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

Two Promising China Microcaps

Huifeng Bio-Pharmaceutical (HFGB) is currently trading at $0.70, down 24.74% for the year and down 50.00% from its May 4 high at $1.40. The Trading China Tracker Score is 9 (Buy).

Huifeng is a leading Chinese producer of diosmin and rutin, raw materials for the pharmaceutical industry. Huifeng products are sold in China, France, Japan, Hong Kong, Russia, India, Germany and the U.S. and the company has a five-year $56 million diosmin supply contract in place with a leading French distributor. For FY 2009 the company reported earnings per share of $0.15 on 25% higher revenues and significantly improved net margins.

The company sees strong growth ahead for 2010 and the years to come. Official guidance calls for revenues to rise by 60% this year and for net margins to improve further to the 22%-23% range. 2010 EPS should come in around $0.20 due to a higher share count. There is a high risk of further dilution in 2011/12 as the company plans to make several strategic acquisitions and to aggressively pursue the patent drug market. Entering this market will transform the company from an input supplier to a patent drug developer.

Huifeng plans to raise $15-20 million dollar to acquire patent medicine factories and for the construction of a new diosmin plant. With this funding the company expects revenues and net income to more than triple in the next three years. However, I would not expect such an equity raise before Huifeng has successfully uplisted to a senior exchange - the company is actively progressing this plan and a reverse split will likely precede execution.

At the current price of $0.70 Huifeng shares are valued at 3.5x this year's earnings. In a normalized market for China small caps a P/E multiple of 7 should be easily achievable, which leads me to believe that the stock will revisit its May high of $1.40 within the next 12 months.

Jade Art Group (JADA) is currently trading at $0.36, down 47.06% for the year and down 66.98% from its April 5 high at $1.09. The Trading China Tracker Score is 15 (Strong Buy).

Now this is an interesting story. Back in 2008 this stock was trading safely in the $2-$7 range, just to collapse in early 2009 and stay below $0.30 for most of the year. Last fall trading in JADA shares became highly erratic with huge price swings to both sides, culminating in a massive run up from $0.36 to $1.09 within just two weeks this April. And now for the past 3 weeks we find JADA below $0.40 again, trading on low volume and having lost all momentum.

However, Jade Art Group finds itself in a much improved financial position now. With a current market capitalization of $28.8 million, the company is sitting on $14.5 million pure cash, if we add account receivables we even get to $20.5 million. The company posted earnings of $0.09 for the past two quarters and operating cash flow looks even better with $0.16 per share for the past six months. The company has no debt and a 50-year contract to access a huge mountain of jade on favorable terms.

The company tries to put some of its cash to work by searching for a complementary acquisition. Last November it transfered $8.8 million to a Shenzen-based investment group to identify a possible target company, the results of this endeavour are expected to become clear by August 14 this year. The strategy of diversifying its business seems crucial for JADA as right now the company has only one supplier and five customers, the risks associated with such a fragile business structure should not be underestimated (government regulation, natural disasters, weather conditions, competition, jade market).

Acknowledging those risks, I don't believe JADA's business should be valued with a multiple higher than 5x this year's earnings. If I assume no growth in jade sales for the remaining quarters this year, the company should be able to generate $12 million net income in FY 2010. As operations are high margin and provide strong cash flow we should add the company's current pile of cash to our projections (5x $12m plus $20m cash) which gives JADA a fair value of $1.00 at this time.

I would be a buyer in the low $0.30's, a level that provided strong support in the past nine months. It seems very likely that the stock will regain momentum later this year on the next earnings release, the announcement of an acquisition, a recommendation focusing on the strong balance sheet, or just the company breaking their months-long silence again. This is a very speculative idea, high risk and low visibility, but with potentially huge rewards and that's why I am recommending it here.

Short Earnings Round-Up

Huifeng Bio-Pharmaceutical (HFGB) reported revenues and net income at the high end of their February guidance. Gross margin improved by 182 bps to a healthy 36.69%. The company seems well on track to achive their 2010 net income target of $5 million and has a forward P/E of barely 5 at current levels. Huifeng did not publish a press release.

New Energy Systems (NEWN) announced financial results in line with expectations: $6.4 million in adjusted net income on $26.4 million revenues. However, NEWN's 2009 numbers do not include any revenue or profits from the two major acquisitions, Anytone and NewPower. The company reiterated its 2010 guidance of at least $15.6 million net income or EPS of $1.23 based on 12.6 million fully diluted shares. This guidance calls for 67.5% net income growth based on pro forma consolidated 2009 net income of $9.3 million as stated in the 10-K filing, and the company has a very healthy balance sheet with no further dilution to be expected for 2010. With a forward P/E of 6.7 New Energy is trading well below its peers and with a Nasdaq listing being a safe bet for Q2/Q3 the stock should appreciate significantly from current levels. I see this one as a clear buy below $10.

