Another Auditor Blow-Up - Digging through the Chinese RTO Jungle

Davis Accounting Group

As of November 4, 2010, the independent registered public accounting firm of two OTC-quoted Chinese microcaps has ceased to exist. Davis Accounting Group P.C., the current auditor on file for both Jade Art Group (JADA) and BioPharm Asia (BFAR), has to be licensed with the state of Utah to work as a certified public accountant. But a recent filing with the Utah Department of Commerce's Division of Occupational and Professional Licensing reveals that the principal of the firm, Edwin "Ted" Reese Davis Jr., "has engaged in unlawful conduct by continuing to practice as a certified public accountant and otherwise hold himself out to be a CPA after his license had expired on September 30, 2008."

Ted Davis's license has been revoked, and with that the license for his Davis Accounting Group is gone as well. "Respondent's expired license to practice as a CPA FIRM was revoked effective the date of the Order (November 4, 2010). Respondent was also ordered to cease and desist from engaging in any acts or practice which constitute the practice of public accountancy unless Respondent is duly licensed in that regard." (Source: State of Utah Newsletter, December 1, 2010)

Digging deeper into this story reveals that Ted Davis has been arrested in December on suspicion of issuing bad checks and a Montana-issued warrant. We don't have a statement from either JADA or BFAR on this matter, and both companies are still registered with Davis Accounting Group as their auditor. Attempts by Trading China to contact the companies have been unsuccessful so far, but we will keep trying.

In 2009, the Public Company Accounting Oversight Board (PCAOB) issued a report on Davis Accounting Group. According to this report, the firm had a total of one partner (Ted Davis?) and 3 employees, but 13 clients. And the report reads like this: "pervasive failure to plan, perform, and document performance of the audit and inappropriately taking responsibility for the work of another auditor when the other auditor performed substantially all of the audit procedures that served as the basis for the Firm's opinion." So, additionally to Davis signing off audits without a license for more than two years, the PCAOB report suggests that no actual audit work had been done by the firm.

BioPharm and Global Pharm

BioPharm Asia (BFAR) engaged Davis Accounting Group on February 21, 2010, after their previous auditor, Sherb & Co., resigned on February 11, 2010. Sherb had been engaged for just a couple of months (since June 30, 2009), following the dismissal of BFAR's previous auditor, Moore & Associates Chartered. A reason for Sherb's resignation was not given in the filing, but the firm declined to re-issue its report on BFAR's 2008 Financial Statements, and Davis was engaged to perform a re-audit. On May 10, 2010, Davis Accounting Group signed off on both the 2008 and 2009 financial statements (10-K Filing).

There is an interesting connection between Davis, BioPharm Asia, and another recent Chinese reverse merger, Global Pharm Holdings Group (GPHG). Global Pharm, known until September 2010 as Top Flight Gamebirds, Inc., is a Shenzen-based wholesaler and distributor of pharmaceutical-related products. Two of the company's three executives come directly from BioPharm Asia: Chairman, CEO, and sole director Yunlu Yin served as BFAR's CEO until April 2010, while Secretary Dan Li was assistant to President in BioPharm Asia until late 2009. Li was also director of China US Capital Holding Group. The third executive, Chief Financial Officer An Fu, was employed as an auditor at Davis Accounting Group until May 2010.

China US Capital Holding and Subsidiaries

Now this China US Capital Holding Group has several wholly-owned subsidiaries: China US Venture Capital Group Limited, China US Bridge Capital Limited, China Finance Inc., and Giant Fortune Investment Management Limited.

China US Venture seems to have changed its name to "China US Strategy Capital Group", advertising its services as "paving a way to US capital market for excellent Chinese enterprises, enabling them to become international excellent enterprises as soon as possible." Among the clients presented on their website are Home System Group (HSYT), Jade Art Group (JADA), Gulf Resources (GFRE), China Organic Agriculture (CNOA), Universal Travel Group (UTA), and China 3C Group (CHCG). The company is partnering with several U.S. accounting firms, among them two small firms with a strong presence in the Chinese RTO space: Kabani & Co. and Weinberg & Company. Davis Accounting Group is not mentioned as a partner.

China US Bridge says it were dedicated "to strengthening the integration between fast-growing China enterprises and US capital market." As partners they have listed the same accounting firms as China US Venture, and the same reverse merger "cases" are advertised with additionally New Energy Systems (NEWN). US Bridge is also partnering with several investor relations firms, among them well-connected Hawk Associates. AMI Research, a division of Hawk Associates, initiated paid coverage of Jade Art Group (JADA) in June of 2008, and recommended the stock with a $7.49 price target. JADA is currently trading at $0.08. Among AMI Research's 2011 Top Microcap Picks are two Chinese companies: Tri-Tech Holding (TRIT) and China Kangtai Cactus (CKGT). Both are current clients of Hawk Associates.

Giant Fortune again presents the same auditing and investor relations partners as the previous two entities. Three U.S.-listed Chinese companies are presented as "successful cases" on their website: BioPharm Asia (BFAR), Universal Travel Group (UTA), and China 3C Group (CHCG). Giant Fortune's Zuhong Xu still is the largest independent shareholder of BioPharm Asia as of its latest annual report, holding 8.50% of outstanding shares.

