Why I Sold My China Positions

Like many microcap traders, jumping in and out of the dozens of U.S.-traded Chinese microcaps has been my bread-and-butter over the past few years.

Until now.  Something has changed, and until I get a better sense of how severe the change is I am staying away from China stocks.  Today I sold my last positions, HQ Sustainable Maritime (HQS) and China 3C Group (CHCG.OB), even though both posted good numbers.

China itself is going through a massive transition from breackneck growth to….I’m not sure what.  As Kevin Depew explained on Minyanville:

I saw this morning where Nouriel Roubini has said he believes growth in China could slow to 4 to 5%. I believe that may be too optimistic. China is already experiencing massive deflation.

• According to a recent report from Mitsubishi UFJ Securities (MTU): the Toyota (TM) Corolla, which was selling at 250,000 yuan last year is now selling at 90,000-130,000 yuan, a drop of about 50%.
• Mercedes C Class cars prices have declined from 800,000 yuan to 350,000 yuan.
• Audi A4s from 300,000 yuan to 50,000-60,000 yuan.
• While official government figures show the average price for housing sales (in 70 large and medium cities) rising at 6.2% year-over-year, in Shenzhen’s Jini Mieda district (an expensive residential area), the average price per square meter has declined from 18,000 yuan in autumn 2007 to 11,000 yuan (finished) recently.
• Steel-related prices have seen a marked decline.
• Iron ore prices started the year at $250/tonne, fell to $100 in July and now stand at $83

Incidentally, Mitsubishi UFJS notes that 65% of bank lending in China is secured by real estate.

These deflationary trends should have the greatest impact on Chinese retailers like China 3C Group and LJ International (JADE), and manufacturers like China Precision Steel (CPSL).  Biotech/pharma companies like American Oriental Biosciences (AOB) and exporters like HQS might be less affected, but at times like this I’m inclined to step back from the whole group.

Disclosure: No positions

Comments

[User 292572:]

I am an American Chinese. One of my relatives in China bought a Toyota Corolla for 115 K Chinese Yuan last year. Some of your data are not accurate.

2008 Nov 11 06:59 PM

[willym:]

4 to 5 percent is a whole let better growth than the us you should have stayed in and not try to scare people into selling

2008 Nov 11 08:11 PM

[Steven Hansen:]

you are correct about not being able to visualize how china will evolve through this crisis. and i think china will do better than anywhere else because they have better central control over their economy and a larger rainy day reserves.

so i begs the question ...... why are we investing anywhere until we can see what is going on?

2008 Nov 11 08:18 PM

[Monkey Man:]

Microcap: Given your exaggerated deflationary figures to make your point, I question whether you're long or short on some of these Chinese names.

2008 Nov 11 08:46 PM

[Mr. Zhao:]

Your figures are way off. If they're right please point out to me where to acquire an Audi A4 for 50,000 yuan... that's about 8k USD.

2008 Nov 11 10:11 PM

[Larry House:]

I am going to stick with my China mutual fund. I am investing for 10 years out, and if any country can get its economy going in that time period, I think China can--I hope, anyway.

2008 Nov 11 10:38 PM

[intelligence:]

china is growing at 5% plus with a rising middle class--no other country is growing at this rate--these stocks are selling for less than 3 times earnings--look at CHCG ( China 3 C ) which has $32 million of cash or 60 cents per share and earnings of 50 cents a share--selling for 1 times earnings net of cash--AND IF YOU DIVIDE THE SALES VOLUME FOR THE THIRD QUARTER OF THIS YEAR BY THE NUMBER OF RETAIL STORES AND COMPARE TO THE SALES VOLUME LAST YEAR BY THE NUMBER OF STORES, AVE. STORE VOLUME INCREASED BY 15-20%--BAD SALE

2008 Nov 12 02:34 AM

[Karl Francis:]

Nouriel Roubini is a perma bear, no China expert. Following him, you should not hold shares at all.
If you base your decisions on the hodgepodge of partly inaccurate, partly irrelevant facts you present, I wonder how you can make sound decisions and outperform the markets. In Q3, China's economy was growing at 9% y/y, nominal retail sales were up 21% y/y, despite US in recession, flat export growth, depressed steel prices, flat local real estate markets. 3/4 of its growth is internal, independent from exports; a lot comes from infrastructure investments, financed through high savings rates. The huge stimulus package will make sure that impressive growth will continue.

