Nine Top China Plays

The financial crisis has sent the markets plummeting. For those who believe that companies that make more money than other companies should be priced higher than other companies, boy do I have some bargain bin deals for you. In the past 6 months, I’ve hand sorted through over 5000 companies. The steals are all in China.

1. China Architectural Engineering (CAEI) specializes in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects. It just got added to the Halter USX China Index.

Trading at $37.24M with a book value of $78.2M for a company that does specialty construction projects looks like a steal, especially when they made $22.6M in the first 9 quarters of 2008. The company lowered its guidance for Q4 2008 and they are eating some cost overrun costs. Recent news: CAEI was awarded two new contracts for projects valued at $80 million in Dubai and Singapore. The Company also reported that its project backlog has increased to a new record of $245M.

2. China Yongxin Pharmaceuticals (CYXN) has three segments: The wholesale of pharmaceuticals and other medical-related products, the operation of retail drugstores, and the cultivation, processing of ginseng. Currently trading at $2.19M when they made $4.0M in the first 3 quarters of 2008 and $2.6M in the first 3 quarters of 2007 is absurd. Not to mention that the book value is $12.5M. Yongxin also just put up a new, more flashy website. The investor message boards were very concerned when their old website went down. I sat by and let the people who don’t understand website development sell out. Same thing happened with New Dragon Asia.

3. New Dragon Asia (NWD) is engaged in the milling, sale and distribution of flour and related products, including instant noodles and soybean-derived products, to retail and wholesale customers throughout China. I find the fact that it is trading at $9.14M with a book value of $74M mildly entertaining.

The company made $14.12M in 2008. In my opinion, investors are shaky because their operating margins got squeezed by the ridiculous expansion in commodity prices. Good news, the whole bubble collapsed. As I see it, this is an opportunity for the company to make some huge numbers in 2009, not to mention that it's been religious about growing revenues over the past 5 years with high predictability. Its website crashed about a month ago and the stock price hit the chopping block, getting cut more than just in half. Look for the catalyst at $0.83 of the Halter USX China Index.

4. Gold Horse International (GHII) is principally engaged in three business sectors in China: Construction, residential and commercial real estate development, and management and operation of the Inner Mongolia Jin Ma Hotel. Top line revenue guidance for 2009 is $90M and the company is priced at $2.63M. In 2008, they made $4.53M on revenues of $66.91M. The book value is about $25M.

Gold Horse is located in Hohhot, China; a city that has been growing at 23.5% for the past 7 years. Gold Horse has contracted to build a wind power manufacturing plant. This company is located in the middle of china, not on the outskirts where the exports have fallen and hurt the economy. There are two issues that I see. The first is that its cash is low and the company is burning through cash to maintain operations. The second is that there are some big shareholders that look to be slowly selling the stock down.

5. Orsus Xelent Technologies (ORS) is engaged in the business of designing, manufacturing and distributing cellular phones for retail and wholesale distribution. What we have here is a company trading at $7.44M that has a book value of $42.4M. In the last 9 months they made $6.34M. According to its annuals, the company is trying to advance along with technology into the 3G markets and is targeting China’s rural population. It grew 16% in 2008 even with the economic crisis slowing it down in the end of the year.

6. Lotus Pharmaceuticals (LTUS) manufactures branded drugs and distributes them along with products produced by third-party manufacturers throughout China. Lotus just came out with a new website in the last week. Trading at $8.06M with a book value of $38.3M and making $6.3M in the first 9-months of 2008 makes Lotus extremely attractive.

There is downside for the risk-averse. Lotus East has historically funded its capital expenditures from its working capital and has advised us that it believes this capital is sufficient for its current needs. Lotus East has contractual commitments for approximately $65.5 million related to a Technology Transfer Agreement and the construction of the new manufacturing facility. If Lotus East is not successful in obtaining all of the funding necessary to complete the construction of the new facility, it would lose the approximately $17,219,000 spent to date, including the $17,000,000 for the deposit on the land use rights which is non-refundable.

That said, it’s still trading below book value and has several huge projects in the works setting the stage for huge growth potential.

7. China Sun Group High Tech (CSGH) mainly engages in the production and sales of cobaltosic oxide and lithium cobalt oxide, both anode materials used in lithium ion rechargeable batteries in the People’s Republic of China. Trading at $12.29M with a book value of $27.45M with a 2008 annual net income of $6.74M, I immediately started digging deeper into the growth potential of this company. Not to mention that every quarter in 2008 trounced the comparable quarter in 2007. I don’t really mind reading headlines like: Quarterly Revenue Up 42% to $7.6 Million; Net Income Increases 145% to $1.8 Million. You can’t find headlines like those with your average run of the mill blue chip.