Mr. Xu served as Chairman and CEO of the fourth company on our "subsidiary list": China Finance Inc., which was quoted on the Bulletin Boards under CHFI, before it went dark in 2009, became delinquent and subsequently demoted to the pink sheets. As of March 31, 2009, China Finance still held sizable positions in Jade Art Group (JADA, 8.87%) and Gulf Resources (GFRE, 5.46%), additionally small leftover shares in Home Systems Group (HSYT) and China Organic Agriculture (CNOA, 1.30%). Previous holdings of CHFI include Universal Travel Group (UTA, 2008), Orient Paper (ONP, 2008), and the failed RTO stocks China 9D Construction Group (CNAG.PK), Beijing Logistic (BJGL.PK), Guilin Paper (GUPR.PK), and China Ivy School (CIVS.OB).

Doubts about Jade Art Group

Jade Art Group (JADA) engaged Davis Accounting Group on July 13, 2009 after dismissing Chisholm Bierwolf, Nilson & Morrill. Davis has been engaged "for all audit and permissible non-audit services," and the firm signed off on JADA's 2009 financial statements on April 12, 2010. JADA is currently not delinquent with its filings, and the most recent balance sheet shows cash and cash equivalents of $16.27 million or 250% of their current market capitalization. The company went dark again, all attempts to contact anyone there have been unsuccessful for weeks, and the stock price keeps collapsing on extremely high volume. With the recent developments regarding their auditor the market does apparently not believe JADA's financial statements, questions that all that cash even exists. We will see if (and what) they file their 2010 annual report - due by March 31, and who will sign off on the numbers (can't be Davis anymore).

Colatteral Damage?

Both BFAR and JADA have not yet shown any reaction on the developments at Davis Accounting. They will both have to engage a new accounting firm for the 2010 report, and I have my doubts that this can be a quality name. I am also not sure about further legal implications. Will a re-audit be required by the SEC for the fiscal years of 2008 and 2009 when Davis illegally practiced as a CPA firm? If so, then another Chinese firm that had connections with China US Capital Holding and China Finance might be affected:

Orient Paper (ONP) engaged Davis Accounting Group on November 27, 2007, replacing Moore & Associates Chartered (similar to BFAR). Davis signed off on Orient Paper's 2007 results on March 28, 2008, and on the 2008 numbers on March 19, 2009. Davis resigned as ONP's auditor on December 1, 2009 and was replaced by BDO Limited. On November 29, 2010, Orient Paper presented the findings of an independent investigation, assisted by two law firms and Deloitte & Touche Financial Advisory, into several issues which also covered the period when Davis was engaged. ONP said this investigation found no evidence for falsely reported revenue, inventory turnover, and gross profit in previous financial statements.

Preparing for the RINO Fall-out

After a series of events with almost comical dimensions, we now have the first case of fraud on the Nasdaq, involving a Chinese small cap company. RINO International (RINO) admitted Friday that it did not enter into two contracts for which it reported revenue during its 2008 and 2009 fiscal years. The stock has been halted by the NASDAQ Stock Market around noon on November 17, and it will remain halted until RINO has fully satisfied NASDAQ's request for additional information. NASDAQ has not specified what kind of information they are looking for, but at this time it seems unlikely that RINO will be allowed to remain listed on the prestigious NASDAQ market. Investors should be prepared to find the stock on the pink sheets in a couple of weeks.

Earlier on Friday, the first official statement in the RINO case came from its auditors, Frazer Frost LLP, in form of a letter issued in an 8-K Filing with the SEC.

In a telephone conversation on November 16, 2010, Mr. Zou Dejun, the Chief Executive Officer of the Company, informed Ms. Susan Woo of our firm, in substance, that as to the six RINO customer contracts discussed in the recent report of Muddy Waters LLC, the Company did not in fact enter into two of the six purported contracts, and a third contract among the six was explainable. When Ms. Woo inquired about the Company's other contracts, Mr. Zou said he was not sure, but there might be problems with 20 - 40% of them. Assuming that these statements were reasonably accurate, it appears that our reports would have been affected if this information had been known to us at the date of our reports, although the effect on the financial statements is currently unknown and cannot be quantified without a thorough investigation. We further note that in a conversation the following day, November 17, 2010, involving Ms. Woo, several directors of the Company, Company counsel, and Mr. Zou, Mr. Zou stated that he was not sure the day before and went back to look into some things, and found that apart from the two problematic contracts, all other contracts are legitimate and can be verified.

The language used in this letter gives those very serious events an almost comical note. The CEO said "he was not sure" and "there might be problems," then "went back to look into some things." And Frazer Frost is "assuming that these statements were reasonably accurate" to conclude that "it appears that" their audited reports were wrong as they might have based their findings on forged invoices.

The very basic conclusion from last week's events is that RINO is not taking their status as an U.S.-listed public company any bit seriously, and that Frazer Frost did a pretty lousy job as an auditor. To fall for forged information of such a magnitude raises the question of what exactly Frazer Frost did attempt to verify, if anything at all. This will likely lead to lasting damage for the reputation and credibility of Frazer Frost and the market has already started to punish other clients of the firm.

