Barron's Attack on Chinese Reverse Mergers

Barron's launched a strong attack on Chinese reverse mergers in a feature article this weekend. While the article is extremely biased as it suggests that all reverse mergers are bad investments, and questionable or even fraudulent activities of selected few companies can be safely transfered to the whole group of 200+ Chinese stocks that went public via reverse merger, the underlying sentiment that such stocks bear a higher degree of risk should not be taken lightly and the market will probably react accordingly.

This makes it now even more important for retail investors to proceed with their own due diligence and apply strict quality rules to possible investments. I have made a few suggestions for what to look at in a previous article (Checklist for Quality). If you find a stock with seemingly wonderful fundamentals and a ridiculously low P/E ratio then you might want to dig deeper to find possible reasons for the depressed share price. There are undoubtedly many Chinese stocks out there which got unfairly punished with the whole group and which do really trade at ridiculously low levels here. You want to find those with a level of assurance about reported numbers and credibility of management that makes you comfortable holding your positions through these volatile times. Simply put, if you have reason to question the credibility of a company - your own reason, not something you might just have snapped up from short sellers' inflammatory accusations - then don't get involved. Look for something else then.

Let's have a brief look at those stocks mentioned in the Barron's article this weekend:

China Green Agriculture (CGA) is currently trading at $10.65, down 27.56% for the year and down 36.42% from its March 9 high at $16.75. The Trading China Tracker Score is 3 (Hold).

Fertilizer company China Green has been mentioned for its relationship with questionable promoter Du Qingsong and his involvement in the 2007 reverse merger. Also for having retained Kabani & Co. as the company's auditor, a firm that Barron's singled out as an example of those "that certified the financials of companies that came to grief." While there are no current accusations against CGA in the article and most of the story focuses on 2007/08 events, Barron's mentioned CGA several times throughout the piece and it is very unlikely that the stock will be doing well when trading starts again on Monday.

Unrelated to the article, the stock wasn't doing too well on the Trading China Scorecard. It is relatively expensive compared to its peers and we have already marked the auditor as a negative. Out of four analysts following the stock, three give it a neutral rating. CGA might find itself re-testing the 2010 lows at $8.15 as early as next week.

China Integrated Energy (CBEH) is currently trading at $8.33, up 18.32% for the year and down 32.34% from its April 15 high at $12.31. The Trading China Tracker Score is 7 (Hold).

Bio-diesel maker CBEH is mentioned in the same context as CGA, with Du Qingsong being indirectly involved in the 2007 reverse merger. However, the company has matured since going public, doesn't seem to have any involvement with Du as of today, and the stock has relatively strong analyst backing. All four firms that cover the stock give it a positive rating with an average price target at $11.83. CBEH is not exceptionally cheap here and with Sherb & Co. it doesn't have an auditor which meets the Trading China quality standard for a $360 million company. I would not be too worried here, but there are better deals out there in the China space so no need to aggressively pursue the stock on weakness.

China Natural Gas (CHNG) is currently trading at $5.27, down 52.61% for the year and down 52.66% from its March 10 high at $11.13. The Trading China Tracker Score is 6 (Hold).

Barron's mentioned CHNG for the serious accounting irregularities that surfaced last week and prompted Roth Capital to downgrade the stock to SELL and Rodman & Renshaw to put their rating under review.

"We believe CHNG's Q2 filings indicate worsening corporate governance and internal controls over financial reporting. In its 2Q10 Form 10-Q, the company disclosed additional actions that indicate continued governance and control weaknesses. It entered into a bank loan agreement in the amount of $17.7 million in February 2010 without reporting the bank loans in its consolidated balance sheet as of March31, 2010. In addition, the company acquired four natural gas fueling stations without BoD pre-approval on the final acquisition." (Roth Capital)

The company's auditor is Frazer Frost whose Asian-services partner commented according to Barron's that "every company has some deficiencies in internal controls." While that might be true, even understandable for a newly public company, I believe that risk-sensitive investors should think twice before taking on such an additional risk. I wouldn't touch this stock until all issues are resolved to everyone's satisfaction.

