China Water & Drink (CWDK.OB) announced Friday that it has successfully closed a $50 million private placement of convertible notes to a small group of investors include Goldman Sachs (GS), the bluest of all blue-blooded investment banks. The company's CEO describes this transaction as a "tremendous opportunity for us to expand our market penetration", mainly through acquisitions.

This looks great, until you realize the company is setting the conversion price at $4.25 per share, a whopping 75.4% discount from Thursday's closing price of $17.25. Why is the conversion price so low, with the knock-on effect of a greater-than-necessary dilution? I thought I would look at other recent OTCBB convertible deals for comparison.

Coca Cola (KO) has bid $2.4 billion for HK-listed fruit juice company Huiyuan Juice Group, offering to pay HK$12.20 per share. Compare this to the company's previous closing price of HK$4.14 and you'll realize the amazing premium built into this deal.

This also happens to be the second largest acquisition in Coke's history and the biggest purchase of the control of a Chinese company by a foreign entity. Just goes to show how U.S. big businesses are currently viewing opportunities in China.

On Wednesday, China Education Alliance (CEUA.OB) announced that it had appointed The Ruth Group as its new investor relations firm. The New York-based IR firm, which was founded by Carol Ruth in 1999, is known for its healthcare and technology practice. Previously, Crocker Coulson of CCGIR had served CEUA.

On one hand, I think this is great news. CCGIR currently represents so many Chinese OTC companies that I've lost count. I don't know how the company can provide the necessary attention to the client, and more important, service its respective investor communities, when the company is spread so thin.

HSBC has published a report looking into consumer spending in China. Despite a slowing economy and the knock-on effects of the disastrous earthquake in Sichuan, real retail sales growth hit a decade record of 15.4% YOY (to about US$100 billion) in July this year. This was up from 14.8% in June, substantially higher than the monthly average of 12.4% for 2007.

The primary reason is the rapid expansion of disposable income (quotes from a Xinhua report):

"With nearly 1,900 US dollars per annum of disposable income for the urban residents and almost 700 US dollars per annum cash income for farmers, Chinese people are upgrading their consumption structure ... They spend more on recreational goods, dine out more frequently, buy cars and go on more holidays, hence the fast rising sales of automobiles, garments, cosmetics and jewellery."

Writing for the New York Daily News Saturday, he singled out quite a few Chinese companies he likes including the following C.O.P. companies:
1) American Lorain (ALRC.OB);
2) China Yingxia [CYXI.OB];
3) China Agritech (CAGC.OB);
4) China Pharma (CPHI.OB);
5) China Solar (CSOL.OB);
6) China 3C Group (CHCG.OB); and
7) China Educational Alliance (CEUA.OB).

Former C.O.P. companies were also cited: Zhongpin (HOGS), Sutor (SUTR), Sinoenergy (SNEN.OB) and Ever-Glory (EVK).

Sinobiomed (SOBM.OB) this week announced that it has received an injection of $500,000 in cash from Accelera Ventures, an Asia-based investment fund. According to the press release, this amount is to be set aside for "current strategic initiatives that will place the Company in a strong position for growth and accelerate product development". The company will in due course announce what these initiatives are.

While it is great that SOBM obtained funding (and this is the company's first press release since late November last year), there are just a few things that didn't sit well with me. First, this is a small amount, and I'm just wondering what the company can do with its "initiatives" with this sum. After all, $500K is very close to its G&A for Q1 2008, which was approx. $459K. In fact, SOBM's total expenses was $1.8M for the first three months of this year. So, in the grand scheme of things, it is a drop in the ocean. All right, several drops.

Since announcing its preliminary Q2 results on July 10th, China 3C Group (CHCG.OB) has been on a roll. It was only less than two weeks ago that its stock price languished at $1.20, amid listless trading. Tuesday CHCG.OB closed at $2.17, a gain of over 80% in just nine trading days.