In Friday's trading Frazer Frost clients were among the biggest losers. China Valves Technology (CVVT) dropped 15.28% for the day to close at $8.93, snubbing off any upside from a Roth Capital upgrade ($16 price target) before the open. Harbin Electric (HRBN) closed at $16.95, down 10.7%, and the stock finds itself now 30% below the $24 going-private offer it received a couple of weeks ago. Other FF clients affected were Fushi Copperweld (FSIN, down 6.69%), China Fire & Security (CFSG, down 5.86%) and China Medicine (CHME, down 4.20%).

Another stock that is directly affected is Orient Paper (ONP, down 7.00% on Friday). Rino International's fall is the first big success for 2-man (short-selling) research firm Muddy Waters LLP who released a very detailed report about the company on November 10, which led to the reported series of events. Muddy Waters' previous target was Orient Paper, but that company has very determinedly defended itself and its stock price had stabilized recently. With the collapse of RINO the focus might now shift back to ONP and put the stock under renewed selling pressure until the results of the ongoing independent investigation into MW's allegations is presented.

So what will happen next? Will this lead to new or resumed short-selling attacks on a variety of Chinese small caps? Most certainly it will! Short sellers have the whole weekend and beyond to come up with pretty much anything, knowing that whatever they get published will likely have an immediate effect on the stock price, as with the RINO disaster they now have a precedent of Chinese fraud on the Nasdaq. Those companies do already have a hard time defending themselves, even against totally ridiculous allegations. And always keep in mind that not all those attacks will be unfounded, it is very likely that RINO is not the only Chinese company with severe irregularities in its financial statements. But don't make the mistake to interpret this as a "China problem," other than that Chinese companies are just the easiest targets right now.

Will we see a new downtrend for the sector similar to what we all have experienced last summer? That depends on the direction of the general markets in the U.S. and China. It is an undeniable fact that big money is very eager to put their money in (perceived) quality Chinese companies, proven by the China IPO craze of the last three months when most offerings opened for trading some 30-50% above their IPO price. However, if we see the general appetite for risk fading, or the S&P 500 heading for a 10-15% correction, I would expect China small caps to lose value twice as fast. Right now I am still bullish for equities in general, but less so than two or three weeks ago. We should be prepared for both scenarios now.

This RINO situation is serious. Even the biggest bulls will now have a hard time dodging smear attacks on perfectly healthy stocks from China which just happen to have some detail in common with RINO, being it company structure, a sub-par public accounting firm, a weak Board of Directors, or the way they became a public company. It might be that the normal "innocent until proven guilty" is turned upside down for the time being, especially for those companies that do not take their U.S.-listed public company status seriously.

What we should do is looking at business models and trying to understand them. Doing our own in-depth research and see if we can be comfortable with what we find out. Looking at management credibility and perceived credibility. Who is running the company, which investors are backing it? Personally I am no longer willing to risk my money with a $250MM stock that chose to reaffirm Kabani or similar as their auditors, nor am I seeing the point in holding a position in a stock that doesn't even bother to do earnings calls. Talking about big board names here only, for Bulletin Board stocks and companies that are early on their way of maturing he have to set different requirements. However even there, companies that choose not to communicate at all should be treated with extreme caution.

This is not the time to run away from China stocks. Smart money will always look for value, and you have to find out where the value is, what companies you want to invest in, and why exactly you would do that. Re-evaluate your holdings, make adjustments now, and prepare yourself for possible "bargain hunting" with quality stocks that might get beaten down in the RINO aftermath, but don't deserve to be treated in the same way for reasons you have to determine for yourself.

I am making several adjustments to the China Model Portfolio today:

Changda International (CIHD) is currently trading at $0.75, down 76.20% for the year and down 69.76% from its April 5 high at $2.48. The Trading China Tracker Score is 20 (Strong Buy).

Changda has posted strong third quarter numbers last week, however an equity raise is still looming. CIHD has not reached our price target of $1.00 yet, however we are locking in profits here to protect our gains in the light of the RINO situation. We are closing the position here for a gain of 78.57% or $3,927.

Gulf Resources (GFRE) is currently trading at $10.53, down 9.70% for the year and down 12.25% from its April 15 high at $12.00. The Trading China Tracker Score is 13 (Strong Buy).

While I have little doubts about the integrity of Gulf Resources, the stock has been a target before, also mentioned along RINO in the infamous Barron's "Beware..." article. I believe it is prudent to secure profits here as this is one of the stocks that might see a short-selling attack. We are closing the position here for a gain of 61.75% or $3,087.

Renhuang Pharmaceuticals (CBP) is currently trading at $2.41, up 145.91% for the year and down 19.67% from its April 9 high at $3.00. The Trading China Tracker Score is 16 (Strong Buy).

Renhuang is close enough to our price target now, so we can take profits here as well. We are closing the position here for a gain of 67.36% or $3,367.

