A Look at Short Interest

With all the chatter about short sellers attacking small cap Chinese stocks in recent weeks, it is probably a good idea to look at the actual short interest data from Nasdaq, Nyse and Amex. I don't have to explain much here, the numbers should speak for themselves.

Small-Cap China Stocks with the Highest Short Interest


China MediaExpress (CCME) is on a fast and steady rise to the top of this table. Short interest has increased from 900,878 (10.1% of float) on June 15, via 1,707,333 (19.2%) on July 15 and 2,467,724 (27.8%) on August 13, to a record 3,311,233 (37.3%) this month.

Largest Increase in the Last Two Weeks


Highest Short Interest by Days to Cover


Short interest data from FactSet Research Systems; WSJ Market Data Group; Wall Street Journal

Don't be afraid!

The last time I checked, the average P/E-ratio for the S&P 500 was in the 16-17 range, and the closest comparable in mainland China, the Shanghai Composite, sported a P/E of 19-20. The GDP growth rate for China is safely in the 9-11% range compared with just 3-3.5% in the United States.

Now here's a special offer from Indian Summer Sale 2010 on the U.S. stock markets: you can invest in companies with 3-5x higher growth rates than Chinese average at a 75-90% discount to Chinese valuations. How is that even possible, you find asking yourself, what's the catch? And the answer is simply that it is supply and demand that determines the price of any type of goods, and demand for U.S.-listed Chinese stocks is close to a historic low.

Do we really believe that most of the Chinese stocks on U.S. exchanges are frauds? That all the audited financial reports are fake, reported numbers with the SEC overstated, most of the companies don't have an actual business and we were all fooled by a bunch of criminals just trying to steal our hard-earned money? Yes, there are huge transparency issues in the sector, undoubtedly also a few cases of blatant fraud, but - come on - many or most companies should be fraudulent in one way or the other? All the auditors and investment bankers should have been fooled, been ignorant or even conspiring?

As long as money is involved there will always be corruption, fraud and greed. There will be a new Arthur Anderson, WorldCom, Enron or SpongeTech, uncovered maybe as early as tomorrow. And yes, the risk with emerging market stocks is probably higher than with European or American companies, being it just for the language hurdles, corporate culture differences, and transparency issues involved. Investing in small cap China stocks will always be one of the more speculative and higher risk endeavors. But as a sophisticated China investor you might want to clear your head from all the chatter in the past few months and use some common sense to evaluate the situation.

Here's my take: money will undoubtedly return into this sector. Being it next week, next months or next spring, we don't know that yet but does it really matter? The months-long sell-off in U.S.-listed China stocks has created unreasonable or even ridiculous valuations for many highly profitable high-growth companies, and the market will recognize it as soon as the sentiment changes and big money comes back.

Here are 20 stocks that look interesting at their current levels. I will add them all as equally weighted positions to a China Model Portfolio with an initial time-frame of six to twelve months. All those stocks deserve a deeper look, it's time for your own quality due diligence right now when nobody else wants anything to do with small cap China stocks.



China Redstone Group (CGPI) is currently trading at $3.05, down 12.68% for the year and down 53.79% from its April 14 high at $6.60. The Trading China Tracker Score is 9 (Buy).

China Redstone is a cemetery developer in the Chongqing area in Western China. The company was listed via reverse merger in February this year and is actively working on uplisting to a senior exchange. Redstone announced their FY 2011 (ends March 31st) guidance in an investor presentation this month, looking for EPS of $1.45 based on 13.4 million shares. The stock is currently trading with a P/E-ratio of 2.10.

Renhuang Pharmaceuticals (CBP) is currently trading at $1.44, up 46.93% for the year and down 52.00% from its April 9 high at $3.00. The Trading China Tracker Score is 19 (Strong Buy).

Renhuang's main products are botanical anti-depressants based on Siberian Ginseng. The company recently reaffirmed its 2010 guidance of adjusted net income between $18.6 and $18.9 million and stressed that "fourth quarter sales and net income are expected to exhibit strong growth, as it is historically our outstanding quarter with peak sales primarily driven by the beginning of the flu season." The stock is currently trading with a P/E-ratio of 2.88.

China MediaExpress (CCME) is currently trading at $8.48, down 20.00% for the year and down 42.67% from its March 24 high at $14.79. The Trading China Tracker Score is 17 (Strong Buy).