Deer Consumer Products (DEER) is currently trading at $7.79, down 31.13% for the year and down 39.80% from its March 2 high at $12.94. The Trading China Tracker Score is 2 (Hold).

Home appliance maker DEER has been mentioned for its involvement with Benjamin Wey, who Barron's calls "one of the most controversial promoters of Chinese reverse takeovers." The article states that "Wey's Website shows him flying with Deer's management in a private jet on the night before the pricing of a $75 million secondary offering." Again, there are no direct accusations against the company, and just a connection with a very influential Wall Street promoter doesn't make this a bad investment. However, with a forward P/E of 11 the stock is not cheap here, and buying it would be a bet on strong 3rd and 4th quarter results. The company said in their latest press release that it expects "record earnings in the second half" of 2010.

Agfeed Industries (FEED) is currently trading at $2.35, down 53.00% for the year and down 56.73% from its March 9 high at $5.43. The Trading China Tracker Score is -5 (Sell).

Pork producer Agfeed is also mentioned for their business connection with Benjamin Wey. Barron's said that "since our piece describing Wey's work for the hog farmer AgFeed Industries (FEED), the company has missed production targets and its shares have slumped from 15 to below 2.50." What the article fails to mention is that the missed production targets are hardly the fault of Wey or the result of any wrongdoings, but merely the result of a series of natural disasters in China.

"During the second quarter the Company faced an extremely difficult operating environment as a result of a series of severe floods throughout its area of operations. The floods led to significant operating disruptions on the Company's farms and on the transportation infrastructure supporting the operations. The movement of feed and live animals was severely disrupted. These factors led to the loss of over 16,000 live animals." (Source: PR Newswire, 2010-08-10)

All of this led to disastrous quarterly results and severely reduced short term prospects as FEED will have to repair the damaged infrastructure and it will take some time to get the business back to normal. That's why I do not expect the stock to recover soon and the Trading China score is reflecting my investment position very well.

Gulf Resources (GFRE) is currently trading at $8.60, down 26.25% for the year and down 34.38% from its March 8 high at $13.10. The Trading China Tracker Score is 12 (Strong Buy).

GFRE is mentioned in connection with Kit Tsui, who helped with the reverse merger. And Barron's claims that "trouble seems to haunt Tsui's deals." That is certainly true in regards to Orient Paper (ONP), but implying that any type of reverse merger would be automatically a bad deal is very irresponsible journalism. Short sellers will probably find out that next to Tsui, Orient Paper and Gulf Resources also have their auditor, BDO Limited (HK), in common. But that also doesn't make jumping to conclusions right. Cautious investors might want to stay away from GFRE just for the Barron's fallout. However, if you believe the strong numbers GFRE reported for the second quarter, if you believe in the excellent business outlook provided by the company and supported by analysts from Brean Murray, then you might want to buy this stock aggressively on any Barron's induced weakness.

Orient Paper (ONP) is currently trading at $4.34, down 58.59% for the year and down 63.07% from its April 26 high at $11.75. The Trading China Tracker Score is 16 (Strong Buy).

The Orient Paper saga is probably the most talked about event in the U.S.-listed China sector this summer, I don't have to summarize it here again. The Barron's article repeated the attacks on ONP started by Muddy Waters as an example for possible fraud that can be found within the group of Chinese reverse mergers. I still can not judge who is right or wrong here, but it is noticeable that Barron's chose to omit Orient Paper's side in the dispute and printed Muddy Waters accusations uncommented. There seems to be some bias here.

ONP is a prime example of why the Trading China Tracker Score should not be seen as a Buy or Sell recommendation. The ratings (Buy, Hold, Sell) that are posted next to the Score are automatically generated and should be interpreted according to the metrics that are used for calculating the Score only! And those metrics are basically financial data as reported with the SEC. If the data is questionable or subject to restatements then the Score can not reflect that. Additionally future developments can not be accurately reflected by the Score. In ONP's case, even if the company would be able to clear itself from all fraud accusations with an independent investigation, the cost of these initiatives will be significant - approximately a full quarter of earnings - and the future projections should be adjusted accordingly.