China Kangtai Cactus Biotech (CKGT) reported 2009 EPS of $0.43 on very healthy gross margins at 40%. Their 2010 guidance calls for more than 30% growth and we can expect the EPS number to rise to $0.60 for the current year. With a price-to-earnings ratio of just 4.x the stock is still very cheap here and I view it as a China Small Caps core holding.

GC China Turbine (GCHT) reported their first ever quarterly profit but failed to publish a press release with their annual report. That is surprising given the slew of press releases the company put out in the First Quarter. Should the company decide to promote their numbers next week and possibly reiterate their very ambitious business plan, the stock price should take notice. Q4/2009 was the first one in GCHT's history with significant wind turbine sales. My calculations point to $2 million net income for the quarter or $0.03 per share. GCHT stated that 16 1.0 MW wind turbines were sold in 2009, that it started mass production in the second half of 2009, expects sales during every quarter of fiscal 2010, and has a current backlog of 140 such turbines.

That was a short round-up of earnings releases from our China Model Portfolio positions. I will post about other very interesting developments in last week's annual reports (CFMI, CSOL, CHBU) later today if I find the time.

Unrelated to earnings... our portfolio position China Electric Motor (CELM) reached my target price of $8 last week. The stock showed exceptional strength in a weak market and reached a new all-time-high on Friday. However, according to the portfolio rules our CELM position has to be closed now. I am selling 1000 CELM at Friday's close of $8.16 for a profit of $3,180 or 63.85%.

Late Filers Set to Report This Week

A large number of Chinese Small Caps, mostly OTC-traded companies, filed an extension to their annual reports by the end of March. All of them are now set to report by April 15, and there might be some good opportunities coming out of this. Remember that many of the following companies do not have a history of publishing a press release with earnings, so it would be wise to monitor SEC filings in the next 2 days.

Asia Cork (AKRK.OB)

Manufacturer and distributor of cork and cork products. I am expecting EPS of $0.09 for the year. Watch out for more detailed growth plans (incl. acquisitions) and news about the planned share offering. I like the stock at current levels.

BioPharm Asia (BFAR.OB)

The company is selling traditional Chinese medicine and other drugs. Very cheap at current levels, the company reported EPS of $0.15 in the last two quarters alone. High growth rates in the past two years. Watch out for hidden guidance in the 10-K as there probably won't be a press release.

China Growth Development (CGDI.OB)

CGDI owns six shopping malls and plans to acquire more. Consistently profitable and trading below book value. This one could double with a good report. Watch out for leasing rates, expansion plans and operating costs (power and heating).

China Agri-Business (CHBU.OB)

Sells organic fertilizer and bactericides to Chinese farmers. Plans to establish their own direct sales network. Stock rallied last week, about doubled for the year, so be careful here. There are faster growing companies in the sector, I'm not a fan here.

China 3C Group (CHCG.OB)

Electronics retailer in trouble. Promised to do everything necessary to turn the business around. Trading below cash at current levels. A return to profitability or just positive 2010 guidance would make this a clear buy at current levels below $0.50.

China Carbon Graphite (CHGI.OB)

After a TheStreet.com induced hype in March the stock fell back below book value. I'd like to see them reporting well above $1 million in net income for the Fourth Quarter, which could bring CHGI back on the radar screen of many traders.

China Industrial Waste Management (CIWT.OB)

Expect the filing for this one in a few hours as the company announced a conference call for later this morning. A very important industry for China, but the whole sector is underperforming so far this year. Not cheap based on past numbers, it all depends on future guidance.

China Kangtai Cactus (CKGT.OB)

One of my favourite picks in the China OTC space. Very cheap, high growth rates, several promising business segments, but apparently many US investors are only reluctantly investing in a cactus farmer. I'm confident that they will deliver this week.

China Organic Agriculture (CNOA.OB)

CNOA has several seemingly unrelated business segments in the agricultural/food area. Their newest one is blueberries. Just watch out for bottom line numbers, the stock is very liquid and many people are waiting for the annual report to jump in (or not).

China Shuangji Cement (CSGJ.OB)

The stock doubled over the past few weeks and I believe that this one has to report way above expectations just to keep its current levels. It doesn't have a history of doing so, but I am looking forward to getting surprised for once.

GC China Turbine (GCHT.OB)

Wind turbines manufacturer just coming out of development stage. Their press releases with project agreements have been frequent, their guidance is astronomical, any reassurance that their business plan will be achievable could propel this one to much higher levels.

Huifeng Bio-Pharma (HFGB.OB)

Huifeng supplied the pharmaceutical industry with rutin and related plant-derived chemicals. The company issued very bullish guidance in February and is very cheap at current levels with a P/E of less than 5. Also plans to uplist this year. Watch out for guidance confirmation.