CCME is the television advertising operator on inter-city and airport express buses in China. The stock is currently followed by 2 analysts, both give the stock a positive rating. The average price target is 23.00, which implies 171.22% upside from current price. More about China MediaExpress in a recent article on the Trading China blog.

China Housing & Land Development (CHLN) is currently trading at $2.02, down 51.09% for the year and down 56.19% from its March 9 high at $4.61. The Trading China Tracker Score is 15 (Strong Buy).

China Housing is a property developer in the Xi'an area in central China. Most real estate stocks have been hit by new government policies leading to purchase hesitation in the market, and CHLN had to guide down revenue projections for the year. However, the stock seems to have bottomed now and is currently trading below book value close to cash level.

Changda International (CIHD) is currently trading at $0.42, down 86.67% for the year and down 85.96% from its February 1 high at $2.99. The Trading China Tracker Score is 14 (Strong Buy).

Changda is a chemical and fertilizer company which recently announced a partnership with Sinochem, one of Chinas biggest chemical companies. The company has already applied to list its stock on NYSE Amex. The stock is under pressure from the open $35 million offering, money the company needs to complete their Heze fertilizer plant.

Charm Communications (CHRM) is currently trading at $8.34, down 12.22% from its May IPO and down 16.60% from its May 5 high at $10.00. The Trading China Tracker Score is 11 (Buy).

Charm is one of the largest media/advertising companies in China with strong partners and tier one clients. The stock didn't catch much attention yet since its IPO and trades very thinly. CHRM is currently followed by 3 analysts. All 3 give the stock a positive rating. The average price target is 11.10, which implies 33.09% upside from current price.

China RuiTai International (CRUI) is currently trading at $0.78, down 31.58% for the year and down 48.00% from its March 15 high at $1.50. The Trading China Tracker Score is 11 (Buy).

RuiTai is a leading cellulose ether manufacturer in China, a cotton-based raw material for the chemical, pharmaceutical and food industry. The stock is currently trading at 47% of book value, has 60% of its market cap in cash, and is valued at 2.89x 2010 net profit based on the company's July guidance of $7 million net income for the current year.

Gold Horse International (GHIID) is currently trading at $3.13, down 2.19% for the year and down 27.21% from its September 14 high at $4.30. The Trading China Tracker Score is 10 (Buy).

Gold Horse is a real estate developer in China's Inner Mongolia province. The company has recently completed a 1:40 reverse split as the final step to get its shares listed on NYSE Amex, an uplisting could be imminent. Gold Horse will file their 2010 annual report next week and the company has already pre-announced full year results in their last presentation. GHII will report adjusted fully diluted EPS of $4.01 for FY 2010, and the stock is currently trading with a quite ridiculous P/E-ratio of 0.78.

Gulf Resources (GFRE) is currently trading at $6.51, down 44.17% for the year and down 50.31% from its March 8 high at $13.10. The Trading China Tracker Score is 10 (Buy).

Chemical company GFRE is a leading producer of bromine and other speciality chemical products in China. The company is currently under pressure for corporate governance issues and it has recently engaged Deloitte Touche Tohmatsu to perform an independent assessment over the Company's internal controls. On September 15 the company raised FY 2010 guidance and now expects earnings between $1.38 and $1.44 per diluted share. The stock is currently trading with a P/E-ratio of 4.50.

Huifeng Bio-Pharma (HFGB) is currently trading at $0.53, down 43.55% for the year and down 62.50% from its May 4 high at $1.40. The Trading China Tracker Score is 16 (Strong Buy).

Huifeng produces raw materials for the pharmaceutical industry. Last week the company announced that it has gained GMP (Good Manufacturing Practice) Certification for another five years from the SFDA and sees "great potential growth in our sales in the following quarters." Current company guidance calls for $4.5-$5.0 million in net income for this year, which translates into a current P/E-ratio of 2.50.

LianDi Clean Technology (LNDT) is currently trading at $3.50, down 46.97% from its April 28 high at $6.60. The Trading China Tracker Score is 6 (Hold).

LianDi is a provider of environmental protection solutions to China's petroleum and petrochemical industry. The company went public via reverse merger in February this year and has already applied to list its stock on a senior exchange. LNDT announced a series of positive developments (here, here and here) which went completely unnoticed in the current negative environment for U.S.-listed Chinese stocks.

