China Model Portfolio Sharply Higher
posted by The Traveller on Saturday, November 06, 2010

What a beautiful run it has been for our China Model Portfolio in the last six weeks. The portfolio value is up by 44.34% since September 24th, and the sentiment for China stocks couldn't be better right now. Several of our portfolio positions have reached the price targets we have set, so we are making a couple of changes this weekend.

Please remember that the model portfolio is designed for long-term oriented value investors, set up to be as transparent as possible, and transactions are allowed only on the weekends at Friday's close. Contrary to many other model portfolios out there, we do not claim to have hit the bottom or top of a move, and transactions can be easily reviewed and modeled into a real portfolio. In theory the performance of our China portfolio should be lagging those that can react on intra-week news, price movements, earnings reports and momentum, so we are quite proud of the performance so far.

Closing Positions

Charm Communications (CHRM) is currently trading at $12.23, up 28.73% from the IPO price and down 2.09% from its November 4 high at $12.49. The Trading China Tracker Score is 5 (Hold).

Charm has reached our target price of $12.00 last week and we are closing the position here for a gain of 46.64% or $2,330. While I still believe that the company has a very bright future, the recent price appreciation has lowered the China Tracker Score from 12 (BUY) to 5 (HOLD) and we are locking in the profits here.

China MediaExpress (CCME) is currently trading at $19.61, up 85.00% for the year and down 2.44% from its November 4 high at $14.79. The Trading China Tracker Score is 12 (Strong Buy).

CCME has also reached our target price ($20.00) last week. This has worked out much faster than expected. China MediaExpress is scheduled to report Third Quarter earnings on Monday before the open, what is widely expected to be a very good report. However, as our price target has been reached, we are closing the position here for a gain of 131.25% or $6,555.

Longwei Petroleum (LPH) is currently trading at $3.50, up 29.63% for the year and down 1.13% from its November 5 high at $3.54. The Trading China Tracker Score is 7 (Hold).

Longwei has been doing very well since its uplisting and the stock reached our price target last week, even closed at new highs on Friday. There is a good chance that LPH can establish a new trading range above the $3 mark now, but we are locking in gains here and closing the position for a gain of 76.77% or $3,838.

Tianli Agritech (OINK) is currently trading at $7.73, up 28.83% from the IPO price and down 4.93% from its November 5 high at $8.13. The Trading China Tracker Score is 8 (Buy).

OINK is the second stock in our model portfolio that established new all-time highs on Friday. I believe it has further upside from here, but as we can make changes to our portfolio positions only on the weekends, we will stick with our initial price target ($7.50), that has been surpassed now. We are closing the position here for a gain of 105.58% or $5,280.

New Additions

SinoHub (SIHI) is currently trading at $2.42, down 39.50% for the year and down 25.77% from its April 1 high at $3.26. The Trading China Tracker Score is 4 (Hold).

SinoHub is expanding its virtual contract manufacturing to serve mobile phone distributors in emerging markets outside of China. We do like the stock here because the prospects for FY 2011 are bright. SIHI is currently followed by 4 analysts. All 4 give the stock a positive rating, and the average price target is 5.25, which implies 116.94% upside from current price. Rodman & Renshaw raised their estimates and price target ($7.00) in late October. The stock is currently trading at 2010e and 2011e P/E of 4.4 and 3.5, respectively.

Agfeed Industries (FEED) is currently trading at $3.17, down 36.60% for the year and down 34.64% from its April 14 high at $4.85. The Trading China Tracker Score is -5 (Sell).

Agfeed is a Chinese hog breeder and producer of animal feed that came under pressure as severe floods led to the loss of over 16,000 live animals in the Second Quarter. Thus, results for the first half of 2010 were disastrous and the Trading China Score is currently at negative five, or Sell. But this could be an excellent turnaround play for several reasons.

Impact of the natural disasters will be fading. Peers in the Chinese pork industry like OINK and HOGS have been performing very well, indicating positive developments in the industry. Agfeed said its revenue base will nearly double in connection with the M2P2 acquisition. And the company plans to carve out its animal feed segment soon and has already filed for an IPO with the SEC. This will very likely unlock value for shareholders.

Rodman & Renshaw sees fully diluting EPS climbing from a measly $0.02 in 2010 to $0.59 in 2011 and $1.03 in 2012. The firm has a price target of $7 on the stock and notes that this target "does not include the impact of additional production from the five western style farms being constructed in Dahua and Xinyu." All in all a very favorable risk-reward ratio here, so we are adding FEED to our model portfolio with a price target of $6.00 based on 6x 2012e EPS.

Jade Art Group (JADA) is currently trading at $0.41, down 39.73% for the year and down 62.40% from its April 5 high at $1.09. The Trading China Tracker Score is 16 (Strong Buy).

Jade Art Group is a producer of raw jade that wants to expand into the retail business. I believe such a move would be very positive as the market for luxury goods is expected to see strong growth in the years to come, with the Chinese consumer having more and more money to spend. JADA has been lagging all moves in the China small caps space and is still trading at a P/E of 3.4 with 45% of its market value in cash. I expect the traditionally strong Q3 earnings report to serve as a trigger for a higher share price.

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8 Comments:

At November 06, 2010 4:53 pm , Anonymous Ojlert said...

I am a hobby analyst.. Can you give some examples of attractive companies with good cash flows that I can analyze?

Preferably companies with trusted auditors and little hidden dilution (warrants, B series shares e.t.c.)..

 
At November 06, 2010 6:49 pm , Blogger The Traveller said...

I find all the names in the model portfolio attractive, not always for the same reason. Most are still not trading on their fundamentals, some are turnaround stories, some are bets on future growth. If you want more names I suggest you use the China Tracker or the Screens as a starting point. If a stock catches your eye it might be worth digging a little deeper.

 
At November 07, 2010 1:33 am , Anonymous bogus07 said...

Based on trailing eps, JADA has a P/E of 2.2. Another low P/E stock with nice growth prospects is CGPI. I am surprised that it didnt make your list.

 
At November 07, 2010 8:51 am , Blogger The Traveller said...

China Redstone (CGPI) is already in the model portfolio. This post was just about position changes. http://www.fixyou.co.uk/portfolio_china.php

 
At November 07, 2010 5:30 pm , Anonymous Ojlert said...

Thanks for the advice.. I've been exploring this site a bit now and it's really great!

 
At November 07, 2010 5:33 pm , Anonymous ojlert said...

By the way, are you an individual maintaining this site? There's no large investor behind it? I assume you're not a really big one. But a very professional site I must say.

 
At November 08, 2010 7:17 am , Blogger The Traveller said...

Yes, the site is completely independent at the moment. There is no funding from any outside source nor did we ever get compensated for any research or article that has been published.

 
At November 09, 2010 6:03 pm , Anonymous Ojlert said...

This guy:
http://seekingalpha.com/user/752908/instablog

seems to think that several chinese smallcaps are frauds.. He has some pictures of China Green Agriculture claiming them to be a fraud.
http://seekingalpha.com/instablog/752908-longshortvalue/102205-photos-of-china-green-agriculture-s-facilities-myth-vs-reality

He also discusses TPI a bit.

 

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Entrepreneur, trader, programmer. Several businesses since 1990 (Software Distribution, Record Store, Communities, Publishing). Work must be enjoyable