Jade Art Group (JADA.OB)

They are selling jade. We hear nothing from the company outside of earnings filings, so key here is to watch out for new sales contracts, and ideally for new customers. If they report any of that the stock should trade much higher, if not then I would avoid it here.

New Energy Systems (NEWN.OB)

Lithium-ion battery producer on the verge of uplisting to Nasdaq. Crazy cheap here compared to its peers. We get the first consolidated earnings report with their two big acquisitions. Expectations seem to be low.

Songzai International (SGZH.OB)

Another one of those Chinese companies that leave shareholders in the dark most of the year. A coal miner that was ignored in the Chinese coal rally. Huge potential with a good 10-K, even bigger potential with reignited uplisting chatter.

Earnings Previews, Part 3

GC China Turbine (GCHT.OB) has yet to post a profit or any meaningful revenue but there's a chance that at least the latter will be accomplished with Fourth Quarter earnings. The company posted a slew of positive press releases in the past weeks and said it is well on track with their ambitious plan of generating orders for their wind turbines with an estimated value of $1.1 billion from 2010-2015. However, the stock is down 20% for the year and almost 50% from its November high at $3.79. Highly speculative but possibly very rewarding with the next momentum driven rally.

China GrenTech (GRRF) will report Wednesday, March 31, after the close. The stock just turned positive for the year on Friday after the company announced to be the exclusive WLAN provider for the 2010 Shanghai World Expo. GRRF is expected to post a small profit for the Fourth Quarter, if all goes well in the same range as for Q3 ($3 million net income). Year-over-year comparables will look good as GrenTech was not profitable a year ago, but keep in mind that GRRF handily beat estimates in all of the past four quarters.

Huifeng Bio-Pharmaceutical (HFGB.OB) is very thinly traded and completely under the radar. The company is profitable, pre-announced a healthy net income of $2.8-$3.0 million for FY09 (80% to 93% year-over-year growth) and provided net income guidance between $4.5 million to $5.0 million for 2010. HFGB is in the pharmaceutical raw materials business and doesn't carry drug approval and acceptance risks that are common in the pharmaceutical industry. This should allow them to have a pretty good idea of how their business is progressing mid- to long-term.

Hong Kong Highpower (HPJ) is set to report earnings on March 30 before the open. Like most other Chinese battery stocks HPJ is down sharply for the year (-20%) and from its January high (-37%). Still valuation is one of the highest in the group and the company has to post very strong numbers to support the current short-term uptrend. The stock climbed 25% in the past five sessions probably in anticipation of the earnings report. Personally I would avoid the stock, but I have been wrong about HPJ in the past when it caught strong momentum and tripled in price from November until January.

Jade Art Group (JADA.OB) is sitting on one of the largest jade reserves in China but we do not know much about how the business is progressing. What we know is that the company had six sales contracts for raw jade in 2008, valued at $42 million and "did not acquire any new customers or enter into any new contracts with existing customers during the first nine months of 2009." There should be about $11 million revenue left to collect from those contracts or about as much as JADA reported for Q3/2009. The key here is to look out for new sales contracts and possibly new customer wins in the near future.

Lihua International (LIWA) is scheduled to report on March 31 before the start of trading. The company already pre-announced full-year 2009 revenue of $161.5 million and net income of $25.5 million (non-GAAP) representing 118% income growth over 2008. LIWA anticipates 2010 year-over-year growth of approximately 30-35% in gross profit and 35-40% in non-GAAP net income. The good performance of close peer Fushi Copperweld (FSIN) supports Lihua's high growth prospects. However, there are persistent rumours about possible accounting fraud at LIWA and the stock behaved very vulnerable to recent FUQI issues.

Lotus Pharmaceuticals (LTUS.OB) is another one of China's undervalued health care micro caps. The stock is up 12% for the year but at the current price of $1.43 it has given back most gains since the January high at 2 dollars. The Fourth Quarter 2008 has been Lotus' strongest so far and I do expect nothing less from next week's earnings report than a new record in quarterly net income, possibly more than $7 million. If Lotus delivers I call it an instant buy at current levels and it should be able to take out this year's highs pretty quickly.

China North East Petroleum (NEP) is now slightly down for the year after they had to restate several quarters and admitted to having made 'computational errors' and 'incorrect assumptions.' Plain numbers say the stock is undervalued here and should appreciate significantly this year. The company also announced record oil production for 2009 and drilling results exceeding their expectations. Watch out for the company confirming their 2010 guidance in the conference call and words about the possible impact of a revamped Chinese resource tax on FY2010 results.

