China Infrastructure Smallcaps Worth a Long Look

by: Danny Furman

Contrarian thinking usually involves countering trends or popular opinion. Shorting gold or Google (NASDAQ: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 OTC:LPIH 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 (NYSE: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 OTCPK:CBEH, 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 OTC:CVVT, 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 (NYSEMKT:GRC), only with no competition.

Huaneng Power (NYSE: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 (OTCPK:CGYV) 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. OTC:RINO and OTCPK:CIWT, 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.