Of course, this is attributable to its better-than-expected financial results. Q2 sales is expected to come in between $81.5m to $82.5m, a 26%-28% increase compared to the prior year results. Net income is expected to be in the range of $7.3m to $7.4m, giving us an approximate EPS of $0.14 compared to $0.10 in the same period last year. These numbers trump the consensus earnings estimate of $0.11 on revenues of $69.9m for the quarter.

With China 3C Group's (CHCG.OB) announcement this week that it has partnered up with major Chinese appliance retailer Yongle to open new stores-within-stores, the company is finally in reach of its long stated goal of having 1000 stores. This is a major achievement, especially given the fact that CHCG has been on a mission to close non-performing stores in the last six months or so.

This is more than a symbolic victory, as Yongle, with 200 locations, is the third largest appliance retailer in China and has 60 stores in Shanghai alone. The agreement is for CHCG to open in 30 Yongle locations, with the possibility for more stores in the future. While it may seem counterintuitive that a major appliance retailer would allow another to open stores within its location, I think this merely attests to the strength of China 3C Group's businesses.

After briefly touching $2.81 last November, China Clean Energy (CCGY.OB) has now lost almost 75% of its value, trading at approx. $0.75 per share currently. This is a sorry tale and has less to do with the management of the company than with where commodity prices are headed. After all, if it is no longer viable to profitably make biodiesel, then a great part of the reason why CCGY exists goes out of the window.

But that is not the whole story. As touched upon in a previous entry on the company, we are still waiting for clarification from management as to how they plan to convert the still-being-built biodiesel facilities in Jiangyin for the manufacture of other chemicals. This has never been clear to me and CCGY never supplied details. And while the company insisted that production will start on January 1st, 2009 (as promised), what exactly is being manufactured? Will there be additional costs in re-outfitting the site? How does the company expect to line up customers for these chemicals if they still don't know what they're making?

In another case of a company outgrowing its name, China Organic Agriculture (CNOA.OB) has decided to buy a vineyard in California called Bellisimo Vineyard and will start selling wine in China. Bellisimo produces grapes for other wineries (including E&J Gallo) and also bottles its own Bellisimo-branded chardonnay, merlot and cabernet. CNOA calls this wine "premium", but those familiar with E&J Gallo will know that this is hardly the case. Perhaps they can fool the Chinese consumers by calling it premium California wine, but soon enough the truth will out. If there's one thing that defines the nouveau riche in China, it is that they are not stupid. At least not for long.

And of course, these grapes are not organically produced. How that fits into a company called China Organic Agriculture is far from certain.

In contrast to recent CFO appointments, I am not impressed with China Education Alliance's (CEUA.OB) choice of Ms. Susan Liu. Sure, she was the CFO of Hendrx Corp [HDRX.OB] and Entech Environmental Technology, aka SkyPeople Fruit Juice [SPFJ.OB], both OTCBB companies, but interesting facts emerge just after a little digging.

First of all, HDRX's market capitalization is a mere $2 million, not surprising for a company whose shares are trading at just $0.05 per piece. In fact, HDRX appears to be headed for insolvency. In the company's most recent 10Q, net loss expanded, and the company owes its insiders (including its CEO) almost $1 million. It also has $3.2 million worth of outstanding short-term loans. Further, HDRX is being sued by Worldwide Water for fraud and patent infringement.

Monday, Legend Media (LEGE.OB) announced the appointment of a new Chief Financial Officer. I've seen many CFOs come and go, and this CFO, I have to say, must be one of the most qualified I've encountered. His name is William Lee and his credentials are quite stellar.

First, he has a PhD from MIT and did postgraduate work at Harvard. He published a book on Chinese politics. He worked for McKinsey in China. He then worked for TNT China where he was responsible for the acquisition of Hoau, the largest private road transportation company in China. He then worked for Transworld Capital Group, where he was Managing Director (they need to update their website).