8. Asia Cork (AKRK) is a rapidly growing leader in the development, manufacturing and marketing of cork-based building materials. Asia Cork is currently valued at $4.64M, even though it has a book value of $17.1M and pulled down $2.54M of profit in the first 3 Quarters of 2008. In my conversations with flooring experts, cork seems to be trending back into fashion as a “green” alternative. Another set of great headlines: Asia Cork Q3 ’08 Revenue Up 117% to $8.96M; Net Income Up 220% to $1.40M. The issue here is the daily volumes are low and Asia Cork isn’t off its 52-week high as much as I’d like it to be.

9. China Kangtai Cactus Bio-Tech (CKGT) is principally engaged in the production, research and development (R&D), sales and marketing of products derived from cacti. Again, I see a big deal since the company is trading at $3.93M with a book value of $22.69M and a yearly net income of $2.1M including a -1.09M adjustment in Q1 2008. The downside here is that there are rumors that the market maker, NITE, has a lot of excess shares. For the three months ended September 30, 2008, revenues increased by $2,229,213 or 56.4% to $6,184,685 from $3,955,472 in the corresponding period of the prior year. The increase in revenues was attributable to the fact that the Company is continuing to expand its productions and distribution, and its products are better accepted by the Chinese market customers.

In an environment like this, where game theory is prevailing, there’s no question in my mind that a lot of these companies are likely to become more attractive in the short term. The long term trade-offs and value price trade-offs warrant further investigation. Price is what you pay and value is what you get.

Disclaimer: I own NWD, GHII, CAEI, ORS, and LTUS in my accounts and the accounts I manage. I am working around Ameritrade to acquire exposure to CYXN and AKRK. I also plan on purchasing the other companies mentioned in this article.

Comments

[balabanovj:]

Regarding LTUS, I do regard them as quite speculative and they are really taking some big chances on these future deals, however, if they succeed and get their in-house IV fluids plant off the ground in 2013, they will be a major player in that market, instantly! China imports 92% of their IVF's, so this market is absolutely wide open. This will double, if not triple Lotus' revenue in the first year. As for margins, I have no answers, although I would expect the IVF market margins to be quite good and with the plant being in Inner Mongolia, overhead and other costs will be minimal. At about 0.20/share, this company is certainly worth the risk.

JBB

Mar 09 09:08 AM

[HChang:]

You are recommending junks.

Mar 09 10:30 AM

[fran:]

author, please advise--

why would one speculate on a handful when an ETF/CEF could offer growth and diversity protection, in a relatively novel environment[eg. HAO[etf], CAF[cef]]???

Mar 09 12:30 PM

[Mad Hedge F...:]

Some good ideas here. Clever traders are keeping a sharp eye out for things to buy for the next recovery, whenever that is. Look at the industry of the future in the country of the future, Chinese Internet shares, which are growing 15%-30% a year with strong cash flows. Baidu (BIDU), which is often referred to as the Google of China, saw its shares sell off 75% last year, but have rallied 75% from the December lows. Internet use in China is expected to increase from 250 million to 900 million over the next 5-10 years. The majority will access the net via cell phones, where gaming is the dominant application. Expect huge growth at the four horsemen of the Chinese internet sector, which also includes Netease (NTES), Sina (SINA), and Sohu.com (SOHU).

Mar 09 01:04 PM

[Glen Bradford:]

My understanding is that there are two big ETFs to invest in china, FXI and PGJ. PGJ is my favorite of the two because FXI is financially heavy.

So, the question is why would i do my own diversification when I could have an ETF diversify for me? When you have a growing company selling at less than a price multiple of 2, the upside potential is more than 500%. Risk here is not knowing what you're doing. Risk is mitigated by doing your research on the companies and understanding what you're buying as well as not putting all your eggs in one basket. That said, all my eggs are shifting to the china basket. If china decides to eliminate foreign investment, then I'm toast. Otherwise, the upside on FXI or PGJ is probably 200%-300% in a couple years.

Same goes for HAO and CAF, just saw them for the first time. Claymore updated their website layout since the last time I visited. If you're an individual investor and just want to make money and can't read a balance sheet or income statement, and realize that china's price/gdp ratio is great as well as their potential for future growth. I definately agree. What I am doing by specifically choosing these 9 companies is choosing companies that if i diversify my money into, I believe will outperform every single index that is created, even with a few of them going bankrupt (even though I try to choose ones that bankruptcy is highly unlikely. I would have said the same thing about CYXI a couple weeks ago. The picture changed, not sure why.

