Portfolio Changes - March 18, 2011
posted by The Traveller on Sunday, March 20, 2011

Agfeed Industries (FEED) is currently trading at $1.97, down 33.00% for the year, and down 42.74% from the November 9 high at $3.44. The Trading China Tracker Score is -5 (Sell).

Since we added FEED to our portfolio (November 5, 2010), the company posted disastrous 2010 results. Large write-downs of its Chinese hog farms led to a Fourth Quarter loss of 42 cents a share, much worse than expected. FEED slashed its workforce by nine percent and did not give FY 2011 guidance. Related to the unacceptable performance, the company saw a mass exodus of executives in February. Both the Chairman of the Board and the President/CEO resigned from their positions.

We are closing our position in the China Model Portfolio for a loss of 37.86% or $1,892. We are no longer betting on FEED being able to turn its business around in the foreseeable future. Additionally the stock did not pass our initial safety/risk test in regards of corporate governance, credibility and investor protection.

China Housing & Land Development (CHLN) is currently trading at $2.14, down 21.90% for the year, and down 41.21% from the January 7 high at $3.64. The Trading China Tracker Score is 8 (Buy).

China Housing announced fourth quarter and full year earnings on March 14, both pretty much in line with expectations. Form 10-K for 2010 has been filed, and CHLN's Canadian auditor MSCM LLP attested the company effective internal control over financial reporting as of December 31, 2010. Guidance for 2011 has been issued, calling for about 50% revenue growth and a 140%-179% increase for total contract sales over 2010 numbers. Although we see room for improvement, the stock passed our initial safety/risk test, and we are keeping the position in our portfolio with a target price of 6x 2011 earnings ($0.70) or $4.20.

China MediaExpress (CCME) is currently halted. Last available quote was $11.88, down 25.01% for the year, and down 50.44% from the January 28 high at $23.07. The Trading China Tracker Score is UNDER REVIEW.

Trading in CCME will likely stay halted for a while, it is unlikely that the stock will be allowed to reopen on Nasdaq with the revelations of last week. We will sell the shares in our portfolio at the close of the first Friday the stock is trading again, as the rules for the portfolio do not allow us to liquidate the position at any different time. I would expect CCME to follow similar trading patterns as RINO when it reopens: a sharp drop at the open to sub-$5 levels, followed by a bounce driven by short covering and a slow fade from there on. It is very unlikely that long investors will see significant positive developments from here on, given the magnitude of the disaster that was unfolding last week.

China RuiTai International (CRUI) is currently trading at $0.55, down 45.00% for the year and from the February 2 high at $1.00. The Trading China Tracker Score is 13 (Strong Buy).

RuiTai is set to report full year numbers for 2010 by the end of March. Based on reported financials the stock is extremely cheap, but in the current environment it is prudent to wait for the 10-K filing before making an investment decision. We will apply our safety/risk test when the annual report is available, then review our portfolio position.

China XD Plastics (CXDC) is currently trading at $6.14, up 13.07% for the year, and down 16.47% from the February 17 high at $7.35. The Trading China Tracker Score is 11 (Buy).

China XD is also scheduled with their next annual report on or before March 31, 2011. The stock is holding up very well within the group of small cap Chinese companies, still posting nice gains of more than 13% for the year. Our initial safety/risk test came out inconclusive, while price action, institutional support, and management continuity is in favor of the company, we see risks in the ownership structure and recent lack of updates from management. We will review our position in early April when we should have a new 10-K filing.

ChinaCast Education (CAST) is currently trading at $5.99, down 22.81% for the year, and down 25.04% from the November 9 high at $7.99. The Trading China Tracker Score is 5 (Hold).

ChinaCast reported strong earnings last week, and guided for 21-23% revenue growth in FY 2011. The stock came under heavy pressure early last week, but recovered nicely with a 12% gain on Friday alone. The company announced a large $50 million buyback program for the next 12 months, and management seems committed to creating shareholder value. Our safety/risk test came back positive with Deloitte Touche Tohmatsu (CCME's auditor) signing off on the financials (10-K filing). However, it should be noted that Deloitte identified material weaknesses and has expressed the opinion that CAST has not maintained effective internal control over financial reporting as of December 31, 2010. Those weaknesses are a "lack of sufficient skilled resources in the finance team to meet the demands of rapidly expanded businesses," and a "lack of contemporaneous documentation of certain decisions made by the Board of Directors." We believe that CAST should be able to address these issues successfully.

I will complete the review of our China Model Portfolio positions next week, when I will hopefully have a bit more time to do the write-up. But as we can only make changes to the portfolio at Friday's close, the following positions will all be closed now:

Agfeed Industries (FEED)
Jade Art Group (JADA)
New Energy Systems (NEWN)
Sino Agro Food (SIAF)
U.S. China Mining Group (SGZH)

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At March 21, 2011 5:15 am , Blogger Simon Garceau said...

What is your take on CSKI (China Sky One Medical, Inc.). I hear very different things from different people. If one can believe this company was falsely accused of fraud, don't you think the risk/reward at this price level could justify a buy?

At March 21, 2011 7:59 am , Blogger The Traveller said...

Simon, I don't want to participate in the rumour mill. All I can tell you is that CSKI clearly did not pass the safety/risk test we have developed. And for me personally, this doesn't justify a buy at any price for anything else than gambling or a very short term trade.

At March 21, 2011 6:53 pm , Anonymous Strindberg said...

Why did you sell Siaf?

At March 21, 2011 8:34 pm , Blogger The Traveller said...

SIAF - my opinion on SIAF hasn't changed, but as long as the company isn't fully reporting with the SEC I can't run the safety/risk model on the stock, and the bar has to be set higher now.

At March 22, 2011 12:16 am , Anonymous Anonymous said...

Why are you leery of NEWN?

At March 22, 2011 8:58 am , Blogger The Traveller said...

NEWN - there are some issues related to the Anytone pre-merger results (Chinese filings seem to show a much smaller company), and the acquisition of this solar gadgets company. The company announced an earnings call yesterday - I am pretty sure those issues will come up there. I took NEWN off the model portfolio as the stock does currently not come out positive in our safety/risk model. If the company can resolve the open questions and the upcoming 10-K comes out clean, then I might add it back.

The model portfolio is designed as a medium- to long-term value investing portfolio. Preserving capital and avoiding unnecessary risks is part of the strategy.

At March 22, 2011 6:01 pm , Blogger Chickenpookie said...

Not to downplay the seriousness, but it seems Japan isn't the only slow-motion explosion currently underway.

I'm interested in the safety/risk model you've developed, and will search around here in attempt to better comprehend it's features and application.

Any hints where I might start?


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