The Turning Point
posted by The Traveller on Saturday, October 02, 2010

Now... have you been hunting some bargains this week? The 20 U.S.-listed Chinese stocks that I have introduced last week (Don't Be Afraid) have gained 9.61% in the last five sessions. That compares to a small loss for the S&P 500 in the same period.

Some of the largest gainers were Gold Horse International (GHIID, 37.38%), Gulf Resources (GFRE, 25.19%), China MediaExpress (CCME, 18.27%), Huifeng Bio-Pharmaceuticals (HFGB, 18.09%), Tianli Agritech (OINK, 15.95%), New Energy Systems (NEWN, 15.83%), and Longwei Petroleum (LPH, 15.65%). None of these stocks are expensive at current levels, with a confirmation of the sentiment change in the next 1-2 weeks they could run much further from here.

Recent developments:

Gold Horse International (GHIID) is currently trading at $4.30, up 19.44% for the year and comfirming the September 14 high. The Trading China Tracker Score is 14 (Strong Buy).

Gold Horse filed their FY 2010 annual report after the close on Friday. After doing a bit of maths, adjusted fully diluted earnings per share for the year add up to $4.03. Even after the 37.38% PPS appreciation last week the stock is still available at a trailing P/E-ratio of 1.05.

NF Energy Savings (NFECD) is currently trading at $6.25, down 40.48% for the year and from the March 9 high at $10.50. The Trading China Tracker Score is 6 (HOLD).

NFEC common stock will be listed on Nasdaq next Monday, October 4th. The company has not issued a press release for this important milestone in their history yet, and the stock has not run up in anticipation of a big board listing. Keep this on your watch list for Monday.

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4 Comments:

At October 05, 2010 10:24 pm , Anonymous Anonymous said...

Hello

Your website of Chinese micro-caps is amazing! Good job! I noticed some strange info in some cases your give minus points (in scores) on auditors and for other company where was same auditor you did not give any minus points?

I have been myself following AMEX:ALN company? Do you have anything else on that company (except that which you have already write?). Is there anykind way to get information how thrustworthy is auditor? Or example in this AMEX:ALN-case that does there really exist those products which they claim to sell, factories etc.

- tuoki

 
At October 06, 2010 9:41 am , Blogger The Traveller said...

Hi Tuoki,

the idea is that it is reasonable for small early stage companies with low market capitalization, revenue and earnings to go with a small accounting firm specialized on microcaps. However, a company that has outgrown its early stage (we measure this with $200 million market cap here) should move on to a well-reputed high standard auditor as it can easily afford the additional cost. Please keep in mind that small accounting firm does not necessarily mean less trustworthy financials. But the market demands high transparency into management credibility and financials. The Score system for auditors is explained on the help page (http://www.fixyou.co.uk/help_score.php)

About ALN, the auditor is a tiny firm with three partners, but they have a bunch of Chinese small cap reverse merger clients and ALN is still a sub-$100M company. As ALN is followed by three analysts (Rodman, Global Hunter, Maxim) you have good independent coverage here and I see no reason to doubt the company's honesty. In a normalized market the stock should trade up to the $3.50-$4.00 range based on the information I have right now (aquisitions, ~25% EPS growth forward).

 
At October 06, 2010 7:52 pm , Anonymous Anonymous said...

Hi!

Thank you for information. There are some strange things in ALN which worries me, like their CEO did somekind shady stock dillution deal month ago (they sold stocks on price 2.8 USD which is quite quite low price AND they are making lot of money allready!). The stock sell agreement contained some strange stuff (which i did not understand fully) like if ALN does not manage to get EPS on 2011-2012 to correct level it needs to give more stocks? (Agreement: http://www.sec.gov/Archives/edgar/data/1117057/000120445910002190/exhibit99-2.htm ) If so what price new shares are sold? Are those new shares or CEO:s own shares? Also their website : www.americanlorain.com has been on "building" state allready many months.

I agree with you that if company is honest its stock price is currently very low. Too low. Company which works in non-cyclical field should trade between P/E 10 or P/B 1-1.5 depending of growth speed.

- tuoki

 
At October 06, 2010 9:37 pm , Blogger The Traveller said...

Don't worry, there is nothing "shady" in the recent financing. ALN sold 3.44 million shares at $2.80 or roughly 5x this year's earnings. That is okay for the current environment, they probably could've got a better deal in spring but since the situation for Chinese stocks has changed.

The Make-Good Agreement is rather normal. You can assume that those EPS numbers are the minimum the company expects to safely achieve. Would be $0.55 for 2010, min. 25% EPS growth for 2011 and min. 20% for 2012. As an investor you can use those numbers for projections. Most such private placements have similar make-good terms.

A P/E of 10 is currently not achievable for a company like American Lorain, maybe the situation changes next year but for now I would use lower multiples. A reasonable expectation would be $3.75 - $4.50 based on $0.75 EPS for FY 2011 and a P/E ratio of 5-6. That would be my 6 months target range for this stock.

 

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