Isn't buying an ETF speculating on a handful anyway? I don't believe in the Efficient Market Hypothesis, if that helps.

On Mar 09 12:30 PM fran wrote:

> author, please advise--
>
> why would one speculate on a handful when an ETF/CEF could offer
> growth and diversity protection, in a relatively novel environment[eg.
> HAO[etf], CAF[cef]]???

Mar 09 05:46 PM

[theonlyteacher:]

what do you think of cyxi.ob

Mar 10 08:09 AM

[theonlyteacher:]

The loan is on the ceo not the company, how can they shout down the operation, it is soooo funny these chiease companies

Mar 10 08:10 AM

[anil mewara:]

Glen,

I am very impressed by your research and sharing your knowledge.
I came upon your article as I am an investor in NWD.

I have a substantial stake in it and have averaged my cost of 100,000 shares to .29 .

I know it ought to rebound, was expecting earning release yesterday but did not happen.
also, the chairman has to buy back a Million dollars worth of shares by July 09, he has to date purchased only 100K worth.

Your thoughts please.

Regards
Anil

On Mar 09 05:46 PM Glen Bradford wrote:

> My understanding is that there are two big ETFs to invest in china,
> FXI and PGJ. PGJ is my favorite of the two because FXI is financially
> heavy.
>
> So, the question is why would i do my own diversification when I
> could have an ETF diversify for me? When you have a growing company
> selling at less than a price multiple of 2, the upside potential
> is more than 500%. Risk here is not knowing what you're doing. Risk
> is mitigated by doing your research on the companies and understanding
> what you're buying as well as not putting all your eggs in one basket.
> That said, all my eggs are shifting to the china basket. If china
> decides to eliminate foreign investment, then I'm toast. Otherwise,
> the upside on FXI or PGJ is probably 200%-300% in a couple years.
>
>
> Same goes for HAO and CAF, just saw them for the first time. Claymore
> updated their website layout since the last time I visited. If you're
> an individual investor and just want to make money and can't read
> a balance sheet or income statement, and realize that china's price/gdp
> ratio is great as well as their potential for future growth. I definately
> agree. What I am doing by specifically choosing these 9 companies
> is choosing companies that if i diversify my money into, I believe
> will outperform every single index that is created, even with a few
> of them going bankrupt (even though I try to choose ones that bankruptcy
> is highly unlikely. I would have said the same thing about CYXI a
> couple weeks ago. The picture changed, not sure why.
>
> Isn't buying an ETF speculating on a handful anyway? I don't believe
> in the Efficient Market Hypothesis, if that helps.
>
> On Mar 09 12:30 PM fran wrote:

Mar 10 09:56 AM

[Glen Bradford:]

On the note of CYXI, Not mentioned

I had some of my chinese speaking friends try and shoot an email to the CEO in simple chinese, and I've discussed the situation with the CFO. I haven't gotten anything useful:

The following is what I've heard from Ren Hu

First of all the recent PR was not about the stock price of the company, not about the disputes between Ms Jiao and her investors in China.

The company has not decided what to do with its assets. Ms. Jiao is still in negotiation with the investors.


What special in me that caught your attention?

Which company are you talking about, CKGT or CYXI?


Basically I noticed he hopped off CKGT and onto CYXI.

Scary stuff... but the upside is 100x. Rule #1 is don't lose money, and I just dont know.


On Mar 10 08:10 AM theonlyteacher wrote:

> The loan is on the ceo not the company, how can they shout down the
> operation, it is soooo funny these chiease companies
>

Mar 10 09:06 PM

[Glen Bradford:]

I was unaware the chairman was obligated to buy back stock. That's a plus, I do know that a lot of the options are exercisable significantly higher than the present price.

My calendar says March 12th for Earnings Release
Q4 2008 New Dragon Asia Corporation Earnings Release

I put a lot of my thoughts on a discussion board and my website. The viral networking lowers my time to find great stock investment opportunities. Highly useful

investorshub.advfn.com...




