Bullish on Chinese Microcaps

I have been investing for more than 25 years. And with quite a bit of success, I might say. I have a MBA from a name US school, and a degree in economics from Oxford across the pond. I have traveled widely, and know the world. I have taken a company public myself, and understand the stock game both from the perspective of the insider and the outsider.

Above all, I am not easily impressed. I tend to be skeptical by nature, especially when it comes to investing. However, the opportunity I see right now in Chinese micro-caps is the single most attractive play I have ever encountered in my many years of following the market.

Can I believe my eyes? Can I really fill up my shopping cart with a diverse portfolio of growth companies selling at PE ratios in the low single digits? Are there really companies reporting huge increases in sales and profit, expanding rapidly, and holding almost no debt . . . and selling, in some instances, for less than the net current assets on their balance sheet? Can I really purchase a company that is growing 30% or 40% or 50% or more, year-on-year, for an amount equal to the total EPS for the next eight quarters? Is it really possible to invest in the fastest growing economy in the world at a 75% discount to what a sluggish, no-growth stock sells for in the US?

The answer is – surprisingly! – yes. Here is the portfolio I have been accumulating over the last several months.

• China Organic Agriculture (CNOA.OB)
• Lotus Pharmaceuticals, Inc. (LTUS.OB)
• China Agritech Inc. (CAGC.OB)
• China 3C Group (CHCG.OB)
• Universal Travel Group (UTVG.OB)
• China Sun Group High-Tech (CSGH.OB)
• China BAK Battery, Inc. (CBAK)
• Eternal Technologies Group Inc. (ETLT.OB)
• General Steel Holdings (GSI)

Okay, so the conference calls are awkward. The companies don’t know how to talk to analysts. They are lousy at giving guidance on earnings. But honestly? Check out these details . . .

China Organic Agriculture (CNOA.OB) Net sales were up fourfold last year, and the company is a leading supplier of rice to China. Rice is hitting new price highs all the time. Yet this company is selling for 5 times trailing earnings. Go figure . . .

Lotus Pharmaceuticals, Inc. (LTUS.OB) Revenues for the year were up 72%. The PE is less than 5 times trailing earnings.

Eternal Technologies Group Inc. (ETLT.OB) Revenues were up 24% last year. But you don’t need to focus on the growth story here. Just look at the net current assets on the balance sheet. These are substantially more than the market cap. If you did a LBO of this company, you could pay for the whole thing with the current assets, and get the business for nothing.

China Agritech Inc. (CAGC.OB) This company is situated in the very fast growing organic fertilizer market. Reveues increased 33% and net income was up 59% last year, but the trailing PE is 7.5.

China A 3C Group (CHCG.OB) This Chinese retailer and distributor of consumer electronics grew EPS by 83% last year. But the PE ratio is less than 4.

China Sun Group High-Tech (CSGH.OB) This company showed year-on-year growth of 167% during the last quarter. It’s product mix is focused on fast growing energy and commodity segments of the economy. And it’s PE ratio is 7.

Universal Travel Group (UTVG.OB) Jim Rogers recently highlighted tourism as one of the fastest growing industries in China, and the Olympics will only give it a greater boost. Universal Travel just reported revenue growth for the year of $44.3 million – up 342% versus the previous year. What kind of PE does that deserve? Let’s see . . . net income of $8.7 million in the year just finished, and market cap is $56 million. Oh, yawn . . .

China BAK Battery, Inc. (CBAK) This company is well situated in the fast growing battery market, building relationships with Hewlett-Packard and a bunch of other high potential customers. This company is poised to generated .29 cents in EPS next year, even without factoring in the potential for hybrid battery sales to Western automakers, which is the huge upside there. Share price is still under $4.00 as I write.

General Steel Holdings (GSI) In the last year, this company grew revenues from $139.5 million to $772.4 million. Yes, you read that right – a 450% increase in revenues. Does that get you a PE of 50? 100? Nope, it’ selling for a forward PE of less than 10.

Are these companies phony? Are they scams? I doubt it . . . I have done business in China, and these enterprises are by no means atypical of businesses flourishing in that fast-growing economy.

Investors always dream of those great opportunities that come around once in a lifetime. Perhaps you read how John Templeton became rich. In 1939, he borrowed $10,000 from his boss to purchase one hundred dollars worth of each of the 100 stocks listed on the NYSE selling for under a buck per share. A few years later he paid back the debt, and saw the average stock in his portfolio increase 400%.

These stocks represents a similar buying opportunity. If you are waiting for a better opportunity . . . be prepared to wait a long time. For my part, I am not going to miss this chance to buy and hold a portfolio of fast-growing companies in a fast-growing economy selling at PE ratios in the low single digits. A chance like this may not come around again.

