This week will see two more US listed China “up-listings”, both of which enjoyed a substantial run-up in price. China Agritech (CAGC) will begin trading on the NASDAQ on Monday and Puda Coal (PUDZ.OB) will begin trading on the AMEX on Tuesday. CAGC was up as much as 10% on Friday and PUDZ actually closed up 22%. Other China stocks which have up-listed this year have also been top performers. As detailed below, the top 3 stocks on my up-list watch list are: China Biologic Products, Inc. (CBPO.OB), China Digital Communications (CMTP.OB) and L&L International Holdings (LLFH.OB).
To get a better feel for the upside potential of up-listings, I teamed up with Maj Soueidan, President of GeoInvesting, LLC. Geoinvesting.com has one of the most comprehensive databases which specifically follow US listed China small caps. As a result, it is one of my favorites. Some of the findings from Geo:
- RINO International (RINO) up-listed to the Nasdaq in July and initially saw its price jump 10% from $9.10 to over $10.00. Since up-listing, the stock has traded as high as $17.75 – almost double its pre-Nasdaq price.
- Deer Consumer Products (DEER) was trading at $8.00 in July when its NASDAQ approval was announced. The stock traded up over 50% in 1 week, to over $12.00 and currently trades at $12.74. It reached a high of $14.00 in August.
- China Bio Energy (CBEH.OB) was trading at $5.00 in July and then rose 10% on the day of its NASDAQ approval. It now trades at $6.42, almost 30% above its pre-Nasdaq levels.
Tracking potential up-listing candidates is well worth the effort because up-listings typically result in a significant inflow of new investor demand to a previously underfollowed stock. There are many institutional investors who may be very interested in a specific sector or company but who will simply not invest in an OTC stock. As soon as the stock becomes Nasdaq or Amex listed, those funds will jump in immediately, giving the stock a boost. Due to the lack of institutional following, many research analysts are reluctant to initiate coverage on OTC stocks, which in itself contributes to a lack of investment by institution funds.
In order to identify and track potential up-listing candidates, it is important to understand the criteria for an up-listing and watch for OTC traded companies that are actively looking to fulfill these criteria.
The most obvious criteria which issuers seek to satisfy are stock price thresholds and corporate governance requirements. The Amex requires a minimum share price of $3.00 and the Nasdaq requires $4.00. As a result, small cap companies who intend to up-list will typically undergo a reverse split in order to meet the minimum share price level. DEER, RINO, CBEH, PUDZ and CAGC all underwent this identical process.
A second tip off is a ticker change or other corporate governance changes which are done to accommodate the listing. For example, Puda re-incorporated in Delaware just prior to the up-listing. Another change to watch is changes to the composition of the board of directors. These are done to satisfy listing requirements at the Nasdaq and Amex which require a certain minimum number of independent directors on audit and compensation committees.
A third tip off is when institutional investors are already taking an interest in an OTC stock. This was the case for both CAGC and PUDZ, who both presented at Rodman & Renshaw (RODM). It is also the case for potential up-listers LLFH and CBPO, both of which still trade OTC.
- CBPO recently presented at the Rodman & Renshaw conference in New York and recently raised over $9 million in a private placement. The company completed its reverse split in 2008 and currently trades at $5.80, well above the threshold for Nasdaq or Amex.
- L&L also attended the Rodman & Renshaw conference. Last year the company conducted reverse split and changed their accounting firm to Kabani & Company, a well known US listed small cap firm. The stock is currently trading at $4.75.
- China Digital has publicly stated that they are looking into an up-listing and the company is currently looking to hire an international CFO. Following its 10:1 split in July, the company now trades at $4.30.
Many investors had accurately predicted the up-listing of Puda and China Agritech for much of this year, and yet when the up-listing occurred, there was still a significant run-up in the stock price. Why does this profit opportunity persist ? I believe it is simply because institutional funds and research providers avoid OTC stocks, leaving that category of investing to the individual investor. For those of us willing to play this corner of the market, this seems like one case where the individual investor might have an actual advantage over the institutions.
Disclosure: The author is long shares of CAGC and CMTP.OB