Wonder Auto Technology (WATG) is currently trading at $8.50, down 27.60% for the year and down 33.44% from its April 9 high at $12.77. The Trading China Tracker Score is 5 (Hold).


Wonder Auto disappointed us with their third quarter report. Account receivables more than doubled for the quarter and the stock still couldn't get above a "Hold" rating on the China Tracker. I would also expect the company to upgrade to a Big4 auditor as soon as possible. We are closing the position here for a loss of 3.30% or $164.

ZST Digital Networks (ZSTN) is currently trading at $7.25, down 17.24% for the year and down 14.51% from its November 8 high at $8.48. The Trading China Tracker Score is 10 (Buy).

We are also selling our ZSTN position here. The only reason is that we are not entirely comfortable with the company's business model, there are open questions about the reported margins and future prospects (GPS) which lead us to believe that ZSTN does not pass our high quality standard for senior exchange stocks at this time. We are closing the position here for a gain of 29.46% or $1,471.

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.

Barron's Attack on Chinese Reverse Mergers

Barron's launched a strong attack on Chinese reverse mergers in a feature article this weekend. While the article is extremely biased as it suggests that all reverse mergers are bad investments, and questionable or even fraudulent activities of selected few companies can be safely transfered to the whole group of 200+ Chinese stocks that went public via reverse merger, the underlying sentiment that such stocks bear a higher degree of risk should not be taken lightly and the market will probably react accordingly.

This makes it now even more important for retail investors to proceed with their own due diligence and apply strict quality rules to possible investments. I have made a few suggestions for what to look at in a previous article (Checklist for Quality). If you find a stock with seemingly wonderful fundamentals and a ridiculously low P/E ratio then you might want to dig deeper to find possible reasons for the depressed share price. There are undoubtedly many Chinese stocks out there which got unfairly punished with the whole group and which do really trade at ridiculously low levels here. You want to find those with a level of assurance about reported numbers and credibility of management that makes you comfortable holding your positions through these volatile times. Simply put, if you have reason to question the credibility of a company - your own reason, not something you might just have snapped up from short sellers' inflammatory accusations - then don't get involved. Look for something else then.

Let's have a brief look at those stocks mentioned in the Barron's article this weekend:

China Green Agriculture (CGA) is currently trading at $10.65, down 27.56% for the year and down 36.42% from its March 9 high at $16.75. The Trading China Tracker Score is 3 (Hold).

Fertilizer company China Green has been mentioned for its relationship with questionable promoter Du Qingsong and his involvement in the 2007 reverse merger. Also for having retained Kabani & Co. as the company's auditor, a firm that Barron's singled out as an example of those "that certified the financials of companies that came to grief." While there are no current accusations against CGA in the article and most of the story focuses on 2007/08 events, Barron's mentioned CGA several times throughout the piece and it is very unlikely that the stock will be doing well when trading starts again on Monday.

Unrelated to the article, the stock wasn't doing too well on the Trading China Scorecard. It is relatively expensive compared to its peers and we have already marked the auditor as a negative. Out of four analysts following the stock, three give it a neutral rating. CGA might find itself re-testing the 2010 lows at $8.15 as early as next week.

China Integrated Energy (CBEH) is currently trading at $8.33, up 18.32% for the year and down 32.34% from its April 15 high at $12.31. The Trading China Tracker Score is 7 (Hold).

Bio-diesel maker CBEH is mentioned in the same context as CGA, with Du Qingsong being indirectly involved in the 2007 reverse merger. However, the company has matured since going public, doesn't seem to have any involvement with Du as of today, and the stock has relatively strong analyst backing. All four firms that cover the stock give it a positive rating with an average price target at $11.83. CBEH is not exceptionally cheap here and with Sherb & Co. it doesn't have an auditor which meets the Trading China quality standard for a $360 million company. I would not be too worried here, but there are better deals out there in the China space so no need to aggressively pursue the stock on weakness.

China Natural Gas (CHNG) is currently trading at $5.27, down 52.61% for the year and down 52.66% from its March 10 high at $11.13. The Trading China Tracker Score is 6 (Hold).

Barron's mentioned CHNG for the serious accounting irregularities that surfaced last week and prompted Roth Capital to downgrade the stock to SELL and Rodman & Renshaw to put their rating under review.

"We believe CHNG's Q2 filings indicate worsening corporate governance and internal controls over financial reporting. In its 2Q10 Form 10-Q, the company disclosed additional actions that indicate continued governance and control weaknesses. It entered into a bank loan agreement in the amount of $17.7 million in February 2010 without reporting the bank loans in its consolidated balance sheet as of March31, 2010. In addition, the company acquired four natural gas fueling stations without BoD pre-approval on the final acquisition." (Roth Capital)

The company's auditor is Frazer Frost whose Asian-services partner commented according to Barron's that "every company has some deficiencies in internal controls." While that might be true, even understandable for a newly public company, I believe that risk-sensitive investors should think twice before taking on such an additional risk. I wouldn't touch this stock until all issues are resolved to everyone's satisfaction.

