China Model Portfolio

The Trading China Model Portfolio closed the year with a gain of 37.79% since September 24, 2010. We are currently holding more than 26% liquidity, looking for good long-term entries this January. One name that looks very promising is Shengtai Pharmaceutical (SGTID), a leading producer of glucose and cornstarch, raw materials for the pharmaceutical and food & beverage industry. Shengtai promised massive growth for 2011 with net income expected to grow by more than 200% to $10 million. With fully diluted 10.5 million shares, incl. 4.4 million warrants (strike price: $2.60), the stock seems very attractive at current levels below $3. Keep Shengtai on your watch list.

China Redstone Group (CGPI) is currently trading at $4.26, up 21.71% for the year of 2010 and down 8.39% from the November 29 high at $4.65. The Trading China Tracker Score is 15 (Strong Buy).

We are closing our CGPI position for a gain of 39.67% or $1,983. While China Redstone's reported numbers and business outlook appear entirely positive, we have identified several open questions that need to be addressed. Results of our due diligence have been inconclusive so far and we have decided to lock in profits here.

Lotus Pharmaceuticals (LTUSD) is currently trading at $2.59, up 1.17% for the year of 2010 and down 13.09% from the November 10 high at $2.98. The Trading China Tracker Score is 15 (Strong Buy).

A two-for-one reverse split of Lotus Pharmaceuticals' common stock became effective on December 31st. The company announced the reverse split as "an important step toward our goal of a national securities exchange listing." The shares will be trading under the ticker symbol LTUSD for 20 business days. We have adjusted our Lotus position in the China Model Portfolio and changed the target price to $4.50. We are now expecting an uplisting to NYSE Amex in the first half of this year.

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

Cemeteries and Cement (CGPI, CRJI)

China Redstone Group (CGPI) is currently trading at $3.70, down 43.94% from its April 14 high at $6.60. The Trading China Tracker Score is 10 (Buy).

China Redstone filed their annual report today, a conference call is scheduled for next Monday morning. The company did handily beat their FY 2010 guidance and posted earnings per share of $1.33 ($0.96 if we use the current share count of 13.5 million) with strong operating cash flow, especially in the fourth quarter.

The company is a cemetery developer in the greater Chongqing area, one of the largest cities in the world. Greater Chongqing is currently growing by half a million residents every year and the business of selling graves (don't want to sound morbid here) should be set for long-term growth with an annual mortality rate of 6.5/1000. Apparently it is also a Chinese belief that purchasing a grave prior to one's death is wishing for a healthier and longer life.

China Redstone, through their operating entity, Chongqing Foguang Tourism Development (about time to strip that 'tourism' off your name, folks) has big plans for the future.

In 2010, we plan to complete the first phase of land acquisition for the Gui Yuan II project and the construction of the cemetery and supporting facilities within the acquired land. We plan to develop 5,000 external tombs and 2,000 internal tombs. After the Gui Yuan II project is completed, our next focus will be the development of the Longqiao Lake project. In 2011, we plan to develop tourism, leisure, entertainment, dining accommodation, transportation and other comprehensive services and facilities. We plan to expand our seedling base in the Longqiao Lake area. Management believes that the funds for such short-term developments can be obtained through the sale of securities or issuance of debt instruments in addition to our retained earnings.

Foguang's projected income is approximately US$12 and US$16 million in 2011 and 2012, respectively, so Foguang expects to have enough funds for its short term development projects. Our long term development includes acquisition and merger with cemeteries locally or in other cities. We plan to acquire Shenzhen Huaqiao Public Cemetery in 2013. The funds needed for this acquisition is approximately US$29.33 million.

CGPI has only a very short history as a public company and there is a lot of work to do for the management, especially regarding internal controls and auditing. Official guidance that was released earlier this year calls for FY 2011 earnings per share of about $1.20, implying net income growth of about 30%. Uplisting to a senior exchange is not currently on the agenda, but the company states they "do not rule out the possibility of applying for listing on the NYSE Alternext or Nasdaq Capital Market or other markets" in the future.

We can not apply very high multiples to a company that is still in the early stages as a public company, but I believe the current valuation at roughly 3x this year's earnings doesn't do China Redstone justice.

China Runji Cement (CRJI) is currently trading at $0.11, down 54.21% for the year and 78.46% from its February 5 high at $0.51. The Trading China Tracker Score is -2 (Sell).

China Runji filed their quarterly report for the third quarter of fiscal 2010 today. With a current market capitalization of $8.66 million, trailing nine months net income of $660,000, operating cash flow of $10.12 million and total stockholder's equity of $26.5 million the stock is currently priced for bankruptcy.

Not everything in today's report looks hopeless. Gross profit increased by 400% over the year ago period on a 12% decrease in revenues, mostly as a result of cost control procedures. However, the big concern is still that huge working capital deficiency of $34.35 million which means all the financial statements had to be prepared on a going concern basis and the company is in dire need of financing. CRJI "anticipates raising funds through an equity or debt offering or with a strategic partner in the coming year," which seems almost impossible to do at the current deeply depressed share price. The company needs to raise funds to proceed with their ambitious plans:

We plan to construct a third production line in late 2010, which will have a daily cement clinker production capacity of 5,000 tons or 1.5 million tons annually. Upon completion, our total cement production capacity will reach 3.6 million tons per year, and cement clinker production will reach 3 million tons per year, controlling 30% of the market share within a 100 miles radius of our production facility.

This stock is a highly risky gamble on CRJI's ability to raise funds in the near future. It is unlikely that the stock will trade up to book value anytime soon, however the regional market position of Runji is strong and the company has the support of the local government.