Chinese Stocks Just Getting Started? Two Opportunities

I love scanning the headlines these days only to read all of the incredible pessimism pertaining to Chinese stocks. There are even backhanded references to 1998, after a dizzying run in Internet stocks had thrown all rationalists (aka EMT) into the holding tank where reality often goes into hiding.

Although we have seen quite a few high double digit moves since August, we are nowhere remotely close to stock behavior during 1998, which I vividly recall in detail. During the rip roaring mania of 1998 and 1999, the moves were in the high triple digits in the same time frame.

Not that I am advocating embracing the type of risk that would have allowed a trader to truly benefit in that type of environment. The only way to have caught that entire move was to be naïve enough to believe that the move was warranted and not a bubble.

It appears nobody is speaking about the move in Chinese stocks being warranted. On the contrary, it appears that most of the talk is centered on the move in Chinese stocks actually being a bubble that needs to be avoided because of 1998!

If you don’t see the trading implications of this, then you probably wouldn’t see it if it ran straight into you or if Cramer came into your dreams and screamed it in your face. If you do see the potential trading implications, then let’s roll up our sleeves, pretend it’s 1998 again and trade this incredible run that appears to just be getting underway.

This chart of China BAK Battery (CBAK) from July 31, 2007 accompanied an entry in my trading journal.

Screen clipping taken: 7/31/2007, 5:00 AM

China BAK Battery Inc. is one of the largest manufacturers of lithium-based battery cells in the world, as measured by production output. It produces battery cells that are the principal component of rechargeable batteries commonly used in cellular phones, notebook computers, cordless power tools and portable consumer electronics, such as digital media devices, portable media players, portable audio players, portable gaming devices and PDAs (Personal Digital Assistants).

China BAK Battery, Inc.’s 1.9 million square foot facilities are located in Shenzhen, PRC, and have been recently expanded to produce new products. China BAK Battery, Inc. is the largest manufacturer of lithium-ion battery cells for China’s cellular phone replacement battery market. At the time of this trade, the PE for the stock was 14.

The stock traded near $9.50 early this month, as the following chart illustrates:

Even with updated fundamentals, including a PE of closer to 35, China BAK Battery is one of those Chinese stocks that should be in a trader’s arsenal. Specifically, if you can catch this stock offered below $6 in the next few weeks, you will have to pinch yourself first to make sure you are not dreaming about Chinese stocks again.

Another Chinese stock that I keep a constant eye on is Sinovac (SVA). Sinovac Biotech is a Chinese stock that has an incredibly promising opportunity. As a leading Chinese biotech company, Sinovac Biotech Ltd. is a provider of biopharmaceutical products in China.

On August 1, 2007, Sinovac announced it had entered into an Exclusive Promotion Service Agreement with GlaxoSmithKline (China) Investment Co., Ltd. (or “GSK China”). GSK China and Sinovac will market and promote Anflu, a seasonal influenza vaccine developed and manufactured by Sinovac. Sinovac is one of the most active Chinese vaccine manufacturers, in both seasonal and pandemic flu franchises, and we anticipate a lot of synergy between GSK and Sinovac.

Sinovac Biotech Ltd. is a China-based biopharmaceutical company that focuses on the research, development, manufacture and commercialization of vaccines that protect against human infectious diseases. Sinovac’s vaccines include Healive (hepatitis A), Bilive (combined hepatitis A and B) and Anflu (influenza). Sinovac is currently developing human vaccines against the H5N1 strain of pandemic influenza, Japanese encephalitis and SARS.

In the “Government Working Report” presented on March 2007 at the Fifth Session of Tenth National People’s Congress, China’s Premier Wen Jiabao indicated that the government will expand its immunization program and purchase vaccines, which could prevent 15 types of infectious diseases, such as hepatitis A and meningococcal. The Chinese government will increase funding for the vaccine program to RMB 2.8 billion.

Sinovac is seeking regulatory approvals in targeted international markets to tap the US$10 billion global vaccine market with an estimated 10% annual growth.

Although Sinovac Biotech recently broke out from an accumulation base between $2.50 and $4.00, and is currently trading around $6.25, look for a pullback under $5 as an opportunity to buy this potentially high flying Chinese stock. There is no doubt that there is a tremendous macroeconomic play for this Chinese stock.

Comments

[Hype]

There are still some opportunities in the Chinese markets, but the valuations are retarded. Look at this report from PINR. There are many scenarios that could bring the markets back down to reality. Many more than would keep it up.

[Hype]

There are still some opportunities in the Chinese markets, but the valuations are retarded. Look at this report from PINR. There are many scenarios that could bring the markets back down to reality. Many more than would keep it up.

[michel monnin]

like cbak as batteries are the weakest link of solar energy

[Roanoke]

I have been following CBAK for almost a year. I think as a long term investment CBAK will be very good. The company has close to 10,000 employees and room to grow. They are an OEM for A123 and are likely to be making the batteries for the new GM Volt as well as a healthy contract in the works with HP. However their last quarter was actually in the red www.bak.com.cn/. Q4 reports should be announced in the the first or second week of November. I sold my position at $9.10 with a 125% gain because of a nervous feeling that the PE was getting too high with all the excitement from volume 10 times above average. I'll get back in after the excitement goes away and a healthy forward PE.

[Market Swimmer]

It's a very interesting post, I totally agree with you. Chinese stocks are on fire, there are some historical reasons for it. Google me, you will fine my posts.

marketswimmer.blogspot...

[an actual trader]

i know the author of this article. he knows almost nothing about trading or chinese stocks (he didn't even know what PTR was until i told him to look at it a few months ago). read and trade based on this moron's advice at your own peril.