RINO International (RINO) is currently trading at $16.03, down 42.03% for the year and down 51.31% from its January 11 high at $32.92. The Trading China Tracker Score is 2 (Hold).

Rino's connection to the Barron's article is limited to the company being a Frazer Frost client and a statement that Rino "has had three auditors and four CFOs in the past four years, while restating its financials twice." Rino still admitted to material weaknesses in internal control over financial reporting in its latest 10-Q, but it has taken several steps to address these issues, including hiring a new Internal Audit Manager last month. Looks to me that Rino is on the right track and all three analysts covering the stock rate it a buy with an average price target more than 100% above current levels. The fact that Rino changed auditors and CFO's several times in the past few years may as well point to the company trying to strengthen their financial reporting, while restatements show that mistakes have been found and corrected.

SkyPeople Fruit Juice (SPU) is currently trading at $4.90, up 18.93% for the year and down 39.51% from its March 5 high at $8.10. The Trading China Tracker Score is 15 (Strong Buy).

SPU has been mentioned in connection with Andrew B. Worden when Barron's aggressively stated that "investors would be well advised to steer clear of stocks like those in the PIPE deals involving Andrew B. Worden's Barron Capital." What should worry investors more than this is last week's secondary offering that was priced at just $5 per share, a huge discount to market and a very shareholder unfriendly price at a time when most responsible companies have postponed their public offerings due to unfavorable market conditions. Management actions like this speak louder than P/E ratios or net income guidance as it doesn't seem that creating shareholder value is very high up on management's agenda.

China Stocks: Checklist for Quality

Many U.S.-listed Chinese stocks are currently priced with so very unreasonable forward multiples that the only possible conclusion for the low share price is that the market doesn't believe the numbers. You could argue that when numbers look too good to be true they can't be true. And there is undeniably a higher degree of risk involved with investing in Chinese small caps than with your average U.S. company. However, it is our strong belief that there is a large number of high quality China companies being unfairly punished by the market for the mistakes of selected few well-known names from the space.

For determining the quality of a stock it is not enough to look at reported numbers and published guidance. It is always a good idea to be sceptic and to do your very own due diligence before investing your money in a tiny company on the other side of the world, where you don't get any other first-hand information than what the company chooses to disclose to you. What matters is management credibility and trust in the reported facts and financial results. Here is a list of 10 criteria I consider important for determining quality in U.S.-listed China stocks.

1. Quality Auditor

As I pointed out in an earlier article, the quality of a company's independent auditor should be the most important factor for investor confidence and trust in the reported numbers. While I acknowledge that it is unreasonable for a tiny, newly-listed company to hire a Big4 auditor, I believe that with maturity of the business comes the responsibility to upgrade to a high or the highest standard. For now I have drawn a line at $200 million market capitalization where I expect all larger companies to have hired a Top10 or better a Big4 (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) auditor.

2. Analyst Coverage

This one is very important in my opinion, especially for foreign-listed Chinese companies. Having two or more analysts (I am not talking about IR firms like RedChip here) covering a stock gives investors a much enhanced transparency into a company's business. While the depth of the analyst research might vary and not all analysts will be completely unbiased, investors will be able to benefit from the due diligence of the research firm (or institutional investors) and management will get valuable feedback from analysts about deficiencies and possible problems, also what (institutional) investors want to see in regards of transparency, communication and earnings quality.

3. Active and Effective Communication with Investors

What I want to see is regular press releases with updates for investors, business outlook and timely reporting of material events. The very minimum should be a press release for quarterly earnings, preferably with a conference call following. Passive communication as in management or an investor relations firm responding to shareholder questions is all fine, but can't make up for the failure of management to actively communicate their story with investors.

4. Strong Independent Board of Directors

Many U.S.-listed Chinese companies, especially those that went public through reverse mergers, are controlled by just one or two majority shareholders. While many investors view high insider ownership as just a positive for a stock, I see it as a warning sign if the company doesn't have a strong and influential independent board and audit committee.

5. Effective Internal Controls and Procedures

U.S.-listed companies are required to report in their SEC filings on the effectiveness of internal controls over financial reporting and disclose any material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis.

