Betting Big on Small Cap China

by: Cameron Fous

When it comes to finding attractive bullish small cap stock picks with high growth, strong earnings, and that are deeply undervalued, there’s no better place to do your stock hunting than in the Chinese small cap arena. Back in 2007 and early 2008 we were able to gain substantial profits playing Chinese small cap stocks and now that the dust has settled with the recession there is an abundant amount of small cap chinese stocks grabbing my undivided attention. My favorites that I have spotted so far are CHLN, CMFO, CHTL.OB, OTCPK:CPQQ, and OTC:LPIH. I have substantial positions in all of these.

Small Cap Stock Pick: CHLN


China Housing & Land Development, Inc., through its subsidiaries, engages in the acquisition, development, management, and sale of commercial and residential real estate properties in the People's Republic of China.

CHLN has been a huge favorite of mine for the past several years as we have traded it on numerous occasions all for big profits. And I don’t plan on this winning streak to end here and now. CHLN reported some substantial earnings growth, which gave way to a huge rally now sparking a lot of momentum for the bulls in CHLN and the short term trend is now highly in favor of being long.

CHLN is trading at an extremely low forward P/E of just 6.66x earnings while the industry average is trading much higher at 22.81. Given that CHLN is expecting forward EPS in 2010 of .65 this gives us a fair value within its industry for CHLN around $15/share, which gives us +200% upside potential from a fundamental perspective. Short term technically I think $6/share on momentum is in plain sight.

Technical Analysis:


Small Cap Stock Pick: CMFO


China Marine Food Group Limited engages in the processing, distribution, and sale of processed seafood products, as well as the sale of marine catch in the People's Republic of China and internationally.

CMFO has been in a huge uptrend for all of 2009 making some substantial gains. Yet this stock is still extremely depressed in value. After trading in a range from 4-6 over the past 4.5 months this finally broke out to all time highs Friday on substantial volume, placing a lot of conviction for bull power on this breakout.

CMFO is trading with a low forward P/E ratio of just 7.91x earnings in an industry with an average multiple of 19.9x earnings. CMFO is expecting strong forward growth and expects .79 EPS in 2010 which gives them a fair value within there industry around 15.75/share. Short term technically I think we could reach $8

Technical Analysis:


Small Cap Stock Pick: CHTL.OB


China Tel Group, Inc., through its subsidiaries, provides engineering and deployment services related to the development of a wireless broadband telecommunications networks.

CHTL is a really speculative small cap penny stock that has some huge upside potential. Yet always with penny stocks there poses some risks. We first took a position here in CHTL at .50 and we are currently up around +20% on this position.

They deploy the LARGEST 4G Wi-Max network in the world. We look for CHTL to VASTLY expand its initial 5 city simultaneous deployment schedule as the demand for TRUE broadband connectivity purely from the Shanghai World Exposition is significantly more than we first projected. Travel and business demand from the 78 million Chinese traveling to Shanghai during the May-October 2010 event creates security/surveillance projects through out the region, not just Shanghai and Beijing. They ALL run on private broadband networks and China simply does not have NEARLY enough bandwidth from most of its DSL providers to make this happen. CHTL is literally the only broadband provider that will have the spare capacity to make this happen.

And in light of the problems the PRC has had in its northern provinces, they will NOT be unprepared for the influx of tens of millions into Shanghai. We have intelligence reports from a number of Wi-Max vendors that they expect to see a HUGE wave of Wi-Max demand in the big cities and regions in China.

For the full story on CHTL visit my other article here HERE.

Technical Analysis:

Small Cap Stock Pick: CPQQ.OB

Business summary

China Power Equipment, Inc., through its wholly-owned subsidiary, Xi’an Amorphous Zhongxi Co., Ltd., has developed a proprietary patented technology to produce a new generation of energy saving transformers and transformer cores. The company currently manufactures 59 different products, primarily amorphous transformers in four product series that are sold throughout China. The company was formed in 2006 as an U.S. corporation, and in November 2006, created a Chinese subsidiary that was granted a license as a privately held wholly owned foreign enterprise by the Chinese government.

CPQQ.OB is one of my favorites of the small cap China group as the chart pattern here breaking the ascending triangle to all time highs and a low price stock. This is a recipe for some huge profits. I'm hoping to pull at least a 30-50% gain out of this stock. CPQQ released some substantial earnings and growth results in their latest 10q last week which sparked its initial move that lead me to buying into this stock at 2.25

Third Quarter 2009 Highlights -- Net revenues increased 252% to $7.89 million in the third quarter 2009 from $2.24 million in the third quarter 2008. -- Gross profit increased 280% to $1.96 million in the third quarter 2009 from $0.52 million in the third quarter 2008. -- Net income increased 516% to $1.41 million in the third quarter 2009 from $0.23 million in the third quarter 2008. -- Diluted earnings per share increased 350% to $ 0.09 per share in the third quarter 2009 from $ 0.02 per share in the third quarter 2008.

I'm looking to take profits between 3-4/share on CPQQ.OB

Technical Analysis:

Small Cap Stock Pick: LPIH.OB

Business Summary

Longwei Petroleum Investment Holding, Limited (the “Company”) is an energy company that, through its subsidiaries, engages in oil and gas operations in the People’s Republic of China (”PRC”). Oil and gas operations consist of transporting, marketing and selling finished petroleum products. The Company’s headquarters and primary facilities are located in Taiyuan City, Shanxi Province (”Shanxi”). The Company’s second facility is located in Gujiao, Shanxi. The Company purchases diesel, gasoline, fuel oil and kerosene (the “Products”) from various petroleum refineries in the PRC.

LPIH is yet anther small cap Chinese stock that is in a long standing bullish trend for most of 2009 and was sparked up with another bull rally as their earnings report confirmed that this company continues to perform and deserves the rally that investors have given it . I took up a long position in this on Friday as I think this should re-test prior highs around 2.50.

Financial highlights:

-- Revenue up 33% Year-over-Year to $59.36 million -- Net Income up 31% Year-over-Year to $7.21 million, or $0.09 EPS -- Net Income Excluding Non-Cash Fair Value Adjustments Associated with Stock Warrants was $8.26 million, or $0.10 EPS -- Operating Income up 48% Year-over-Year to $11.06 million

Quote from the EC via yahoo finance link HERE.

Chief Financial Officer Jim Crane stated:

We exceeded our internal forecasts for the quarterly reporting period ended September 30, 2009. Revenues were approximately $5.6 million higher than expected due to significant additional sales in August and September, while net income was approximately $600,000 higher than expected. The new facility looks very good and is already active. We are the only licensed non-government operated fuel distributor in Gujiao who also has significant storage capacity. As previously announced, we expect very strong growth in fiscal 2010.

Financial Outlook:

As of September 30, 2009, the Company’s current assets were $85.24 million and current liabilities were $7.91 million. Cash and cash equivalents totaled $9.43 million as of September 30, 2009. The Company’s shareholders’ equity at September 30, 2009 was $121.65 million compared to $114.92 million at June 30, 2009. The Company had cash provided by operating activities for the three months ended September 30, 2009 of $9.57 million compared to cash used in operating activities of $751,000 for the three months ended September 30, 2008. Net cash used in investing activities was $7.64 million for the three months ended September 30, 2009 compared to $0 for the three months ended September 30, 2008. The Company had net cash provided by financing activities of $76,000 for the three months ended September 30, 2009 compared to $0 for the three months ended September 30, 2008.

Technical Analysis:


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