By the way, the PE ratios of these stocks tend to double or triple immediately when they move to a major exchange. A couple of the stocks on my list have already made the move. The other ones are no doubt planning to do the same.

Disclosure: None

Comments

[ari5000:]

Can I believe my eyes?

That is a very good question when buying China micros.

Do you know the answer?

Better dust off your MBA from a "name" school before you get schooled.

2008 Apr 22 08:41 AM

[xatta:]

Asia Automotive (AAAC.OB) is another one. Should be moving to NASDAQ national market soon, perhaps before the end of the month.

2008 Apr 22 08:52 AM

[NOWHEREMAN:]

First, AG companies in china are tax exempt but more importantly China has has frozen food prices to counter inflation.

Me, I am more involved with SEED whose foray into corn modification cost them......BUT they are very big in the GM Rice area

2008 Apr 22 08:52 AM

[J.D:]

Strange, all that education and worldly experience yet absolutely no credible analysis in this post. No sign of economics, no sign of MBA skills, and no sign of worldly experience.

Gee, either this is untruthful or Oxford and US MBA's are a sell.

2008 Apr 22 09:13 AM

[tirereviews:]

Gee, I get this kind of stock analysis all the time... in my spam folder.

Kidding aside, I've actually owned ETLT.OB for a few years, but it has never surpassed $1 and always comes back down to around $0.50. I should have been in HQSM.OB, which was on my watch list and has since listed on the AMEX. It is up quite a bit, more than 300%. :(

2008 Apr 22 09:29 AM

[Barry Robbins:]

I am getting fed up with articles submitted by anonymous authors. I think China is a great investment opportunity, but I have had mostly bad experiences with Chinese microcaps. My general advice would be to never take any investing advice from an anonymous source.

2008 Apr 22 09:34 AM

[athenian:]

I doubt that any of those companies can rival the U.S./Malaysia/China microcap in which I've been invested for the last three years. It's just produced its audited 2007 results. Revs up 30% at $48 million, net inome up 147% at $1.76 million. Guidance for 2008; revs $55-60 million, net income $2.5-3.5 million. The stock is now selling at $0.15. Call sign SDGL. I think it will be a 10-bagger in two years. By the way, I'm also an Oxford graduate - and have managed multinational subsidiaries in Asia.

2008 Apr 22 12:06 PM

[Nathan Rogers:]

I also think the Chinese small caps listed in US are cheap vs their potential. I think the risk is that the statements they file with the SEC are fraudulent. I worked for a Chinese company for a couple years and believe that in general they accept more corruption in business than that which we are accustomed to in the West. Still I think it makes sense to buy a basket of these stocks at these prices. The problem I am having is picking the right basket. Anyone have suggestions for where you can get some good research on Chinese small caps listed in the US?

2008 Apr 22 01:17 PM

[fxtrader07:]

these microcaps offer good value - unless they are a scam, what many of them undoubtedly are. little or no available trustworthy information leads to high risk premiums and very little public interest, especially in the current environemnt. there is nothing magical at all about these companies trading at very low p/Es. One need not hold an MBA to figure that out, frankly.
anyone expecting a thorough analysis on at least one or two of these stocks stays disappointed. interestingly, one of the very few trustworthy Chinese microcaps (they have earned that reputation with me due to their talk, their actions and their results) has not been mentioned at all. I won't do either or else i ought to write a lengthy analysis on it which i do not want to do at this point.

2008 Apr 22 03:06 PM

[Dutch Trader:]

Why you brag about your education? Education doesn't make you necessarly a good investor. I also have an economic title in the Netherlands but what is it worth if you don't make an basic analyse of the companies.

I agree with you that there are some nice opportunities, such as Lotus (LTUS) and China 3C Group (CHCG). But the mentioned companies are low for a reason. Microcaps are usually thinly traded, causing difficulty to buy and sell. That is why institutional investors or mutual funds don't pay a lot of attention to this kind of stocks.

Also accounting rules in China are different than in the U.S. or Europe. Those companies have historically not adopted our management and financial reporting concepts and practises, which includes strong corporate governance, internal controls and, database, financial and other control systems.

Also the fact that insiders own a majority controlling stake in the company is a negative aspect, because outside investors have no influence in the company's business decisions.

Of course there are other factors that have to be said, but I would refer you to the 10-K reports of the companies you want to invest in. A good and sound analyse of the company's financials is necessary if you want to invest in stocks.

I have to agree that more and more Chinese firms adopt the Western style of reporting. This is a process and will take some time.