6. Chief Financial Officer

A qualified, full-time CFO who is physically located at the company's headquarters and deeply involved in the company's day-by-day operations should be mandatory for any public company that reached a certain level of maturity. Many Chinese small caps hired English-speaking CFO's whose main job is U.S. GAAP reporting and investor communications, but who are not very involved with the company's actual business and spend a good time of the year outside of China.

7. Dilution and Equity Transactions

Two points have to be considered here. First a consideration of management for current shareholder interests when pricing equity offerings or private transactions. Pricing new shares at a very unfavorable price, close to a stock's 52-week low or with a steep discount to market, should raise a bright red flag. And secondly, multiple privately negotiated transactions that lack the transparency and due diligence of underwritten secondary offerings could be a warning sign.

8. Earnings-per-share Forward Guidance

I want to see company management's commitment to creating shareholder value by acknowledging that in the long run the only thing that matters is growing earnings per share. By providing forward EPS guidance additionally to revenue or net income guidance, management provides additional transparency and shows that shareholder interests are on their minds.

9. Limited Share-Based Compensation

Several companies in the Trading China universe have the bad habit of paying for every little, er.. type of service, with warrants or newly-issued shares. Pay attention to the frequency and number of shares that are being issued for 'consulting services', investor relations, management or external compensation and one-time events or 'exceptions'. As a shareholder you want management to have your interests in mind all the time and not to view stock as a cheap currency that is always preferable to available cash on the bank account.

10. Timely Reporting and Filing of Quarterly/Annual Reports

It doesn't stand for quality if a company has repeatedly filed NT-extensions with the SEC for their quarterly or annual reports. While I admit that there might be special circumstances that justify the one-time delay of an earnings report, those deadlines do not come as a surprise to management, and repeated offenses might indicate that a company is not well-prepared in their financial reporting which in turn increases the risk that there are deeper structural problems than the rather unimportant delay of a 10-Q filing.

Biostar and Gulf Resources

Biostar Pharmaceuticals (BSPM) is currently trading at $2.84, down 36.19% for the year and down 48.46% from its April 23 high at $5.51. The Trading China Tracker Score is 9 (Buy).

Biostar scheduled their Q2 conference call for Tuesday, August 17, but quarterly results are already out in a 10-Q filing. The company reported 46% revenue growth with 28% EPS growth year-over-year, overall solid results which confirm that BSPM is on track to earn about $0.65 a share for 2010. Biostar is still heavily dependent on sales of just one product, their Hepatitis B OTC drug 'Xin Aoxing' where the company generated 75% of the quarterly gross profit from. That makes the stock vulnerable from any possibly disruptive rumours regarding this product, as the temporary marketing ban in April. However, with a current P/E-ratio of 4.5 and new products in the pipeline, the stock looks attractively priced at current levels.

Gulf Resources (GFRE) is currently trading at $8.72, down 25.22% for the year and down 33.44% from its March 8 high at $13.10. The Trading China Tracker Score is 3 (Hold).

Chemical company Gulf Resources is one of the largest producers of bromine in China. The company has been aggressively acquiring new bromine properties in their region and plans to continue doing so for the foreseeable future. It has an open shelf for up to $120 million and the money is likely intended to finance further bromine purchases. GFRE's business is very profitable and the company had positive cash flow from operating activities of almost $40 million in 2009.

Gulf Resources announced preliminary second quarter results last week when they moved their conference call and 10-Q filing to tomorrow, Monday August 16. Those preliminary numbers look quite excellent:

The company announced net revenues to range between $43 and $46 million, 50% more than in the second quarter of 2009 and 18% higher than the analyst consensus of $37.5 million. For earnings the company predicted between $0.44 and $0.47 per diluted share, up 55% from 2009's $0.29 and beating analyst estimates of $0.34 by a staggering 30%. The stock is pretty much flat since the pre-announcement, however this might change with Monday's earnings call. Most investors seem to be afraid of the mixed shelf offering but I believe the company has proven that previous acquisitions have been highly accretive and generated shareholder value with significant EPS growth.

