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In China, a country of 1.344 billion there is an environmental time bomb waiting to go off. Over the past decades the country's leadership has been focused with feeding and employing its population and maintaining political stability at all costs. Environmental issues have taken a back seat to growth, but environmental awareness is increasing.

The preparations for the 2008 Beijing Olympic Games indicated that there was a governmental sensitivity to environmental conditions in the Beijing area. Actions taken by the government included the planting of millions of trees around Beijing before the Olympics, the virtual shutdown of auto traffic during the Olympics, and the closing down of Beijing area businesses that contributed to air pollution for weeks before and during the Olympics.

China's economic miracle has occurred at the expense of the country's environment. The health risks have been known, and include most notably air and water pollution. Several years ago it was reported that 750,000 premature deaths occur yearly in China due primarily to air pollution.

While there are not very many pure "green" Chinese based companies whose shares are publicly-traded, increasing environmental awareness has impacted many of the country's businesses. China's provincial, local and central governments are increasingly more environmentally aware, as well as are investors and members of the financial community both within China and worldwide.

While I believe that it's nice to be a socially responsible investor, I also believe that it's critical to take a look at a company's operations, financial results and most importantly its overall its growth strategy. I believe it's possible to do both. Chinese companies can be identified which are socially responsible, who also have strong historical financial performance, and are well positioned for strong growth.

Let's take a look at a few China based companies that I believe are environmentally responsible and that have sound financial metrics:

China Green Agriculture Inc. (CGA)

As a smaller capitalization company, with metrics worthy of investor attention, NYSE listed China Green Agriculture has a market cap of $90.3 million. It's currently trading at a very low PE of 2.11.

China Green Agriculture produces and distributes humic acid-based compound fertilizers, other varieties of compound fertilizers and agricultural products. All of its products are certified by China's government as "Green Food Production Materials," as defined by the China Green Food Development Center.

While it was a challenge for many Chinese companies to maintain growth in revenues and net income during the second quarter of this year, China Green Agriculture's performance is impressive. For the first six months of this year its sales increased 21% to $217.5 million, net income increased 27.5% to $42 million and the company had earnings per share of $1.56, which beat company guidance. Most importantly, the company provided guidance indicating that it would continue to grow during the rest of this year. The company also forecast revenues of at least $238 million, net income of at least $46.2 million, and earnings per share of at least $1.68 for the full year of 2012. The company's shares closed yesterday at $3.265.

China Recycling Energy Corp. (CREG)

Nasdaq listed China Recycling Energy Corp. also has metrics worthy of investor attention. The company is trading at a market cap of $50.66 million, with a low PE of 3.54. The company's shares closed yesterday at $1.09.

China Recycling Energy provides environmentally friendly waste-to-energy technologies to recycle industrial byproducts for steel mills, cement factories and coke plants in China. Byproducts include heat, steam, pressure, and exhaust to generate large amounts of lower-cost electricity and reduce the need for outside electrical sources.

China Recycling Energy has also stated that recycled energy represents only an estimated 1 percent of total energy consumption. The company has indicated that this renewable energy resource is viewed as a growth market due to what it sees as intensified environmental concerns and rising energy costs as the Chinese economy continues to expand.

The company's net income in the second quarter was $1.2 million, or $0.03 per share, a decrease from $3.7 million, or $0.07 per share for the second quarter of 2011. But, most importantly, the company's cash and cash equivalents were $41.6 million as of June 30th, an increase of 300% compared to $14.9 million as of December 31, 2011.

Despite a decrease of sales and net income, the company's revenue model is in intact and one that is likely to continue to grow as new projects and project completions occur yet this year.

Asia Carbon Industries Inc (OTCPK:ACRB)

Asia Carbon Industries Inc, while definitely a smaller cap stock, has a market capitalization of $11.52 million and is trading at a PE of 1.69.

Asia Carbon Industries is a China-based producer of a series of high quality carbon black products. The Company is in the process of expanding its manufacturing capacity to meet growing demand for its products. Carbon black is a deep, black powder with a number of applications. Derived from the controlled combustion of coal tar or residual oil feedstock, carbon black's desirable chemical properties make it a critical raw material for many industries. It is widely used within the rubber industry as a reinforcing filler; in the paint and coating industry as a coloring agent and in batteries as a conductive agent. The vast majority of carbon black is used by the tire industry, where it can improve rubber's strength, wear resistance, and life span, and thus lowers the overall cost of tires.

While not a 100% "green" stock, Asia Carbon does have an environmental and socially responsible strategy. The company issued a news release last week, entitled, "Converting Three Dry Production Lines to More Profitable Specialty Carbon Black Production Lines." The news release discusses the conversion of its three dry production lines to specialty carbon black production lines at a cost of approximately $4 million.

In the news release, Ms. Yao Guoyun, Asia Carbon's Chairwoman of the Board and Chief Executive Officer, stated,

This renovation is just another step in Asia Carbon's expansion plan. As with the recently announced construction of an on-site power plant, the benefits of the conversion are both financial and environmental.

While the production of carbon black has historically not been the cleanest manufacturing process, this step by Asia Carbon Industries is significant, not only in potentially increasing the company's profitability, but as importantly resulting in a cleaner and environmentally responsible operation."

The company's revenues for the second quarter were $13.2 million, down slightly from $13.5 million for the same period in 2011 and its income was also slightly down, to $1.87 million, from $1.98 million for the same period in 2011. Earnings per share remained at $0.04 for the quarter, the same as for the first quarter of 2011. The company's shares closed yesterday at $.22.

Conclusion

As I recently stated here at Seeking Alpha, looming inflation and stagnant economic growth in the U.S. and Europe, require many investors now taking a fresh look at China.

While some investors will look at equities in the U.S. or Europe, economies that more than likely will continue to have minimal or negative GDP growth, many are now looking at emerging markets. And, when investors end up looking at emerging markets, they'll end up looking at China. Chinese equities will be a very likely beneficiary.

I believe what investing in China is about is simply, "investing in companies that are working in an economy that is working."

I also believe that it's possible to investing in Chinese companies and be a socially responsible investor as well. China Green Agriculture , China Recycling Energy Corp., and Asia Carbon Industries (OTCPK:ACRB) are all, worthy of consideration, not just as growth stories based on metrics, fundamentals and prospects for growth, but also due to their environmental responsibilities and commitments.

Caution

Investing in smaller-capitalization companies, as well as investing in companies in emerging markets, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.

The companies mentioned, while definitely smaller-capitalization companies (even though one trades on Nasdaq and one on the NYSE),with operations based in emerging markets, and specifically in China, are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.

Source: A Look At Environmentally Responsible Chinese Companies