Deer Consumer Products (DEER) is currently trading at $7.79, down 31.13% for the year and down 39.80% from its March 2 high at $12.94. The Trading China Tracker Score is 2 (Hold).

Home appliance maker DEER has been mentioned for its involvement with Benjamin Wey, who Barron's calls "one of the most controversial promoters of Chinese reverse takeovers." The article states that "Wey's Website shows him flying with Deer's management in a private jet on the night before the pricing of a $75 million secondary offering." Again, there are no direct accusations against the company, and just a connection with a very influential Wall Street promoter doesn't make this a bad investment. However, with a forward P/E of 11 the stock is not cheap here, and buying it would be a bet on strong 3rd and 4th quarter results. The company said in their latest press release that it expects "record earnings in the second half" of 2010.

Agfeed Industries (FEED) is currently trading at $2.35, down 53.00% for the year and down 56.73% from its March 9 high at $5.43. The Trading China Tracker Score is -5 (Sell).

Pork producer Agfeed is also mentioned for their business connection with Benjamin Wey. Barron's said that "since our piece describing Wey's work for the hog farmer AgFeed Industries (FEED), the company has missed production targets and its shares have slumped from 15 to below 2.50." What the article fails to mention is that the missed production targets are hardly the fault of Wey or the result of any wrongdoings, but merely the result of a series of natural disasters in China.

"During the second quarter the Company faced an extremely difficult operating environment as a result of a series of severe floods throughout its area of operations. The floods led to significant operating disruptions on the Company's farms and on the transportation infrastructure supporting the operations. The movement of feed and live animals was severely disrupted. These factors led to the loss of over 16,000 live animals." (Source: PR Newswire, 2010-08-10)

All of this led to disastrous quarterly results and severely reduced short term prospects as FEED will have to repair the damaged infrastructure and it will take some time to get the business back to normal. That's why I do not expect the stock to recover soon and the Trading China score is reflecting my investment position very well.

Gulf Resources (GFRE) is currently trading at $8.60, down 26.25% for the year and down 34.38% from its March 8 high at $13.10. The Trading China Tracker Score is 12 (Strong Buy).

GFRE is mentioned in connection with Kit Tsui, who helped with the reverse merger. And Barron's claims that "trouble seems to haunt Tsui's deals." That is certainly true in regards to Orient Paper (ONP), but implying that any type of reverse merger would be automatically a bad deal is very irresponsible journalism. Short sellers will probably find out that next to Tsui, Orient Paper and Gulf Resources also have their auditor, BDO Limited (HK), in common. But that also doesn't make jumping to conclusions right. Cautious investors might want to stay away from GFRE just for the Barron's fallout. However, if you believe the strong numbers GFRE reported for the second quarter, if you believe in the excellent business outlook provided by the company and supported by analysts from Brean Murray, then you might want to buy this stock aggressively on any Barron's induced weakness.

Orient Paper (ONP) is currently trading at $4.34, down 58.59% for the year and down 63.07% from its April 26 high at $11.75. The Trading China Tracker Score is 16 (Strong Buy).

The Orient Paper saga is probably the most talked about event in the U.S.-listed China sector this summer, I don't have to summarize it here again. The Barron's article repeated the attacks on ONP started by Muddy Waters as an example for possible fraud that can be found within the group of Chinese reverse mergers. I still can not judge who is right or wrong here, but it is noticeable that Barron's chose to omit Orient Paper's side in the dispute and printed Muddy Waters accusations uncommented. There seems to be some bias here.

ONP is a prime example of why the Trading China Tracker Score should not be seen as a Buy or Sell recommendation. The ratings (Buy, Hold, Sell) that are posted next to the Score are automatically generated and should be interpreted according to the metrics that are used for calculating the Score only! And those metrics are basically financial data as reported with the SEC. If the data is questionable or subject to restatements then the Score can not reflect that. Additionally future developments can not be accurately reflected by the Score. In ONP's case, even if the company would be able to clear itself from all fraud accusations with an independent investigation, the cost of these initiatives will be significant - approximately a full quarter of earnings - and the future projections should be adjusted accordingly.

RINO International (RINO) is currently trading at $16.03, down 42.03% for the year and down 51.31% from its January 11 high at $32.92. The Trading China Tracker Score is 2 (Hold).

Rino's connection to the Barron's article is limited to the company being a Frazer Frost client and a statement that Rino "has had three auditors and four CFOs in the past four years, while restating its financials twice." Rino still admitted to material weaknesses in internal control over financial reporting in its latest 10-Q, but it has taken several steps to address these issues, including hiring a new Internal Audit Manager last month. Looks to me that Rino is on the right track and all three analysts covering the stock rate it a buy with an average price target more than 100% above current levels. The fact that Rino changed auditors and CFO's several times in the past few years may as well point to the company trying to strengthen their financial reporting, while restatements show that mistakes have been found and corrected.

SkyPeople Fruit Juice (SPU) is currently trading at $4.90, up 18.93% for the year and down 39.51% from its March 5 high at $8.10. The Trading China Tracker Score is 15 (Strong Buy).