An article on Seeking Alpha this weekend speculates that Gulf Resources might itself be an acquisition target and that the delay of the 10-Q filing and conference call might be related to a possibly important announcement as the company's board might need that additional time to consider an offer. That is of course a wild guess from the author's side, but I do support the view that GFRE with its growth prospects, sizable cash flow and significant bromine resources would be a nice fit for a bigger player in the chemical industry.

Friday Earnings Round-Up

Lotus Pharmaceuticals (LTUS) is currently trading at $1.05, down 17.97% for the year and down 38.24% from its February 3 high at $1.70. The Trading China Tracker Score is 13 (Strong Buy).

Lotus had a very good quarter with 40% revenue growth and 32% net income growth year over year. Both numbers are higher than company guidance of 20-30% growth for the balance of the year. EPS rose from $0.10 to $0.12 on a 9% higher share count. Operating cash flow is looking good with $6.64 million generated in the second quarter. The stock is currently trading at a P/E of just 2.5. In late July the company announced they would complete the construction of their new building with internally generated cash and "consider alternative funding options and structures only when our stock valuation improves, in order to protect against stock dilution." That's what shareholders want to hear.

Yuhe International (YUII) is currently trading at $8.96, down 5.19% for the year and down 27.97% from its March 9 high at $12.43. The Trading China Tracker Score is 3 (Hold).

Broiler breeder Yuhe reported second quarter EPS of $0.19 vs. $0.13 last year and $0.18 analyst consensus. Revenues came in a tad light with $12.48 million vs. $12.89m estimates, still 27% growth over the year ago quarter. The company is well on track to reach its full year target of $17 million net income which translates into EPS of $1.05 and a current P/E-ratio of 8.5. Yuhe's strongest results will occur in the second half of the year, given the seasonality of the business and the fact that the new parent breeders that were purchased in early 2010 will begin to generate revenue in the fourth quarter of 2010.

China Natural Gas (CHNG) is currently trading at $6.64, down 40.29% for the year and down 40.35% from its March 10 high at $11.13. The Trading China Tracker Score is 2 (Hold).

China Natural Gas presented rather unimpressive Q2 numbers with revenue growth of under 2% and adjusted net income (excl. non-cash warrant charges) of $3.9 million vs. $5.2 million in the year-ago quarter. Considering that the share count has climbed by 46% within a year, second quarter results showed negative EPS growth of 48.7%... not good. CHNG did not reiterate their full year guidance in the press release, however it should still stand at $22-23 million net income. This would mean the company has to double their earnings in the second half of 2010 from the first six months, we'll see how that works out.

China Biologic Products (CBPO) is currently trading at $12.90, up 6.78% for the year and down 10.30% from its May 19 high at $14.38. The Trading China Tracker Score is 3 (Hold).

CBPO reported second quarter revenues of $40.9 million, up 23% from 2009 and slightly better than the $40.52 million consensus. Adjusted EPS came in at $0.40, up slightly from $0.38 last year and higher than analyst's calling for $0.36. China Biologic is on track to reach the upper end of their 2010 net income guidance, which means the stock is currently trading at a forward P/E of 9.2. CBPO should be fairly valued with a stock price in the low teens for the time being.

Sancon Resources Recovery (SRRY) is currently trading at $0.36, up 7.572% for the year and down 26.05% from its March 22 high at $0.48. The Trading China Tracker Score is 14 (Strong Buy).

Recycling company Sancon posted respectable Q2 results once again with EPS of $0.02 and a solid balance sheet. The company is steadily generating cash from operations and has now almost 60% of their current market capitalization in cash and cash equivalents. SRRY announced several growth initiatives in May and projected that their new waste paper collection business that started in June will contribute about $4 million in revenue in the first year. That is about 40% of current total revenue. Trading China EPS estimates have been raised to $0.12 for the FY 2010 and the stock is currently trading at a P/E of 3.

China Clean Energy (CCGY) is currently trading at $0.63, up 23.52% for the year and down 36.37% from its April 6 high at $0.99. The Trading China Tracker Score is 14 (Strong Buy).