On Mar 10 09:56 AM anil mewara wrote:

>
> Glen,
>
> I am very impressed by your research and sharing your knowledge.
>
> I came upon your article as I am an investor in NWD.
>
> I have a substantial stake in it and have averaged my cost of 100,000
> shares to .29 .
>
> I know it ought to rebound, was expecting earning release yesterday
> but did not happen.
> also, the chairman has to buy back a Million dollars worth of shares
> by July 09, he has to date purchased only 100K worth.
>
> Your thoughts please.
>
> Regards
> Anil
>
> On Mar 09 05:46 PM Glen Bradford wrote:

Mar 10 09:10 PM

[anil mewara:]

Here is the press release.
Chairman of New Dragon Asia Corporation Announces Intent to Purchase Shares
Wednesday July 9, 2008 9:00 am ET


SHENZHEN, China, July 9, 2008 (PRIME NEWSWIRE) -- New Dragon Asia Corp. (AMEX:NWD - News), one of China's leading producers of instant noodles, flour-related products and soybean-derived products, announced today that New Dragon Asia Food Limited, which is controlled by New Dragon's Chairman, Heng Jing Lu, will purchase approximately US$1 million worth of the Company's outstanding shares of common stock currently trading on the public market over a period of 12 months commencing today. New Dragon Asia Food Limited is currently the largest holder of New Dragon Asia Corp. common stock. The Board of Directors of New Dragon Asia Corp. has been informed of Mr. Lu's intent. The trading price of New Dragon's shares of common stock on the American Stock Exchange as of July 8, 2008 was $0.45.
ADVERTISEMENT


Heng Jing Lu, Chairman of New Dragon Asia Corp., commented, ``New Dragon Asia has consistently executed on our strategy, achieving solid financial and operational results, and I do not believe current share price levels are reflective of our performance. We have increased our revenues year-on-year for the last six years, and have maintained steady margins even in what has recently become a more difficult pricing environment. Demand for our products remains strong, both in China and abroad and we continue to aim for a higher margin sales mix.''

Lu concluded, ``I would like to take this opportunity to reaffirm both our commitment to our shareholders and our focus on increasing shareholder value.''



On Mar 10 09:10 PM Glen Bradford wrote:

> I was unaware the chairman was obligated to buy back stock. That's
> a plus, I do know that a lot of the options are exercisable significantly
> higher than the present price.
>
> My calendar says March 12th for Earnings Release
> Q4 2008 New Dragon Asia Corporation Earnings Release
>
> I put a lot of my thoughts on a discussion board and my website.
> The viral networking lowers my time to find great stock investment
> opportunities. Highly useful
>
> investorshub.advfn.com...;br/>
>
>

Mar 11 06:33 AM

[theonlyteacher:]

thanks for the information gken,
do u suggest sell at Disastrous lose and leave imagine from 0.40 to 0.015 in less than 2 months. Are they going liquidate the company, are we getting anything from that

Mar 11 08:00 AM

[theonlyteacher:]

sorry glen

Mar 11 08:01 AM

[theonlyteacher:]

ALSO, you can see GRO cash per share is 2.75
cntf cash per share is 1.87
eps is 0.18
lton
alrc.ob cmfo.ob chcg.ob utvg.ob opai.ob chid.ob

may be there is some risks and rewards in them

thanks

Mar 11 08:14 AM

[Glen Bradford:]

CHID: Negative EPS decreasing quarterly revenues, Don't like it

OPAI: Looks great, huge growth and selling for less than last reported cash. Huge opportunity here.

UTVG: Great and cheap, but it's not cheap enough for me. projecting 20% growth with a P/E of 2 is awesome though! That's a 10-bagger potentially.

CHCG: Great, Cheap, appears to have bottomed, worst case scenerio $0.38 as in cash/share... that's cash-total liabilities = lowest market cap. Growing in revs and eps. huge headlines, $8 high, so way off of high.

CMFO: $0.95 cent bottom (cash-total liabilities), lots of growth potential with new contract. year over year down. this is a turn around, not my type of game

ALRC: I just dont want to mess with this, the whole 100:3284 split is ... mind numbing.

LTON: also looks to be a turnaround play. not interested

CNTF: bad Q4, like it more than gro.. well no. i dont like either now that i'm looking at the numbers

GRO: Don't like it.








On Mar 11 08:14 AM theonlyteacher wrote:

> ALSO, you can see GRO cash per share is 2.75
> cntf cash per share is 1.87
> eps is 0.18
> lton
> alrc.ob cmfo.ob chcg.ob utvg.ob opai.ob chid.ob
>
> may be there is some risks and rewards in them
>
> thanks

Mar 13 10:54 PM

[user6244:]

NWD posted a 1.5 million loss for 2008, there website while up finally is outdated. For example they still have the IR relations link which they dumped. They were on Florida's inactive list of corporations for some time and only recently got that activated.