China Clean Energy's (CCGY.OB) fundamentals seem to be deteriorating quick. The company released its Q1 results on Monday and they disappoint. Here are some highlights:

- Revenues of $4.5 million, up a mere 8% yoy
- Gross profit DOWN 9% yoy
- The company almost went into the red with net income of just ~$164,000
- EPS of $0.01

First of all, look at this chart. In the space of less than a month, Universal Travel Group's (UTVG.OB) website, CNUTG.com (not to be confused with its CBA-HOTEL.com site), has gone from nowhere to be the ~4,400 most trafficked site in all of China. Additionally, the website is also gaining traction in South Korea (ranked ~11,000) and Vietnam (ranked ~24,000). This reinforces what I have already been saying - while UTVG's strategy last year was to shore up its physical footprint across China, this year is all about online presence.

In fact, the company's press release regarding its termination of financing agreement on Wednesday is illustrative of a perceptible shift in the UTVG's positioning. It described itself as, I quote, "a fast growing travel services provider in China specializing in online and customer representative services to the travel service industry." This positioning statement has been in place since late March. Is it an accident that "online" comes before "customer representative services"? I don't think so.

Just as things will heat up for the Summer Games (in ways good and bad), things will similarly heat up for the Chinese small caps. Just in case you haven't realized, a rebound is under way, led by stellar results from various companies' Q1 results. And even for those who have yet to report, bearish sentiments are fading away quite quickly. Just as an example, since I last reported on Universal Travel Group's (UTVG.OB) online gains, the stock is up by more than 40%, over the course of just 5 trading sessions.

Universal Travel Group is certainly a stock that will do well from the Games, benefiting from the confluence of greater spending power and increased travel from both domestic and international tourists. China Yida (CYID.OB) is another, with its world class tourist destination in the Great Golden Lake which, despite it being a little off the beaten path, makes for a great summer getaway.

Things are afoot at China Yida (CYID.OB) and I want to use this opportunity to clarify a few things. The first is the number of shares outstanding. When the company was still IAVA.OB, the number of shares outstanding was 100 million. It then did a 1:10 reverse split, bringing down the shares to 10 million. Subsequently it issued 44.75 million shares to its major shareholders, and then another 20 million (13.33m shares and 6.67m warrants) to Pope Investments.

So I have the shares outstanding (diluted) as 74.75 million. This accords with its 10K (issued late March) which had its shares outstanding as 68.08 million, which is 74.75m less 6.67m.

Q1 2008 versus Q1 2007:

- Revenues increased 62.0% from $7.2m to $11.7m.
- Gross profit increased 76.0% from $3.3m to $5.8m.
- Gross profit margins up from 45.6% to 49.6% (industry average is in the 30s).
- EBIT up 152.2% from $1.8m to $4.7m.
- Net income up 76.5% from $2.4m to $4.2m
- Net income (allowing for forex adjustment) up 129.1% from $2.6m to $5.9m

China Clean Energy's (CCGY.OB) press statement Thursday:

(A)s of March 2008 it had temporarily halted production of biodiesel and is now shifting its focus to higher value added specialty chemicals in an effort to mitigate a dramatic recent spike in the costs for raw material coupled with stagnant wholesale diesel pricing.

The last time I checked, Universal Travel Group's (UTVG.OB) online presence China Booking Association, a hotel reservation website owned by subsidiary Shanghai Lanbao, was ranked ~45,000 in terms of the most popular websites in China. When I checked Thursday, it ranked ~14,000.

That is an impressive gain and it tells me two things about the company. First, while Universal Travel's strategy last year was gaining a physical footprint across China (with acquisitions in Shanghai, Xian and Foshan), the strategy for 2008 appears to be improving its online presence. Second, all the press about China being the most wired nation on Earth (with the most internet users) is not just talk but is indeed having a real (and very positive) impact on UTVG. Sure, Universal Travel's website has still a long ways to go before catching up with Ctrip.com (CTRP) and eLong.com (LONG), but at the rate it is going, this may not be entirely impossible.

China Clean Energy's (CCGY.OB) press statement Thursday:

(A)s of March 2008 it had temporarily halted production of biodiesel and is now shifting its focus to higher value added specialty chemicals in an effort to mitigate a dramatic recent spike in the costs for raw material coupled with stagnant wholesale diesel pricing.