Longwei Petroleum (LPH) is currently trading at $1.98, down 26.67% for the year and down 36.13% from its April 13 high at $3.10. The Trading China Tracker Score is 6 (Hold).

Longwei, a distributor of petroleum products, pre-announced strong growth for their FY 2010, ended June 30. Total revenues were $339.4 million, a 72% increase from 2009, and gross profit was $68.5 million, up 119% from fiscal 2009 gross profit. The annual report should be filed with the SEC by the end of September. The company said it "is in an ideal position to capitalize on the boom in oil demand," and is looking forward to another record year for Longwei in 2011."

New Energy Systems (NEWN) is currently trading at $5.17, down 26.97% for the year and down 40.70% from its April 16 high at $8.72. The Trading China Tracker Score is 15 (Strong Buy).

NEWN is a manufacturer of li-ion battery products. Last week the company issued a very bullish business outlook, stating that they are "extremely confident in achieving or exceeding our previously issued guidance for 2010, and anticipate very strong top and bottom-line growth in 2011." New Energy is currently entering the U.S. market with new products designed for Apple's iPod, iPhone, and iPad. The stock is currently trading with a P/E-ratio of 3.45.

Tianli Agritech (OINK) is currently trading at $3.76, down 37.34% from their July IPO and down 42.07% from its July 20 high at $6.49. The Trading China Tracker Score is 15 (Strong Buy).

Tianli is a fast growing hog producer headquartered in Wuhan, China. The company went public via an Initial Public Offering at $6.00 on July 20 and has since been totally forgotten by the market. For the last reported quarter the company posted revenue growth of 87.68% and net income growth of 145.88% over the year-ago period, and meat prices in China have been rising throughout the year. This company might get discovered soon.

Yongye International (YONG) is currently trading at $7.17, down 11.81% for the year and down 22.49% from its March 15 high at $9.25. The Trading China Tracker Score is 7 (Hold).

Yongye is a leading organic fertilizer producer in Inner Mongolia with KPMG-audited financials. After 18 months of dilution the company recently promised that they "are committed to continuing to maximize shareholder value not just through increased sales and net income, but also through further increases in our per share earnings performance." As the company expects to achieve at least a 50% annual growth rate in revenue for 2010-2012 this should now translate into significant bottom-line growth.

Sino Agro Food (SIAF) is currently trading at $1.34, up 6.34% for the year and down only 5.64% from its September 21 high at $1.42. The Trading China Tracker Score is 5 (Hold).

SIAF is a diversified agricultural company which stands out from the group of U.S.-listed stocks as it is actually trading at year highs now. The reason is that SIAF recently announced that the audits for 2008 and 2009 have been completed and the company will register with the SEC soon. SIAF should move up from the pink sheets soon and get another boost. And the planned dividend payment is quite extraordinary for a Chinese micro-cap.

ZST Digital Networks (ZSTN) is currently trading at $7.17, down 36.08% for the year and down 46.06% from its March 12 high at $10.38. The Trading China Tracker Score is 11 (Buy).

ZSTN is a supplier of cable systems and commercial GPS products in China. The company raised its FY 2010 guidance in August and now expects to report between US$17 million and US$19 million in net income for the year. The stock is currently trading with a P/E-ratio of 3.60 with a strong balance sheet.

Eastern Environment Solutions (EESC) is currently trading at $2.30, up 228.57% for the year and down 24.10% from its August 23 high at $3.03. The Trading China Tracker Score is 11 (Buy).

EESC is a provider of municipal solid waste processing and disposal services in northeast China. The company is growing exponentially with 1000% growth rates for revenue and net income over the year-ago period. "We expect to benefit from higher revenues and improved pricing in the second half of 2010, which should positively impact both our margins and overall profitability." EESC is actively working on a senior exchange listing.

Lotus Pharmaceuticals (LTUS) is currently trading at $0.93, down 27.35% for the year and down 45.30% from its February 3 high at $1.70. The Trading China Tracker Score is 10 (Buy).

Lotus sports stable annual growth rates of 20-30% and recently said that it "expects net revenues to increase from approximately $57.8 million in 2009 to $73.6 million in 2010 and for net income to rise from $16.4 million in 2009 to $21.4 million in 2010." The company has also proven a new-found interest for shareholder concerns by canceling an unfavorable financing plan and hiring an investor relations firm.

