China Infrastructure Smallcaps Worth a Long Look

Contrarian thinking usually involves countering trends or popular opinion. Shorting gold or Google (GOOG) would seem a contarian play today, as would shorting infrastructure companies in China, given their government's tremendous stimulus package.

Tha market doesn't seem to agree and, while short interest isn't the issue, infrastructure companies in China are near their 52-week-lows (up to 95% off highs) and have seen only minimal gains in recent months. I consider this an entire industry that is as undervalued as almost any individual stock in any market.

Let's start with LPIH.OB and CNEH.OB, petroleum holding companies. These are the two companies I'll mention that are well above their lows, but neither is within 75% of its high and both trade with P/E ratios under 3. Imagine Exxon (XOM) growing at 50% annually with better profit margins and trading at a P/E of 3. As ignorant as that comparison may be, these are great oil plays. Better yet, maybe CBEH.OB, a gasoline refiner in the same valuation range.

Next is my favorite sub-industry: water. I own shares of several water utility companies, Cascal (HOO) being the only of which operates in China. The pure China play here is CVVT.OB, China Valve Technology. They recently acquired a butterfly valve company and are the Chinese government's provider for many applications. This is a $1.48/share stock that traded at $5/share less than 2 months ago. Volume in the last month is many times the volume in the prior 11 combined, and orders have been 5-10x bigger than most stocks in this price range that I follow. I find it difficult to predict growth for this company, as water dispersion and efficiency are simply invaluable. This figures to be China's Gorman Rupp (GRC), only with no competition.

Huaneng Power (HNP) and Asia Power (APW) are well documented, highly traded power companies in China. I believe in their growth potential, but neither is relatively cheap enough for me to own. Instead, my "power play" is in energy recovery. China Energy Recovery (CGYV.OB) converts heat waste into energy, which in turn reduces emissions and provides clients with government credits for doing so. This is the type of green company I like, and their $35M in backorders is a real bonus for a $56M business.

Waste management is a no brainer, right? China's waste, like its need for water, is recession proof. American companies that dispose our disposables have been hurt far less than most, for obvious demand reasons. RINO.OB and CIWT.OB, the two publicly traded Chinese trash collectors, are growing at rates that make their sub 5 P/Es laughable.

There is, of course, the risk that companies based in China will never again realize valuations in-line with those of western industry. Remember though that they did in the past and most of the bearishness on China relates to declining exports.

These are boring companies on the other side of the globe, and thus contrarian by default.

Disclosure: Long CIWT.OB, CGYV.OB, LPIH.OB, CNEH.OB, CVVT.OB

Comments

[Barry Robbins:]

The thing I don't understand about these stocks (and I own similar ones, like CWSI.ob) is - why isn't there more insider buying? why do I not see hedge fund buying, if the fundamentals are so amazing? why is there so little disclosure? and why are so many of them listed as .ob? If a company has solid earnings and a pe of 5, why not get a regular nasdaq listing?

May 04 08:42 AM

[thedivot:]

A little deceptive here....stating that a couple of months ago CVVT traded at $5. Look at the share history. On Dec 12 & 13 it traded as high as $5 with a total of 1,700 shares trading. Then it hit $5 again on Dec 30 with 100 big shares trading. After that, no shares even traded for a month and a half. Their problem is liquidity and lack of interest - there are more days where no stock trades than days with trades.

May 04 09:41 AM

[Danny Furman:]

My opinion is that hedge funds, generally, see enough domestic value to avoid these companies. GE is also involved in a lot of infrastructure in China, and that (at recent prices especially) is a much easier buy to swallow for a group of investors.

May 04 09:44 AM

[Dfk:]

Then make sure to check out CIWT.OB, the insiders (CEO) own over 70% of the outstanding stocks (this might be outdated as they recently offered new shares to new investors), and as stated in their last press release the company "is currently evaluating the establishment of one or more committees in connection with a possible application for listing of its common stock on a national stock exchange in the United States."

On May 04 08:42 AM Barry Robbins wrote:

> The thing I don't understand about these stocks (and I own similar
> ones, like CWSI.ob) is - why isn't there more insider buying? why
> do I not see hedge fund buying, if the fundamentals are so amazing?
> why is there so little disclosure? and why are so many of them listed
> as .ob? If a company has solid earnings and a pe of 5, why not get
> a regular nasdaq listing?

May 04 11:13 AM

[Danny Furman:]

CWSI definitely makes the cut. Thanks Barry.

May 04 11:22 AM

[Alan Young:]

Some great ideas here, although personally I don't like to trade Pink Sheet issues. I'm long APWR (up 200% since March, and 13% today alone!), and recently added China Wind, 0182.HK (it probably has a Pink Sheet listing, too).
Thanks for all the leads.

May 04 12:17 PM

[Alan Young:]

Barry, the disclosure and reporting requirements for listing on NASDAQ are (I'm told) quite expensive for a small company. One recent micro-cap IPO in the US reported that it would have reported a profit last quarter, but the accounting costs for its NASDAQ reporting requirements amounted to 10% of its operating earnings, putting it in the red.

I'm not criticizing US accounting requirements, but they are different from most other countries, and Chinese small caps can find investors many other places.
On May 04 08:42 AM Barry Robbins wrote:

> The thing I don't understand about these stocks (and I own similar
> ones, like CWSI.ob) is - why isn't there more insider buying? why
> do I not see hedge fund buying, if the fundamentals are so amazing?
> why is there so little disclosure? and why are so many of them listed
> as .ob? If a company has solid earnings and a pe of 5, why not get
> a regular nasdaq listing?

May 04 12:22 PM

[Roberm73:]

I am a big fan of CGYV, but it seems to be stuck even with the good news it keeps reporting. Any idea why it is not getting better play?

May 04 01:24 PM

[Danny Furman:]

It's a baby. No financial history scares people, but a ground floor opportunity with a foundation like CGYV's excites me. :



On May 04 01:24 PM Roberm73 wrote:

> I am a big fan of CGYV, but it seems to be stuck even with the good
> news it keeps reporting. Any idea why it is not getting better play?

May 04 01:36 PM

[Nawar Alsaadi:]

I am gad to see a mention of CNEH.ob, I wrote about it here on seekingalpha in January and April, this company got awesome fundamentals, one of the best in small/micro caps stock universe, excellent production growth, fast EPS growth, high ROE/ROE and ROC, heavy insider ownership, very low valuations and upcoming major market listing.

Thanks for the article.
Regards,
Nawar

May 04 01:55 PM

[Danny Furman:]

Thanks Nawar, I read your article last month and really enjoyed it. You're likening these smallcaps to the big search engines (etc.) was presented in such a way that added significantly to my confidence in China's best small companies.

All the best,
Danny

May 04 02:08 PM

[John Overton:]

I agree with Danny 100% on CNEH. I have owned the company for years, including a time when it was just 50 cents a share. Thanks for mentioning the other stocks, too. Good work!

May 15 10:03 PM

[JazzyBlu:]

Nawar,

I like your Chinese small cap recommendations -- I got Apwr and CNEH, but what you are thoughts on LPIH? Thanks!


On May 04 01:55 PM Nawar Alsaadi wrote:

> I am gad to see a mention of CNEH.ob, I wrote about it here on seekingalpha
> in January and April, this company got awesome fundamentals, one
> of the best in small/micro caps stock universe, excellent production
> growth, fast EPS growth, high ROE/ROE and ROC, heavy insider ownership,
> very low valuations and upcoming major market listing.
>
> Thanks for the article.
> Regards,
> Nawar

May 22 02:14 PM