hotel reservations and packaged tours in China. The company's guidance for the current fiscal year calls for EPS in the $1.35-$1.40 range which leaves the stock with a P/E ratio of just 4.3. Current weakness can be attributed to a cut in ticketing commissions by the big Chinese airlines, which might have an impact of 10-15% on UTA's bottom line. Brean Murray rates the stock a BUY with a $12 price target, already accounting for lower commissions.

ZST Digital Networks (ZSTN) is currently trading at $4.57, down 47.84% for the year and down 55.98% from its March 12 high at $10.38. The Trading China Tracker Score is 7 (Hold).

ZSTN is a supplier of IPTV devices to cable system operators in China. The company reported a disappointing first quarter - the reason why the automatically generated Trading China Score is only at 'Hold' level - but reiterated full year guidance of $13-15 million net income for 2010. That calls for EPS of $1.15 this year and a current P/E-ratio of 3.9. Rodman & Renshaw believes EPS will rise by 32% to $1.52 in 2011 and rates the stock with OUTPERFORM and a $14 price target, which means ZSTN has more than 200% upside from current levels.

Telestone Technologies (TSTC) is currently trading at $9.31, down 53.08% for the year and down 58.07% from its February 23 high at $22.20. The Trading China Tracker Score is 10 (Buy).

TSTC is a supplier to the telecom industry in China, customers are the three large nationwide networks. The stock is under heavy pressure since the March filing of a $150 million shelf offering. However, it is very unlikely that more than a small portion of this sum will be raised anytime soon, with a chance of the company withdrawing the whole shelf. Checks indicate that TSTC doesn't need to raise equity to fund operations or for working capital needs. TSTC is expected to generate EPS of $1.90 this year and grow EPS by 35% to $2.57 in 2011. The stock is currently valued with a P/E of 4.9 and Roth Capital rates it a BUY with a $20 price target.