SPU has been mentioned in connection with Andrew B. Worden when Barron's aggressively stated that "investors would be well advised to steer clear of stocks like those in the PIPE deals involving Andrew B. Worden's Barron Capital." What should worry investors more than this is last week's secondary offering that was priced at just $5 per share, a huge discount to market and a very shareholder unfriendly price at a time when most responsible companies have postponed their public offerings due to unfavorable market conditions. Management actions like this speak louder than P/E ratios or net income guidance as it doesn't seem that creating shareholder value is very high up on management's agenda.

Biostar and Gulf Resources

Biostar Pharmaceuticals (BSPM) is currently trading at $2.84, down 36.19% for the year and down 48.46% from its April 23 high at $5.51. The Trading China Tracker Score is 9 (Buy).

Biostar scheduled their Q2 conference call for Tuesday, August 17, but quarterly results are already out in a 10-Q filing. The company reported 46% revenue growth with 28% EPS growth year-over-year, overall solid results which confirm that BSPM is on track to earn about $0.65 a share for 2010. Biostar is still heavily dependent on sales of just one product, their Hepatitis B OTC drug 'Xin Aoxing' where the company generated 75% of the quarterly gross profit from. That makes the stock vulnerable from any possibly disruptive rumours regarding this product, as the temporary marketing ban in April. However, with a current P/E-ratio of 4.5 and new products in the pipeline, the stock looks attractively priced at current levels.

Gulf Resources (GFRE) is currently trading at $8.72, down 25.22% for the year and down 33.44% from its March 8 high at $13.10. The Trading China Tracker Score is 3 (Hold).

Chemical company Gulf Resources is one of the largest producers of bromine in China. The company has been aggressively acquiring new bromine properties in their region and plans to continue doing so for the foreseeable future. It has an open shelf for up to $120 million and the money is likely intended to finance further bromine purchases. GFRE's business is very profitable and the company had positive cash flow from operating activities of almost $40 million in 2009.

Gulf Resources announced preliminary second quarter results last week when they moved their conference call and 10-Q filing to tomorrow, Monday August 16. Those preliminary numbers look quite excellent:

The company announced net revenues to range between $43 and $46 million, 50% more than in the second quarter of 2009 and 18% higher than the analyst consensus of $37.5 million. For earnings the company predicted between $0.44 and $0.47 per diluted share, up 55% from 2009's $0.29 and beating analyst estimates of $0.34 by a staggering 30%. The stock is pretty much flat since the pre-announcement, however this might change with Monday's earnings call. Most investors seem to be afraid of the mixed shelf offering but I believe the company has proven that previous acquisitions have been highly accretive and generated shareholder value with significant EPS growth.

An article on Seeking Alpha this weekend speculates that Gulf Resources might itself be an acquisition target and that the delay of the 10-Q filing and conference call might be related to a possibly important announcement as the company's board might need that additional time to consider an offer. That is of course a wild guess from the author's side, but I do support the view that GFRE with its growth prospects, sizable cash flow and significant bromine resources would be a nice fit for a bigger player in the chemical industry.

2010 Guidance and EPS Estimates

China Kangtai Cactus (CKGT) is forecasting FY 2010 revenues of $34.8 million, or 35% growth from projected 2009 results of $25.8 million. This translates into Q4/09 revenues of $7.77 million, down 5% from the third quarter. As Q3/09 was the breakout record quarter in CKGT's history, I wouldn't see this guidance as negative - the average for 2009 just sits at $6.0 million so Q4 results should be seen as confirmation of the uptrend.

The company achieved a net margin of 36.8% in the third quarter of 2009. Applying that same margin to the 2010 revenue guidance means CKGT should be able to achive a FY10 net income of $12.83 million or $0.65 per share. This is consistent with my own conservative estimate of 2010e EPS $0.60.

Gulf Resources (GFRE) also issued FY financial guidance. Taking the midpoint of this guidance, GFRE is expecting FY10 revenue of $129.5 million (up 17.5% from 2009) and net income of $37 million (up 21% from 2009). With 35.54m shares outstanding, this translates into a 2010e EPS of $1.07, or just 7% EPS growth from 2009. This number is significantly below my own estimate of $1.20, so I am now calculating with 2010e EPS of $1.02.

Dilution has been heavy for GFRE shareholders in 2009 as the total share count has risen by a whopping 38.6% in just one year. I hope this trend will not continue or Gulf Resources is no longer a value pick for the growth stock investor.

Lihua International (LIWA) preannounced 2009 results and issued FY 2010 guidance. The company expects FY09 revenue of $161.5 million and net income (non-GAAP) of $25.5 million. For Q4/09 this means record revenue of $51.22 million and net income of $7.6 million ($0.32 per share).

Lihua anticipates 2010 year-over-year growth of approximately 30-35% in gross profit and 35-40% in non-GAAP net income. Using the low end of this guidance we can expect FY 2010 net income of $34.5 million or $1.43 per share, which means the stock is currently trading at a forward P/E of 6.3. And that makes this high-growth stock a bargain at the current level.

Fantastic Start of the Year

2010 started with a BANG!! lifting the China Portfolio up to new heights. I am making several changes to the portfolio positions this weekend and there will likely be another post tomorrow with some new additions.