Wonder Auto Technology (WATG) is currently trading at $8.79, down 25.13% for the year and down 35.66% from its January 11 high at $13.66. The Trading China Tracker Score is 3 (Hold).

Wonder Auto is a good way to play the booming automobile industry in China. The company released bullish guidance this month, looking at $36 million or higher in Non-GAAP net income. Strong analyst coverage: WATG is currently followed by 9 analysts. 8 give the stock a positive rating, 1 rate it neutral and 0 give it a negative rating. The average price target is 14.57, which implies 65.77% upside from current price.

Disclosure: at the time of writing the author is long CGPI, CIHD, GHIID, HFGB, LNDT, LPH, LTUS, NEWN, OINK and SIAF

China Stocks Twitter Group

For all Twitter users! I've started a twitter group for U.S.-listed China stocks, could get useful if many people join and contribute.

http://twibes.com/ChinaStocks

If you want to join just tweet the full URL (http://twibes.com/ChinaStocks) or visit the link and click the "Tweet to Join" button. The idea is to share news, articles, trading ideas, commentary and such with everyone interested in trading or investing in China Stocks.

After you have joined you must add the tag #ChinaStocks to your tweets for them to appear in the twitter group. How useful it will be depends on how many people will join and contribute.

Happy days.

The Burden of a Low Share Price

China MediaExpress (CCME) is currently trading at $8.59, down 18.97% for the year and down 41.93% from its March 24 high at $7.58. The Trading China Tracker Score is 17 (Strong Buy).

CCME's biggest problem is its low share price. At yesterday's closing price of $8.59 the shares are trading at just 3.8x our 2010 EPS estimate with $139.3 million in cash or $3.89 in net cash per share. If we back out that cash the forward P/E-ratio drops to just 2.0. And that compares to double digit ratios for CCME's peer group with Focus Media (FMCN, $21.59) currently trading at 28.2x projected EPS of $0.78 for the current year.

That kind of seemingly unwarranted huge discount to the peer group is seen as a strong warning sign by many investors. Something has to be fishy there, why do CCME shares not attract tremendous buying interest at those depressed levels? Rumors have been spread, from the tiresome discussion about discrepancies between financial statements filed with the SAIC and SEC to claims the company would be an outright fraud. Short interest has risen significantly over the past few months which contributed to the 25% drop from a month ago when the company reported strong second quarter results.

None of the accusations have been substantial or verifiable, yet the stock came under increased pressure from negative developments at completely unrelated but fellow Chinese companies like Duoyuan Printing (DYP) and China Sky One Medical (CSKI). The sentiment for U.S.-listed Chinese stocks couldn't be worse right now.

China MediaExpress is followed by only two small brokerage firms. Global Hunter and Northland Securities both rate the stock a BUY with an average price target of $23, or 167% above current levels. But there isn't much those small firms can do to CCME's defense, so the company decided to defend itself by announcing a share buyback program yesterday.

Its Board of Directors has approved a program, effective immediately for one year, to repurchase up to $30 million of its stock, using the company's available cash for funding. CCME reported $25 million in operating cash flow for the second quarter alone, so even if executed in full the buyback program won't leave a dent in the company's cash balance. However, if executed in full, the company will repurchase one third of the current public float of approximately 9 million shares. This is a significant amount.

All those numbers - $30 million buyback program, $38 million operating cash flow and $46 million net income in the first half of 2010, $139 million cash on the bank, ex-cash P/E-ratio of 2.0 - make this stock a screaming buy. Yet the stock price doesn't reflect any of this, it strongly suggests that the market doesn't believe all those numbers. So can we believe them?

Last December CCME hired Deloitte Touche Tohmatsu as its independent auditor. Deloitte is one of the "Big Four" that meets the highest standards, proven again by uncovering the problems at Duoyuan Printing (DYP) shortly after having been appointed. Deloitte audited CCME's annual report for 2009 and reviewed both quarterly reports for the current year.

And with Starr International, a well-known New York based private equity firm, CCME has an institutional investor ($30 million in December 2009) that hired independent third parties to do business due diligence, financial due diligence and legal due diligence. Starr has a board seat and, according to Global Hunter, monitors the company's financials on a monthly basis.

Global Hunter Securities reiterated their BUY rating and price target last night and commented that "in the past two months, we have talked to a number of bus operators and advertisers, who have been working with the company for 3-5 years. They have provided positive feedback on their working relationship with CCME."