The biggest positive surprise comes from biodiesel maker CCGY. Revenues grew by 232% to $14.14 million in the second quarter and the company reported EPS of $0.05 compared to breakeven in the year-ago period. The surprise was the strong performance of the biodiesel business which still suffered from tiny margins in Q1. Gross margins for biodiesel increased from 3.74% to 12% over the past 12 months. I've raised full year EPS expectations from $0.10 to $0.18 based on strong Q2 performance. This would value the company currently at just 3.5x 2010 earnings which means the stock has a good chance to revisit its April highs.

China Armco Metals (CNAM) is currently trading at $4.02, up 26.81% for the year and down 63.79% from its March 5 high at $11.10. The preliminary Trading China Tracker Score is -3 (Sell).

And the biggest negative surprise comes from China Armco which posted an unexpected loss for the second quarter which sent the Trading China Tracker Score from positive 10 to negative 3 as all metrics deteriorated. The Score is preliminary until the 10-Q is filed with the SEC as certain numbers like operating cash flow have not been revealed in the press release. CNAM reported revenues of $17 million, down 24.5% from the 2009 quarter. Adjusted EPS dropped to a loss of $0.05 from positive $0.33 last year, mostly due to significantly lower revenue and contracting gross margins. CNAM's recycling factory is just ramping up now and the metal ore trading business came under pressure in May and June.

CNAM management lowered full year net income guidance from $12 million to $10 million which still implies stellar results for the second half of 2010 as the company didn't earn a dime so far this year. We believe this is plausible as their recycling factory is now operational, and this is still one of the best long-term growth stories one can find. However, the very disappointing results show how much execution risk has to be considered when a tiny company like CNAM wants to bring their business to the next level. The stock is down a good 10% after hours and I would expect further weakness in the days ahead as there won't be many players out there defending the stock after those results. Given the unchanged and still excellent growth prospects of China Armco, I would be an aggressive buyer of the stock when it has calmed down, based and settled at a new post-earnings level, where ever that might be.

Second Quarter Earnings Previews, Part 2

Small cap Chinese stocks continue to outperform the general markets in August. The sentiment is clearly improving and investors are accumulating shares ahead of second quarter earnings next week. The move is once again spearheaded by U.S.-listed China blue chips which are all trading near 52-week highs again. Baidu (BIDU) shares gained 6.29% last week, followed by Ctrip (CTRP) with 5.61% or Focus Media (FMCN) with a 3% gain. Ctrip's earnings report on Monday could set the tone for the whole week.

The China Small Caps sector, as measured by the Trading China Main Index (TCM), gained 3.20% last week, significantly outperforming both the S&P 500 (1.82%) and the Shanghai Composite (0.79%). Among the biggest gainers were fertilizer stocks like China Agritech (CAGC, up a whopping 25.5% for the week) and Yongye (YONG), driven by news from Russia about an export ban on wheat leading to higher spot market prices. Generally all the former momentum stocks in the China space were performing very well.

With most stocks set to report second quarter earnings next week, we have set up a screen with earnings dates and company guidance and/or analyst estimates. Keep an eye on forward estimates and focus on stocks with either strong momentum or low P/E valuation. OTC-listed China stocks are expected to play catch-up after this earnings season, it is probably more profitable to focus on big board names for now. I want to single out two names which I believe have room for significant price appreciation with a good report next week:

SORL Auto Parts (SORL) is currently trading at $9.23, up 7.20% for the year and down 28.40% from its January 12 high at $12.89. The Trading China Tracker Score is 8 (Buy).

All the Chinese auto parts stocks (also WATG and CAAS) are running up nicely into second quarter earnings next week. SORL is up 8.98% for the past five sessions and is the last of the three to report with a conference call scheduled for Thursday, August 12. Both CAAS and WATG are set to report on Monday and their numbers should set the tone for SORL's performance into Thursday. I would be an aggressive buyer of SORL shares on good numbers from its peers. The company has guided for second quarter revenue of $47.0 million (up 58% year-over-year) and net income of $4.3 million (up 43% from 2009). SORL is followed by six analysts who all have a BUY rating on the stock. The average price target is 15.17, which implies 64.31% upside from current price.