Biostar Pharmaceuticals (BSPM): down 5.84% for the week, total return 48.58%
BSPM is consolidating its recent gains but there is much more room for the stock to appreciate, especially as I consider an uplisting to a national exchange to be imminent.

I am doubling my position in the China Portfolio here. I am ADDING 1000 BSPM for Friday's close at $4.19. I am also raising the target price to 10x 2010e EPS of $0.82 to $8.20.

China Agritech (CAGC): up 31.88% for the week, total return 87.39%
The stock has reached my target price of $35 and I consider it fairly valued at current levels.

Closing position: I am SELLING 250 CAGC for Friday's close at $36.86 for a 87.39% gain or $4,297.50.

China Architectural Engineering (CAEI): up 15.25% for the week, total return 13.08%
I am not very happy with this position since CAEI bought a multiplayer online game developer in December. Stick with what you're good at? However, CAEI stays in the China Portfolio for now as I expect its core business to do much better in the coming months now that the Dubai disaster is out of the way.

China Armco Metals (CNAM): up 34.07% for the week, total return 26.49%
China Armco took off this week as the opening of the scrap metal recycling factory nears. No changes to my original investment thesis here.

China Biologic Products (CBPO): up 7.62% for the week, total return 62.50%
China Biologic is rapidly approaching my target of $15. No changes this week, but I will have to re-evaluate the target price in the coming week.

China Kangtai Cactus (CKGT): up 3.32% for the week, total return 64.71%
Despite the 65% gain over the past six weeks the stock is still trading far below what I consider fair value. A problem might be an expected to be huge non-cash charge with Q4/09 numbers resulting from EITF 07-05 adjustments, but earnings shouldn't be out before mid-February.

China North East Petroleum (NEP): up 12.76% for the week, total return 75.00%
The stock has reached my target price of $10.20 - actually it has seen $11.59 mid-week - and consequently I am closing the position here. I am not ready to up the target price above 8x 2010e earnings. This doesn't mean the stock couldn't run much further from here, momentum is clearly on its side, but according to the rules set up for this model portfolio the position has to be sold here.

Closing position: I am SELLING 1000 NEP for Friday's close at $10.43 for a 75.00% gain or $4,470.00..

China Recycling Energy (CREG): down 5.10% for the week, total return 38.16%
Everything looks fine here. The stock was stalling last week but long-term prospects are as bright as ever. No changes.

China Sun Group (CSGH): up 19.89% for the week, total return 43.87%
Excellent week for CSGH took the stock to new all-time highs. I am raising my target price from $2.50 to $3.50 on momentum in li-ion stocks and expected imminent news from the company on customer battery testing.

GC China Turbine (GCHT): up 13.55% for the week, total return -13.11%
The stock caught some interest last week but that I expect it to go much higher with actually verifiable numbers for the fourth quarter. GCHT is projecting its net sales to reach $550m in 2012, up from less than $30m last year. While I think that this is probably too ambitious, we can safely assume triple digit annual growth for the next 2-3 years. Investor Presentation (PDF)

I am doubling my position in the China Portfolio here. I am ADDING 750 GCHT for Friday's close at $2.85..

Gulf Resources (GFRE): up 24.27% for the week, total return 63.73%
The stock has reached my target price of $14.50 and I consider it fairly valued at current levels.

Closing position: I am SELLING 500 GFRE for Friday's close at $14.49 for a 63.73% gain or $2,820.00.

Lotus Pharmaceuticals (LTUS): down 5.47% for the week, total return 40.77%
Quiet trading in LTUS last week. The stock is trading at 52-week highs after it broke through the $1.20 resistance in December.

I am doubling my position in the China Portfolio here. I am ADDING 3000 LTUS for Friday's close at $1.35..

New Energy Systems (NEWN): up 25.42% for the week, total return 40.95%
NEWN released 2010 guidance of at least $1.23 per share this week. I am raising my target price to 12x 2010e EPS or $14.75. I consider this target to be very conservative and it is likely that I am not selling the position when the target is reached.

Orient Paper (ORPN): up 29.58% for the week, total return 42.95%
ONP is one of the top momentum plays in the China space at the moment. After lagging the market for a while the stock took off now and even scratched my target price of $14.50 this week. I will re-evaluate this target now and keep ONP in the China Portfolio for at least another week, although a short-term pullback is quite likely.

Skystar Bio-Pharmaceutical (SKBI): up 6.04% for the week, total return -6.63%
I do fully expect SKBI to do what ONP did last week in the near future: making a jump of a few dollars on strong volume. I am not in the slightest worried about SKBI's relative underperformance in the China Portfolio so far.

Worldwide Energy & Manufacturing (WEMU): up 15.45% for the week, total return 15.45%
Nice first week for the newest addition to the China Portfolio. If this stock gets volume we can see it retesting the 2009 highs this spring already.

Weekly Recap

Biostar Pharmaceuticals (BSPM): up 20.19% for the week, total return 32.98%
The Biostar story is just beginning to unfold. There is a nice article by Maj Soueidan on TheStreet.com that tells the story again with some new details.

