What Caused the Sudden Rise in China Carbon Graphite?

| About: China Carbon (CHGI)

Over the course of only four trading sessions, China Carbon Graphite Group (OTCPK:CHGI) has more than doubled its share price. It closed last Friday at $1.52 and Friday it ended at $3.12. That is an absolute gain of 105%, or approximately 9600% annualized. What caused this incredible spike?

Clearly there have been very positive write-ups about the company in recent days, including this article. However, if the share movements had solely been a result of these reports, then they were clearly hype-based (especially note the verb "skyrocket" in that article). The fact is, the fundamentals for this company have not changed. The buy momentum, if unsupported by anything concrete, is not sustainable and can easily reverse itself.

Perhaps CHGI is going to be listed on NASDAQ soon? This has been suggested by recent commentators but I find scant evidence. Until the past few days, the share price didn't even breach the $2 mark, let alone the thresholds required by AMEX or NASDAQ.

And while the company has three independent board directors (which forms the majority), some of their credentials are not the greatest. One of these directors is Yizhao Zhang, the current CFO of Universal Travel Group (UTA), who has held that job since August last year. UTA's stock hit a high of $17.20 on August 5th and has been sliding down ever since. It closed Friday at $9.30, down almost 46% in the interim. Another independent director is John Chen, who has been the CFO of General Steel Holdings (NYSE:GSI) since 2004. GSI's stock is currently languishing at below $5, in contrast to its highs above $15 in the heydays of 2008.

Well, perhaps CHGI's uptrend was spurred on by the acquisition the company announced last week? However, this was merely the signing of a letter of intent, and CHGI is far from closing the transaction. In fact, the press release stated that "(t)he terms are subject to negotiation and execution of binding definitive documents after all parties complete the due diligence process." Moreover, financial data for the target weren't supplied, so this could hardly have caused such a trading frenzy.

My best guess is that CHGI's jump in share price is a result of the spillover effect from the tremendous gains in a similar Chinese small cap -- SinoCoking (NASDAQ:SCOK), which rose from $19 to over $30 per share in a matter of ten trading sessions. This despite the fact that Chinese coal prices have been declining for the past four consecutive weeks.

Was that a case of pump and dump? Is this? Well, in my opinion, CHGI is now very overvalued:

Current Price: $3.12
52-Week Range: $0.39-$3.12
EPS: (2009) $0.15* (2010) $0.19*
P/E: (2009) 20.8x (2010) 16.4x
PEG: 0.82*

* Based on C.O.P. estimates.

Perhaps I am a little conservative with CHGI's FY2010 EPS but the company has been very trigger-happy in issuing shares and causing dilution, which has amounted to almost 30% in the last six months. In short, I would be extremely careful with this stock.

My Position: None.