Personally I am interested in Lotus and China 3C Group, of course for a small amount. Book values of both companies are attractive and at this moment I can't see any unforeseen material implications in their way of reporting.

For more information about listed companies in the U.S. read carefully 10-K's etc. at sec.gov

2008 Apr 22 03:25 PM

[Thomas Smic...:]

You forgot one. SRRY...a budding recycling operation trading at the princely sum of 14 cents/share. Somehow, penny Chinese stocks and trash seem to add up.

2008 Apr 23 12:39 AM

[opica:]

Some of these companies have the potential to become large % winners even before they reach a major exchange for those that do their homework. CSGH and LTUS especially intrigue me.

2008 Apr 23 02:43 AM

[EvenSmarter...:]

I am the Dean of Oxford, and hold an assortment of MBA's Msc's and Phd's from a name college. I am a ball pro, golf pro, tennis pro, poker pro, savant and investment guru beyond compare. I am better than sliced bread. Can you believe your eyes?

2008 Apr 23 05:53 AM

[FRANKRIZZO:]

These are just pieces of paper trading....they infer absolutely no ownership interest in anything in China. They would be a ripoff at a p/e of 1.
I think this piece was written by Boca Raton Joe.....my old boss and the biggest scumbag on earth!
Learn the hard way newbs!

2008 Apr 23 06:15 AM

[microman:]

Wow, you commenters sure find it easier to bash than to go out on a limb on a public forum and post some ideas. The amount of DD presented here is perfect for tickling our brains to see if further DD is warranted. No need for a 10-page research summary for a message board.

In addition to the stocks mentioned by the author, all of which I'm familiar with, I would also add a few more to the mix: CYXI.OB and CHBU.OB.

Of course these also have the "Chinese Fraud Discount", but are worth a look for speculators.

2008 Apr 23 12:54 PM

[Loren Paz:]

Do people with degrees from Oxford and other high ranked schools commonly brag about their education level but choose to remain anonymous when publishing blogs these days?

In the article you mention how you been accumulating all those stocks and yet list under disclosure you list none?

And, seeing how you made so much money in your 25 years of investing and all those high powered degrees you have, your is blog still hosted for free on blogspot with a cheap default template; www.bullinachinamarket.../

Can't you afford to purchase a real domain and webhosting serivce, and hire a webdesigner with all your dough?

There is a reason these stocks trade with a lower P/E. Their financial statements aren't reliable very often. For those that actually have auditors like CBAK, you commonly see the auditors saying the company lacks sufficient internal control or lack understanding in complying with GAAP, etc.

2008 Apr 23 02:33 PM

[Nextbestthing:]

No joke, heard from a direct source about two more chinese stocks.
LTSC.OB and CREG.OB

Both should hit above $3 this year.

2008 Apr 23 03:52 PM

[eid:]

I consider you need to go up to the next level to give more assurance than with over the counter stocks. Stocks like FEED, VISN, CTRP, LFT, FMCN, HMIN, EJ, XFML, STP, JST all have similar qualities but are not over the counter stocks and as such have more reliability, credability with less risk. They are leaders in their field, are first movers and out do their competition and thus have a moat for future improvements.

2008 Apr 23 04:29 PM

[opica:]

Amazing how people love to bash things that they do not understand even on blogs. Most of the major NYSE/NASDAQ/AMEX % winners of today first started out on the OTCBB fwiw. Some are junk and some are hidden gems you have to pick and choose just like anywhere else. That is what makes a market.

2008 Apr 24 12:54 AM

[microman:]

Amen opica. And EID, why would we want one more analyst in the already-crowded listed ranks? Little value-added there. Folks that provide good ideas in the .OB and sometimes .PK markets are serving a much needed niche.

2008 Apr 24 03:15 AM

[china_investor:]

Well, I don't think "loading up" on BB companies is necessarily the way to go but having a toe in the water might not be a bad idea. My concern is the legitimacy of some of these companies. One connection that bothers me is China Finance/Winning IR and a few the names you included. All China Finance deal stocks get battered and it appears the China Finance is an agressive seller having no regard for the market or no knowledge how to unwind a position. Cnoa has a new IR firm....Winning/IR....... web-site other than the companies address which is the same as China Finance.....With so many fish in the sea I'm staying away from those that smell fishy.

2008 Apr 24 03:55 PM

[organica:]

This is frustrating - I was looking specifically for a stock in China that was in the Rice market a couple of months ago because obviously rice seemed like a good bet in the current economic conditions. Given my desire to have a substantial part of my portfolio be 'green' or 'organic' or socially responsible, well CNOA seemed like an intriguing bet. Organic Rice in China with what appeared to be at least an attempt at a company website, SEC filings, and sales of a legitimate product at least at Amazon.cn. So I invested a small amount of money - enough to be engaged but not enough to be significant versus other holdings.