China Agritech (CAGC): up 2.21% for the week, total return 38.54%
China agricultural stocks have been very strong in the past four weeks. After having exploded from below $19 to the low $30s this month, CAGC is currently consolidating its gains. The stock has been added to the IBD100 last weekend. On Friday China released economic numbers which point to inflation for the first time this year. This could give ag stocks in general a further boost.

China Architectural Engineering (CAEI): up 23.81% for the week, total return 21.50%
On Thursday CAEI was rebounding strongly on high volume based on technicals. Despite its currently weak fundamentals, remember that this is a world class engineering firm with a track record of many large and prestigious projects.

China Armco Metals (CNAM): down 3.08% for the week, total return -6.25%
China Armco didn't do anything this week. The company expects to launch operations in its steel recycling and scrap metal recycling business early in 2010. The recycling facility is expected to be capable of recycling one million metric tons of scrap metal per year which will position the Company as one of the top 10 largest recyclers of scrap metal in China.

China Biologic Products (CBPO): up 1.55% for the week, total return 15.00%
Despite having moved up to Nasdaq, trading volume is still low and there isn't much accumulation of the stock yet. CBPO is a value play in the Chinese healthcare sector that is still under the radar... we just have to be patient here.

China Kangtai Cactus (CKGT): up 22.73% for the week, total return 42.94%
Strong week for China Kangtai which brought a new 52-week high at Friday's close. And all that on no news from the company. My price target for the stock is still far away and shows room for a further double from current levels.

China North East Petroleum (NEP): up 20.18% for the week, total return 35.11%
I have totally underestimated this stock, to be honest. Despite a strong dollar and weak oil dropping below $70 this week, NEP has skyrocketed above the previous high of the year and scratched the $7 mark already. I had only added a quarter position to the China portfolio for concerns about falling oil prices dragging NEP down but that is apparently not happening. If you had bought more of the stock in the $5 area or below, congratulations.

I am doubling my position in the China Portfolio here. I am ADDING 500 NEP for Friday's close at $6.85. I am also raising the target price from $7.50 to 8x 2010e EPS of $1.28 to $10.20.

China Recycling Energy (CREG): up 24.10% for the week, total return 21.91%
China Recycling successfully raised $26.75 million to finance phase 2 and 3 of the Erdos TCH power generation project. And this financing happened without any dilution to shareholders. With a little delay the stock jumped to a new 52w-high on Friday.

China Sun Group (CSGH): down 5.33% for the week, total return 3.23%
Nothing happened this month so far, this is a sit and wait value play which might start to take off at any given moment. Fundamentals, story and outlook are unchanged from my initial profile.

GC China Turbine (GCHT): down 11.56% for the week, total return -20.73%
This is a very speculative stock in the China Portfolio and for that reason I have only added a quarter position so far. GCHT is a start-up manufacturer of wind turbines. The company currently has the capability to produce an average of 30 wind turbines per month which allows it to fulfill its initial orders of 150 wind turbines, worth in excess of US$ 128 million within one year. The company has yet to post revenues and profits, will likely have to invest a lot of money into more production facilities and the development of the planned 3.0MW utility scale turbines, and there are many risks involved in this plan incl. dilution and government policy changes. I consider this to be a very promising story but associated risks demand to keep the portfolio position small for the time being.

Gulf Resources (GFRE): up 3.60% for the week, total return 17.06%
This Friday, Gulf Resources raised $25 million in a private placement. The new shares were sold at $8.50, a 16% discount to Thursday's closing price. While the stock initially traded down to $9 on the news it steadily climbed higher and ended the day in positive territory. I view this as a very positive sign for the performance of the stock in the coming weeks.

Lotus Pharmaceuticals (LTUS): down 4.55% for the week, total return 9.49%
After a failed break-out attempt in early December we are now still waiting for the real move higher. For that to happen LTUS has to break resistance at $1.12 and trade above that level for two days with volume. Fundamentally this stock is worth $5 so it doesn't matter if it sits in the 90 cents or slightly above $1, the real move has yet to come and it should be mind-blowing. I will double the China Portfolio position as soon as the break-out scenario unfolds.

New Energy Systems (NEWN): down 3.72% for the week, total return -1.43%
NEWN successfully completed the acquisition of fellow Li-ion battery manufacturer Anytone this week. 3.6 million new shares have been issues on an average stock price of $6.60 per share. While this acquisition at 5.0x 2010 projected net income for Anytone could be considered a steal, the stock currently sits at a level even lower than the $6.60 acquisition price. At current levels, I consider NEWN to be one of the lowest risk positions in the China Portfolio and a core holding for 2010.

Orient Paper (ORPN): up 0.54% for the week, total return -1.58%
In a filing with the SEC on Friday afternoon, Orient Paper indicated that the listing of their common stock on NYSE Amex is imminent. No PR has been released yet so there is a chance to accumulate the stock before this news breaks. I expect ORPN to trade above $10 with such a press release and to hold this level with the uplisted to Amex. I do already have a full position of ORPN in the China Portfolio which I can't raise by the rules set for this model portfolio.