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

[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

[منتديات:]

nice

Jul 18 12:17 AM

[throwerw:]

who's laughing now?

Oct 22 10:45 AM

[throwerw:]

i agree with the author... i have been searching for a year and this has got to be the best opportunity in the market. i'm starting partnerships as soon as possible.

Oct 22 10:46 AM