They indicate they can still produce x amount of flour yet they just sold off one of there factories that stood idle for a year, so i doubt that information is still valid. Peter Mak was canned oh I am sorry they said he resigned. The new temp CFO will not reply to either email link even if you attempt to contact using chinese language... Forget calling if you do not know the language you'll never get past the secretary. When I asked for Peter Mak prior to his departure the secretary didn't have a clue who Peter Mak was. Oh and they have a chinese website as well but appears to be well dated as well.
I find it also interesting that they purchased a packaging company a while back and have year after year since been pumping money into it (I must assume since they lack transparency that they bought a shell of a packaging company and now are attempting to actually create a packaging company for the soymilk of course that should have started this quarter but probably hasnt since the packaging part is still requiring even more money.....

What is really sad is that should the company actually turn things around and the share price starts to return they will then be punished for all the class A shares they handed out that are excersicable to 2010....So basically the share price will probably go sideways till at the very least 2010 then if and only if they are still a going concern will things turn around...IMO

Yes I currently and sorrowfully own 25K@.50 of the damn shares!!


On Mar 11 06:33 AM anil mewara wrote:

> Here is the press release.
> Chairman of New Dragon Asia Corporation Announces Intent to Purchase
> Shares
> Wednesday July 9, 2008 9:00 am ET
>
>
> SHENZHEN, China, July 9, 2008 (PRIME NEWSWIRE) -- New Dragon Asia
> Corp. (AMEX:NWD - News), one of China's leading producers of instant
> noodles, flour-related products and soybean-derived products, announced
> today that New Dragon Asia Food Limited, which is controlled by New
> Dragon's Chairman, Heng Jing Lu, will purchase approximately US$1
> million worth of the Company's outstanding shares of common stock
> currently trading on the public market over a period of 12 months
> commencing today. New Dragon Asia Food Limited is currently the largest
> holder of New Dragon Asia Corp. common stock. The Board of Directors
> of New Dragon Asia Corp. has been informed of Mr. Lu's intent. The
> trading price of New Dragon's shares of common stock on the American
> Stock Exchange as of July 8, 2008 was $0.45.
> ADVERTISEMENT
>
>
> Heng Jing Lu, Chairman of New Dragon Asia Corp., commented, ``New
> Dragon Asia has consistently executed on our strategy, achieving
> solid financial and operational results, and I do not believe current
> share price levels are reflective of our performance. We have increased
> our revenues year-on-year for the last six years, and have maintained
> steady margins even in what has recently become a more difficult
> pricing environment. Demand for our products remains strong, both
> in China and abroad and we continue to aim for a higher margin sales
> mix.''
>
> Lu concluded, ``I would like to take this opportunity to reaffirm
> both our commitment to our shareholders and our focus on increasing
> shareholder value.''
>

Apr 16 02:22 AM

[Philip Obal:]

CSGH is up today. Smart money is buying into it, expecting good news on the new battery chemistry that they have developed recently. Do you dd on CSGH.

Jun 10 06:53 PM

[Stockpickin...:]

ORS is really holding its own recently, we hope the ARs are getting better this quarter.

Jun 23 03:25 PM

[patoc42:]

PLease re-visit NWD-Supposed book value .90 cents, terading at .14 and insiders dumping millions of shares. Looks like a scam.

Aug 24 10:21 PM

[user6244:]

Looks like it to me in fact I have been nearly begging the SEC to take a look but not holding my breath since it is clear after the madoff scandal they would rather not look into anything especially if it only affects small investors...

Sep 26 01:41 AM

[user6244:]

NWD, still lacking any transparency, they have since removed the investor relations link from there outdated website (probably threaten by the investor relations company). Attempt to call by phone results in nobody answering the phone. In fact if you go too there chinese website and try to call any of the factories listed nobody answers.

The phone number listed on the SEC filing actually is cissy lau from venfund which is owned/run by the former CFO Peter Mak, who supposedly due to family reasons quit, only to turn up at another company very recently, basically it appears that the gig was up and or Peter Mak finally discovered that NWD doesn't give a flying you know what about investors especially from the USA.
Ling Wang having taken over the CFO position immediately sold all of the shares gifted to her as a sign of what? Her lack of faith in turning things around?
How about the chairman who sells 6 million shares well below market price (@.10). If this isn't a scam I not sure what is.
I have filed complaint after complaint with SEC and even contacted government officials in the PRC but all have totally ignored the fleecing that is taking place!!!!!
Anyone in the recent past who pumped this trash as a real company may they all rot in hell!!

Oct 08 10:50 PM