Now it's up to every individual investor to decide whether to believe CCME's numbers or not.

Disclosure: no position in CCME

China Integrated Energy

China Integrated Energy (CBEH) has come under pressure yesterday and posted a new low at $6.47 on a green day for the general markets. The stock dropped 26% in the past four weeks. Let's have a look at CBEH's current situation.

Attack: Barron's mentioned the company in connection with Du Qingsong, Mary Xia and Asia Pacific Securities who assisted the Company in its reverse merger. Du was sent to jail for "fraudulent investment schemes" and bribery but according to Barron's he claims to be innocent. Xia started Asia Pacific Securities with Du which assisted CBEH and other Chinese companies like China Medicine (CHME) with their mergers. In March 2004 Mary Xia was appointed "Head of China Operations" of Bio-One Corp., a nutritional supplements company based in Florida that was charged with fraud in 2005 and subsequently delisted. No direct accusations against CBEH were made by Barron's.

China Integrated Energy is also being watched for their continuous involvment with Sherb & Co., a small public accounting firm with just seven partners that is very popular with Chinese reverse-merger clients. Sherb's current clients include Wowjoint Holdings (BWOW), China Direct Industries (CDII), China Education Alliance (CEU), China Wind Systems (CWS) and China Shen Zhou Mining (SHZ) among others. Sherb & Co. has been accused of wrong-doings in the past, and the Public Company Accounting Oversight Board (PCAOB) issued a report on the firm in 2007 (PDF).

Defense: CBEH issued a press release last week, announcing that the improvement of corporate governance is expected to be completed by the end of the third quarter of 2010. CBEH said that Mary Xia has never played any role in the management or operations of the company, and that they "consider the reputation and integrity of China Integrated Energy to be of utmost importance to our future success, both from an operational and a public Company perspective."

My Position: In the current environment for Chinese reverse mergers the company's next step has to be proactive. Sherb & Co. does not stand for "utmost reputation and integrity" and this tiny accounting firm is no longer appropriate for a company with annual revenue of $425 million and net income of $52 million. CBEH can afford to hire a Big4 auditor immediately and have them go through the complete history of the company, remove all possible merger-related inconsistencies and put the company in a position of strength. It's not enough to proclaim that reputation and integrity is of utmost importance to the company, CBEH has to act accordingly.

The Myth of Underperforming Reverse Mergers

Two weeks ago, Barron's magazine printed a feature article titled "Beware This Chinese Export", written by Bill Alpert and Leslie P. Norton. It was labeled as a "study" and subtitled (as you can see in your browser's title bar) "Chinese Reverse-Merger Stocks Lag Key Indexes." The tone of the article was very negative about anything related to U.S.-listed Chinese stocks that went public via reverse mergers. It basically warned investors not to touch any of those when the article closed with this caveat: "the reverse-merger industry gathers in Hawaii this week at a Roth conference—a venue equally favored by China stock touts and by the sector's short sellers. The rest of us should probably stay home."

Barron's explicitly mentioned nine Chinese stocks in their article and I have added a tenth name here (China Agritech CAGC, which has been downgraded last week on concerns over an auditor the company has dropped 2 1/2 years ago), just to get to an even number. As you can see this group of Chinese reverse merger stocks has clearly underperformed the key indexes since the Barron's article was published. In the last two weeks both the Shanghai Composite Index (SSE, +2.0%) and the S&P 500 (SPX, +4.2%) posted gains, while this group retreated on average by a significant 8.56%. It can't be denied that Barron's had some influence in this.

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
2010-08-27:	$16.72	$8.33	$10.65	$5.27	$7.79	$2.35	$8.60	$4.34	$16.03	$4.90
2010-09-10:	$12.18	$6.71	$8.55	$6.08	$8.12	$2.18	$7.70	$4.42	$13.65	$4.50
Performance:	-27.15%	-19.45%	-19.72%	15.37%	4.24%	-7.23%	-10.46%	1.84%	-14.85%	-8.16%

Now back to the key argument of Alpert and Norton, that Chinese reverse merger stocks lag "key indexes.". I will use the Shanghai Composite as the most watched index in mainland China, and the S&P 500 Index for the U.S. as "key indexes" for this article. But let's also add the Halter USX China Index (HXC), as Barron's refers to this index as their "key index."