New Energy Systems (NEWN.OB) is one of my favourite core holdings in the China Small Caps space as the company has improved in all areas: clever acquisitions, vastly improved investor relations and communications, actively pursuing Nasdaq listing in 2010. NEWN recently reaffirmed 2010 EPS guidance of $1.23, which makes the stock the cheapest one in the battery space. Fourth quarter results will be interesting as NEWN repeatedly held on to their low guidance and expectations are therefore pretty low. With a Nasdaq listing the stock should double from here ($7) and consolidated results including acquisitions will display favourably to 2009 numbers in the quarters to come.

NF Energy Saving (NFEC.OB) will file their 10-K next week. Preliminary 2009 results were announced late February with record revenues and EPS of $0.35. The company also said that an additional $3 million in revenue had to be moved to the First Quarter so those numbers should be not too bad either. I would watch out for proper 2010 guidance beyond the current fluffy note that the 'outlook appears favorable.' and some more details about an uplisting to a senior exchange. The market likes NFEC's industry as the performance of recently uplisted peer China Recycling (CREG) shows.

Orient Paper (ONP) reports Q4 and FY09 numbers on Tuesday, March 30, before the open. There shouldn't be many surprises as ONP has already pre-announced 2009 numbers with revenues up 57% to $102.1 million and EPS up 27% to $1.03. The stock is down 8% for the year and down sharply from its January high of $15.15. Orient Paper is targeting at least 45% net income growth for 2010 and as I pointed out in a previous article an expected revaluation of the Chinese currency should add significantly to ONP's bottom line.

Orsus Xelent Technologies (ORS) is a beaten down consumer electronics stock, trading 75% below book value. However, the company is still profitable, earned $0.20 per share for the first nine months of 2009, which compares favourably to the current share price of $0.48. There are many reasons for the depressed stock price: the company has almost no cash on its books, reported weak earnings, reduced margins, and a 53% drop in net income for the Third Quarter 2009, and pre-announced lower than anticipated full year sales in late December. The 2010 outlook in this last press release was cautiously optimistic, though. For the earnings report this week I would look only at liquidity problems, cash flow, and signs for a business turnaround in the second half of 2010. The company has multi-bagger potential if it can turnaround sales but currently it seems more likely that the stock is kicked out of NYSE Amex before any of this materializes.

Huifeng Bio-Pharmaceutical (HFGB)

Huifeng Bio-Pharmaceutical (HFGB) is the leading Chinese producer of rutin and related plant-derived chemicals for use in pharmaceutical, nutraceutical and food production. For the first nine months of 2009 the company reported net sales of $8.89 million and net income of $1.41 million.

On February 4th, Huifeng announced preliminary 2009 results of revenues between $13 million and $14 million and net income of $2.8-3.0 million. These are huge numbers as they translate (taking the midpoint of the range) into Q4 revenues of $4.6 million and net income of $1.5 million, which is more than the company realized in the first nine months combined. Also net margins would rise from 22.4% in Q3 to 32.6% in the fourth quarter. Huifeng is anticipating year-over-year revenue growth of 31% and net income growth of 86% for 2009. "The increase in revenue reflected both a gain in new customers, as well as an increase in the number of orders from our existing customers," the company stated.

Huifeng also issued very impressive 2010 guidance in early February. "Management is providing revenue guidance of $20 million to $25 million and net income guidance between $4.5 million to $5.0 million for 2010. Growth is expected to be driven by increasing sales of current products. Because of the EU COS for Diosmin, the company has a high level diosmin quality. Certain European customers will be interested in Huifeng's diosmin and will increase their purchasing quantity from the company. The company will begin to perform the contract with Safic-Alan for diosmin. Another driver is production line expansion and acquisition which will increase the production quantity of diosmin. This will meet the big quantity requirement of new orders."

Taking the midpoint of this guidance, the company expects revenue to grow by 66% and net income growth of 64% or 2010e earnings per share between $0.20 and $0.23, which gives the company at the current share price of $0.90 a forward P/E ratio of 4.2 and given the high growth rates for 2009 and 2010 a P/E/G-ratio of below 0.1. Conversion of the company's convertible note and related warrants (exercise price of $1.00) might increase the share count by 2.5 million shares or about 11% which would increase the forward P/E to approximately 4.7.

Hidden in a 8-K filing (no press release), HFGB revealed on February 25th that the company has hired three independent directors. This move usually indicates that the company plans to move its stock to a senior US exchange, and with the sustained profitability and high projected growth rates such an uplisting would make a lot of sense. The current low share price would imply a reverse stock split being on the agenda for 2010, a move that has turned out to be very successful for many Chinese OTC-listed companies in 2009.

I am adding a half position of Huifeng Bio-Pharmaceutical to the China Model Portfolio at Friday's close of $0.90. My target for the stock is $2.00. Catalysts could be final FY09 numbers (to be released by the end of March) and follow-up news regarding a possible uplisting.