Yet in the last month all the sudden it became volitile and seems to be the subject of nefarious attempts to manipulate the price both in December and again now. This is the second blog post I've seen (in addition to one that appeared at MSNBC out of nowhere) where it is just tough to know where the information is coming from. I mean this guy's blog is 1 entry long on a newly-created blogspot site.

It feels like a scam, when the initial investment did not. How frustrating to go from what was a fun little investment to now questioning if I'm just another sucka.

2008 Apr 24 07:30 PM

[WarrenBluffit:]

I'm amazed at the cynicism and skepticism here. Let's see now...in the past few days alone, one of the touted stocks rose by over 50%! I did my homework and found that the advice given was sound and trustworthy! The same people who are complaining about "anonymous" authors are probably wishing they had jumped on the Chine bandwagon. I'm glad that I did...

2008 Apr 24 07:43 PM

[rockoninthe...:]

Hey.....hold on here......the basic content of this persons message is certainly germane.....there are some great long term opportunities in China.....I've played China for a couple years now, and Some of his picks I actually own...you should check them out, rather than smash and bash...check out CBAK....do your dd on the chinese stocks, just as you would any other Amex or NYSE stock.......there are some real serious long term winners in China.....he's just giving you a few that he likes....and I'm familiar with a number of them.......nobody's trying to force you to buy.....and I can't see how he (she) would benefit from this information.......
Frankly, I'm fed up with the NYSE.....it has no idea why it does what it does from one day to the other...it's just as suspect as Chinese stocks.......as Warren Buffet said " It's become nothing more than a full service Las Vegas"

Pick your poison......I like China right now......good luck to all.......

2008 Apr 25 01:46 PM

[User 158051:]

BE CAREFUL , MIGHT GO BANKRUPT.Such chineses company inspite of apparent very high ,multiple growth and inome , suddenly went bankrupt. There is no transparency. May be you will be lucky.

2008 Apr 25 08:23 PM

[Bull in the...:]

I am the author of this article. I will point out that in the short time since I first published these stock recommendations on my blog, they have gone up by an average of 25.6%. Pretty good gains for less than three weeks, huh?

2008 May 06 12:59 PM

[mrivmriv:]

But really, dude, after all is said and done, are you as cool as me? I think not.

2008 May 09 10:46 PM

[martian:]

I too have a degree in economics from
from the Dem Rep. of the Congo.
Possibly we have met in the scam 101 hut.
Why you have not highlighted the outrageous gains to be had by mortgaging everything you own to load up on these stocks tells me you have a lot to learn about the art of spaming and scaming

2008 May 10 11:20 AM

[green tea:]

i agree with u

2008 May 10 08:00 PM

[Mountain Fist:]

Finding value means being willing to do due DD on underloved and underfollowed stocks, and having an open mind. Some of my best picks in 25 years have been stocks trading between the $1 dollar to $12 range. GLW was a pick at under $2 when the market would not touch it. It now trades in the $25 range. Granted this is not a Chinese stock and much more reliable info was available on Corning. However, I like LTUS and GSI. Some that I've liked include CDS, SUTR, CTRP, JST, and they've done very well. I do not invest in penny stocks or those with low volume, but there are some decent ideas here. Nobody is twisting your arm forcing you to buy these. Nice article. It is up to me to due the DD and make the choice to buy or not.

2008 May 11 11:03 PM

[Chrisdu2:]

Since you guys are savy,I have a question about VLO : .Played it with succes for a long time, now What? Would I logicly assume, when they do a service, the make their spread in between, so why should they make less money now???????? Does this make sense?

2008 Jun 06 01:00 PM

[max petrisek:]

You are wrong on nearly all the Cos. by a mile. Maybe in the fullness of time? ?

2008 Aug 02 04:36 PM

[max petrisek:]

As of today the author is still very wrong on the gains to be made in these stocks. Being down since 8/07 is a lousy performance. If the author would be worth anything he should be offering a disclaimer- that's an apology!

2008 Aug 13 06:01 PM

[تحميل:]

thank u ,,

2008 Aug 31 06:32 PM

[fasil:]

tinks

2008 Sep 01 06:17 PM

[Joseph Sherman:]

Interesting assessment. I would like to see how these companies progress in the long term.

Feb 19 09:13 PM

[ajit:]

what is todays position ?

ther is no full date so a problem on comment

27/03/2009

Mar 27 09:55 AM

[jessho:]

these 'articles' are full of fluff. either it's a weird kind of ego trip or they're looking to bump their own portfolios with the hype they are generating.

May 05 10:51 AM