A quick look at the Halter FAQ shows that "for a company to be included in The Halter USX China Index, it must be listed on the NYSE or Nasdaq and have an average market capitalization of at least $50 million for the preceding 40 trading days," and if we look at the list of current components, we find out that China Agritech (CAGC), China Integrated Energy (CBEH), China Green Agriculture (CGA), China Natural Gas (CHNG), Deer Consumer Products (DEER), AgFeed Industries (FEED), Gulf Resources (GFRE), Orient Paper (ONP), RINO International (RINO) and also SkyPeople Fruit Juice (SPU) are in fact current components of this index.

Those 10 stocks haven't always been eligible for the Halter Index, though. They usually started out on the OTC/BB a short while after their reverse merger deal, stayed there for a for a few months or even years, did a reverse split and uplisted to Nasdaq or a NYSE exchange shortly after. All 10 names have matured from their rather obscure post-RM stage on the bulletin board. They have successfully listed their stock on a senior U.S. exchange now, which is the final goal of basically all reverse merger deals.

Now Barron's claims that reverse-merger stocks have drastically underperformed the key indexes: "Most reverse-merger stocks have proven to be a poor way to ride China's boom. Today, the market cap of these stocks has shrunk to $20 billion, a 60% drop." The authors have also determined that "the median return among the 30 CCG reverse-merger clients with at least three years of trading history underperformed the Halter index by a whopping 70%, since their mergers."

So... Alpert and Norton use stocks with "at least three years of trading history" and measure their performance "since their mergers." I believe using both those terms is deliberately misleading, it doesn't prove anything and doesn't show the actual performance of those stocks.

First of all, there aren't that many reverse-merger stocks with a trading history of three years or more. If we go back those three years we get to the peak of the stock market bubble in mainland China. The Shanghai Composite climbed 124% from January to October 2007, reached 6124 points on October 16, and dropped 56.5% to reach the current level of 2663 points. Yes, the average return of a domestically listed Chinese blue chip is a negative 50% for this 3-years period.

However, it is not just pure coincidence that the number of reverse mergers exploded at the peak of China's stock market bubble. Five of the ten stocks in our group exercised their reverse merger between October 2007 and February 2008:

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
Reverse Merger:	2005-02-03	2007-10-23	2007-12-26	2005-12-06	2008-09-03	2006-10-31	2006-12-12	2007-10-29	2007-10-05	2008-02-26
First Quoted Price:	2005-06-14 $6.10	2007-12-13 $4.60	2008-05-02 $26.51	2005-12-19 $25.00	2009-04-24 $2.075	2006-11-22 $5.0625	2007-11-28 $10.00	2008-01-14 $2.04	2008-05-13 $8.25	2009-10-29 $2.50
2010-08-27:	$16.72	$8.33	$10.65	$5.27	$7.79	$2.35	$8.60	$4.34	$16.03	$4.90
Performance:	174.10%	81.09%	-59.83%	-78.92%	275.42%	-53.58%	-14.00%	130.00%	94.30%	96.00%

Now what we can't do is evaluate the overall performance of a stock using the date of the reverse merger or the first quoted price as the starting point. The first quote price is meaningless if there is no active trade in the stock. It can take many months until a reverse-merger stock is actively traded, until then there is virtually no one outside of the deal participants or shell share owners involved. The quoted price on the OTC/BB does in no way reflect what the market is willing to pay for the stock, it very often is nothing else than a painted quote on a single trade of 100 shares with many days of no volume at all in between.

A good example is North China Horticulture (IDCX) which completed their reverse merger on July 16 this year. The first quoted price since the merger was $4.50 and the stock is quoted between $5.00 and $7.00 since. However, there have been only four days with actual volume since July 16, and none of those days saw more than 1000 shares changing owners.

The current quote of $5.00 for IDCX is completely meaningless as it would imply a P/E-ratio of 43 based on the last two reported quarters. We don't know when the stock will actively start trading, but I would expect the price per share to settle at a level of around $0.50 - or about one tenth of the current quote - which would imply a reasonable P/E-ratio of 4-5.

If Alpert and Norton use the term "since their mergers" for measuring performance, it is misleading investors, and they know it. A responsible approach to evaluate total performance would be to use the opening price of the first day when a reverse-merger stock traded more than 10,000 shares - or even better, the average price of the first five sessions a stock was actively traded.

