China Direct: Chinese Growth at Value Prices

On Friday I started a position in China Direct, Inc. (AMEX: CDS). This is a small position which I will scale into slowly given the volatile environment. $8.11 provided a favorable initial entry point.

The company recently increased its 2007 revenue guidance and is experiencing incredible growth by buying majority stakes in Chinese companies and providing consulting services. In their most recent quarter, they posted revenue of 40.453 million, income of 2.268 million and EPS of .15 These numbers included extra income of 603k comprised of 372k of accrued income taxes about 75k of interest income and 175k in marketable securities.

Any news out of this stock, like many Chinese stocks, can drive it substantially up or down, so scaling in gradually makes sense here. The stock has an approximate PE of 20 based on my conservative estimates on 2007 numbers of EPS of .40 - I do believe that .40 is low balling it.

Based on my projections for 30% growth this company has a PEG of .66.

The company has invested in majority stakes in companies that provide the sale and distribution of synthetic chemicals used in paint, glue, plastics, textiles, leather, medical products. They also are invested in companies involved with the marketing and distribution of toys and related entertainment products. Some of these companies are listed below:

• Lang Chemical
• Chang Magnesium
• Changxin Trading
• CDI Shanghai Management
• Luma Logistic
• Big Tree
• Jieyang Big Tree
• CDI Wanda
• CDI Magnesium
• Capital One Resource
• Excel Rise
• Asia Magnesium
• Jinwei Magnesium

Some more information from the company:

CDS is a U.S.-based company doing business in China through two business divisions. Our management division acquires controlling stakes in Chinese companies, then provides investment capital and active management to enable these companies to thrive as our subsidiaries in their respective industries. Our consulting division assists companies in China and the U.S. in establishing and maintaining a presence in the U.S. capital markets. As a direct link to China, China Direct serves as a vehicle allowing investors to directly participate in the rapid growth of the Chinese economy in a diversified and balanced manner.

If you're looking for a Chinese play with a valuation that is actually reasonable, give this one a look.

Disclosure: Author has a long position in CDS

Comments

[prodigy:]

Great article! I would like to hear your thoughts on managements 2008 guidance of more than $20 million in income.

2007 Nov 18 04:29 AM

[prodigy:]

Great article! I would love to hear your thoughts on managements 2008 outlook of $20 million in income. Thanks

2007 Nov 18 04:33 AM

[dgdatta:]

This is fraud management..I had invested in DRGV.Pk with same management and they were giving me wrong information and ask to hold the sahres..management team started offloading after one year..when they were giving nice news stories abt progress of Company..so it is management if pump and dump..also in Money TV advertisement..Now management is exercising the options and selling the sahres..almost all management members are selling shares together..

It is red flag..

I have lost 2,00,000 Dollars on their words..so Pls be careful..
Dilip New Zealand

2007 Dec 25 09:51 AM