For stock selection, you have always to look at the sector and the particular company. Not all sectors will benefit equally. Chinese pharmaceutical stocks in particular are immune to the global crisis, in a long term impressive growth market and some of them are dirt cheap currently, certainly no sells.
Retail sales will also continue growing at high rates. China 3C, that you mentioned, is well placed in its segment of the retail sector with its 1000+ stores, had impressive same store growth in Q3, outperforming its sector, and is trading at a PE ratio of 2, or 1.4, if you deduct net cash. The company will continue to grow organically and through acquisitions, certainly no sell either

2008 Nov 12 05:21 AM

[investor88:]

Microcap Speculator has listed specific examples of deflation like Toyota car prices, Audi car prices, property prices and iron ore prices. These are powerful data that needs to be checked. I hope readers of Seekingalpha who have contacts on the ground would verify the truth of these data because if true, there is no reason to invest in China stocks yet.

2008 Nov 12 08:03 AM

[MarvinMBA:]

Certainly any one that has a feel for what is happening in the world today would realize that EQUITIES ARE NOT THE PLACE TO BE. I believe we are certainly on the path to DEPRESSION not recession. Its going to be impossible to get jobs and real estate and financials including stocks and bonds to start providing growth before we hit bottom. I'm afraid we are on a accelerated downward spiral ending in DEPRESSION before we pull out of this mess perhaps 10 years from today. You heard it first here..MarvinMBA

2008 Nov 12 10:41 AM

[bigrgub:]

You all have been wrong now for 16 months on every story or prediction about CHCG. Why should anyone trust your opinion now. After all you have lost 3/4 of your investment, and in my opinion appear to be selling at the absolute bottom. Perhaps you got out months ago and now are trying to shake the trees for some cheap shares. It will go up when it gets ready to go up, it doesnt matter what anyone here says.

2008 Nov 12 12:48 PM

[NOWHEREMAN:]

Take a look at the following: CNOA and CAGC.

High revenue, earnings and expansionary growth combined with the addition of independant directors leads me to believe both will attempt to leave the BB where they currently trade. I own both and expect both to continue to expand.

I bought with a 5 year horizon, am under water But if it ain't broke why try to time it anyway.

CHCG? will take a look. Meanwhile, while I like the concept behind HQS, I do not know whether all of the hype regarding its elevated sales can be attributed soley to the Olympics. When looking at the 9 month comparisons, it certainly seems that they were a significant contributor.

2008 Nov 12 01:25 PM

[NOWHEREMAN:]

CHCG, Not my type of industry but I do like the chart. If I were interested in 3C, I would spend nore time going through their financials.

But in China, I am only involved in the Agro and water sectors.

2008 Nov 12 03:45 PM

[nyka:]

Your account reads too much like a "How I spent my summer vacation" essay. More importantly, it fails to pass the "Who cares?" test.

2008 Nov 24 09:35 PM

[value81:]

From 4Q07 to 3Q08 CHCG has increased inventory and accounts receivable substantially. Not good. However, as mentioned by others, no debt, $32M cash, a p/e of 2, increasing same-store sales. The stock price seems very inexpensive.

2008 Nov 25 05:15 PM

[ari5000:]

Looking back at this old article - -amazing lesson in timing.

HQS sold on Nov. 11, 2008 -- if you look at the chart, HQS doubled from the Nov. 11 price -- in less than a month!

Aug 12 09:13 AM