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
First 10k Day:	2006-01-27 $8.00	2008-07-08 $6.05	2008-08-07 $3.75	2005-12-20 $7.00	2009-04-24 $2.125	2007-01-05 $2.00	2007-12-03 $9.40	2008-05-13 $1.40	2008-10-30 $2.50	2009-10-29 $2.69
2010-08-27:	$16.72	$8.33	$10.65	$5.27	$7.79	$2.35	$8.60	$4.34	$16.03	$4.90
Performance:	109.00%	37.69%	184.00%	-24.71%	266.59%	17.50%	-8.51%	210.00%	541.20%	82.16%
Avg. First Week:	$8.00	$6.14	$3.07	$7.18	$2.211	$2.046	$9.24	$1.312	$2.62	$2.69
2010-08-27:	$16.72	$8.33	$10.65	$5.27	$7.79	$2.35	$8.60	$4.34	$16.03	$4.90
Performance:	109.00%	35.67%	246.90%	-26.60%	252.33%	14.86%	-6.93%	230.79%	511.83%	82.16%

Investors who purchased our group of 10 stocks during the first week of active trading, would have been sitting on an average return of 145.00% on August 27 this year, the day before the Barron's article was published.

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
2008-09-10:	$3.16	$6.90	$3.29	$8.32	n/a	$10.22	$2.12	$0.60	n/a	n/a
2010-09-10:	$12.18	$6.71	$8.55	$6.08	$8.12	$2.18	$7.70	$4.42	$13.65	$4.50
Performance:	285.44%	-2.75%	159.88%	-26.92%	n/a	-78.67%	263.21%	636.67%	n/a	n/a

Investors who purchased our group of 10 stocks two years ago - at the close of September 10, 2008 - would have a gain of 176.69% today. That compares to a 23.83% gain for the Shanghai Composite (SSE), a 9.94% loss for the S&P 500 (SPX) and a 13.68% gain for the Halter Index (HXC).

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
2009-03-10:	$1.90	$4.00	$3.30	$3.32	n/a	$1.05	$1.46	$0.38	$2.01	n/a
2010-09-10:	$12.18	$6.71	$8.55	$6.08	$8.12	$2.18	$7.70	$4.42	$13.65	$4.50
Performance:	541.05%	67.75%	159.09%	83.13%	n/a	107.62%	427.40%	1063.16%	579.10%	n/a

Investors who purchased our group of 10 stocks 18 months ago - at the close of March 10, 2009 - would have a gain of 378.54% today. That compares to a 23.38% gain for the Shanghai Composite (SSE), a 54.19% gain for the S&P 500 (SPX) and a 84.21% gain for the Halter Index (HXC).

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
2009-09-10:	$6.44	$6.12	$13.05	$12.49	$6.283	$5.27	$6.50	$3.44	$13.59	n/a
2010-09-10:	$12.18	$6.71	$8.55	$6.08	$8.12	$2.18	$7.70	$4.42	$13.65	$4.50
Performance:	89.13%	9.64%	-34.48%	-51.32%	29.38%	-58.63%	18.46%	28.49%	0.44%	n/a

Investors who purchased our group of 10 stocks one year ago - at the close of September 10, 2009 - would have a gain of 3.46% today. That compares to a 8.95% loss for the Shanghai Composite (SSE), a 6.26% gain for the S&P 500 (SPX) and a 4.28% gain for the Halter Index (HXC).

As we can see, our group of 10 reverse-merger stocks has not underperformed the "key indexes" in any of the scenarios, quite the opposite actually. However, many of the Chinese RTO stocks have retreated this year, probably in large parts as a result of negative articles like Alpert and Norton's piece and generally due to concerns over corporate governance, internal controls, earnings quality and management credibility.

This development suggests that many long-term investors who started a position in those reverse-merger stocks have realized profits in the last 12 months and didn't hold on to their shares no matter what, watching their portfolio drop in value every day. Most responsible long-term investors will have protected their holdings with stop-loss marks or will have reacted on market developments. Just for fun, let's have a look at what those investors could have earned if they had sold at the 52-week high.

