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.