NIVS IntelliMedia Technology (NIV) is currently trading at $2.46, down 4.66% for the year and down 43.84% from its March 25 high at $4.38. The Trading China Tracker Score is 14 (Strong Buy).

NIVS manufactures home electronic products and mobile phones. The stock has been unfairly punished for export and forex worries, however the company has little exposure to both Europe and the U.S., it is selling most of its products domestically. The company raised money in April at $3.29 per share. Rodman & Renshaw believes the primary near term catalyst for the stock will be its second quarter results where investors should see revenues from 3G handset sales to China Telecom materialize (this was previously delayed). The stock is moving higher into Tuesday's earnings, appreciating 9.82% last week. However, there is much room for further appreciation given the extremely low P/E multiples of 3.x and a likely earnings beat. Rodman is looking for Q2 revenue of $74.9 million and EPS of $0.16. Should the company beat those numbers I would expect NIV to close in on the $3 mark and possibly trade much higher into fall. Rodman believes NIV should be a $7 stock.

Second Quarter Earnings Previews, Part 1

Fushi Copperweld (FSIN) is currently trading at $8.89, down 12.16% for the year and down 31.30% from its April 9 high at $12.04. The Trading China Tracker Score is 10 (Buy).

FSIN is set to report second quarter earnings on Wednesday, August 4, before the market opens. The company said it expects adjusted fully diluted earnings per share to be between $0.32 and $0.34 for the second quarter, consensus estimate is $0.33. The Company expects profitability in subsequent quarters to improve due to higher seasonal revenue levels, continued increases in capacity utilization at the Fayetteville facility as a result of improving end market demand, and continued incentives from China's ongoing infrastructure buildout. In late June, Global Hunter started FSIN with a BUY rating and set a price target of $15 based on 12x FY 2010 earnings. The stock lost 2.95% in the past five sessions.

China Information Security Technology (CPBY) is currently trading at $5.89, down 4.39% for the year and down 20.84% from its April 6 high at $7.44. The Trading China Tracker Score is 2 (Hold).

CPBY has scheduled its second quarter earnings report for the morning of Thursday, August 5. In May the company raised its full year guidance to projected revenue of $141-146 million and adjusted net income of $35.5-39.5 million. Mid-July CPBY announced that during the second quarter of 2010, new contracts valued at $39.26 million were signed, an increase of 49% compared to the same period in 2009. Analysts expect the company to report EPS $0.18 for the quarter on revenues of $33.84 million. CPBY is currently followed by 2 analysts. Both give the stock a positive rating. The average price target is 10.50, which implies 78.26% upside from current price. The Trading China Score is currently only at Hold due to the huge cash outflow in the past two quarters.

China Integrated Energy (CBEH) is currently trading at $8.84, up 25.56% for the year and down 28.19% from its April 15 high at $12.31. The Trading China Tracker Score is 6 (Hold).

CBEH will also report Q2 numbers on Thursday before the market opens. In May the company raised its full year guidance to revenues of $387 million and net income of $49.5 million. CBEH is currently constructing a new biodiesel facility which is expected to come online in the fourth quarter and contribute $9 million in net income for FY 2011. Consensus estimates for the second quarter call for EPS of $0.27 on $91.7 million revenues. CBEH is currently followed by 4 analysts. All 4 give the stock a positive rating. The average price target is 11.83, which implies 33.86% upside from current price.

General Steel Holdings (GSI) is currently trading at $3.11, down 29.48% for the year and down 28.19% from its March 8 high at $4.81. The Trading China Tracker Score is -8 (Strong Sell).

GSI is scheduled to report second quarter numbers on Friday, August 6, before the open. The troubled steel producer said that "by the end of March, the market began to improve as average selling prices increased at a rapid rate and we were able to pass our costs onto our customers and achieve a positive gross margin." However, on July 21, Rodman & Renshaw reduced Q2/10 estimates from net income of $7.5 million to a net loss of $6.4 million. The analyst has a $4 target on the stock. Consensus estimates for the second quarter currently call for a loss of $0.06 per share on revenues of $491.15 million.