	CAGC	CBEH	CGA	CHNG	DEER	FEED	GFRE	ONP	RINO	SPU
2008-09-10:	$3.16	$6.90	$3.29	$8.32	n/a	$10.22	$2.12	$0.60	n/a	n/a
52-week high:	$30.75	$12.31	$18.70	$15.62	$18.97	$6.05	$14.94	$15.15	$35.15	$8.10
Performance:	873.10%	78.40%	468.39%	87.74%	n/a	-40.80%	604.72%	2425.00%	n/a	n/a

Now what is the bottom line of all this? You should not generalize all Chinese reverse-mergers and throw them all into the same pit. Alpert and Norton followed-up on their article in this weekend's Barron's edition with another misleading claim: "[we measured] the investment performance of every identifiable reverse merger company, then showing how investors would have done if they had picked the typical (i.e., median) performer in the group."

Here is your answer to that: many, if not most reverse mergers fail! Those stocks never make it past their post-merger stage, they never come even close to maturing, to becoming eligible for a senior exchange. And most importantly they never came even close (and probably never will) to catch the attention of a value-oriented investor in Chinese stocks. Those stocks are trading on very low volume on the OTC/BB or Pink Sheets, they are often delinquent in their filings, the price per share is below $1 or even below 1 cent and nothing and absolutely nothing makes them part of the group of serious, profitable Chinese businesses that became public companies via reverse mergers.

No serious investor puts their money in any of the many questionable China-based penny stocks on the OTC/BB or pinks, and most of them went public via reverse mergers. Just like you wouldn't choose any of the OTC-quoted U.S. penny stocks if you seriously intended to invest in technology or mining and metals. That's why the Halter Index has eligibility rules, and that's why investors and research firms do their due diligence, visit the company, talk to customers and competitors and so on...

Look for maturing reverse mergers! They have to be actively traded, should be consistently profitable, and should have a clear path ahead, off the OTC/BB or Pink Sheets onto a senior U.S. exchange. You have to do your own due diligence, there is no way to avoid that for a serious investor in Chinese stocks. If you buy into a newly listed reverse merger stock, you take on many additional risks, including a large number of shares that might flood the market from early investors (hedge funds) who got in at a very low price, or from those parties that managed the reverse merger deal and got a good share of the company in return. Again, as an investor, watch for those RTO stocks that are maturing and have a clear path to Nasdaq or a NYSE exchange.

Alpert and Norton wrote this weekend that "unless one cherry-picks examples, the expected performance of these stocks is lousy." I have cherry-picked those very stocks Alpert and Norton explicitly mentioned as negative examples in their original article, and those have outperformed the key indexes including the Halter Index in every single reasonable scenario. I have picked those ten stocks despite the fact that they are now far off their highs, having dropped in no small part due to Barron's and other publications presuming that "China plus Reverse Merger automatically leads to losses." As any reader or prospective investor can now see, this presumption by the critics is simply not valid.

Asia's 200 Best Under A Billion

Forbes Magazine has published it's annual "Best Under A Billion" list earlier this month and 16 U.S.-listed China stocks made the cut this year.

The list was designed to highlight the 200 top-performing small and midsize enterprises with revenues under $1 billion that have been at the forefront of the economic growth in Asia. Chinese companies predominate the list with 71 of 200 entries, however most of them are listed in Shanghai, Shenzen or Hong Kong. Still, 16 companies that have chosen to go public in the U.S. are among the 200 best performing Asian companies this year, which shows that choosing a U.S. exchange is a very valid path to go for a Chinese growth enterprise.

While it is not surprising that well-known leaders as Baidu (BIDU) or Netease (NTES) are on the Forbes list, it is quite remarkable that some of Trading China's relatively unknown small caps are included. Stocks like Biostar Pharmaceuticals (BSPM), NIVS IntelliMedia (NIV) or Skystar Bio-Pharmaceutical (SKBI) have underperformed the general markets this year, yet Forbes recognizes them as part of "Asia's 200 Best Under A Billion".

Here are all 16 U.S.-listed China stocks on the Forbes list for 2010:

• BIDU -- Baidu
• BSPM -- Biostar Pharmaceuticals
• CAAS -- China Automotive Systems
• CBEH -- China Integrated Energy
• CEU -- China Education Alliance
• CISG -- Cninsure
• CSR -- China Security & Surveillance
• CTRP -- Ctrip.com International
• EDU -- New Oriental Education & Technology Group
• EJ -- E-House (China) Holdings
• MR -- Mindray Medical International
• NIV -- NIVS IntelliMedia Technology Group
• NTES -- Netease.com
• SKBI -- Skystar Bio-Pharmaceutical
• SSRX -- 3SBio
• VIT -- VanceInfo Technologies