Three Interesting China Small Caps to Consider

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Includes: APBS, RMSI
by: China OTC Player

We are starting a new series focusing on newer stocks on the OTC, some of which we may consider for addition to our Rising China Stocks Index. These are mostly lesser known and possibly sparsely traded companies, so extra caution should apply.

The fact is, I have found that there is almost always a gap between the stock price of a newly OTC-listed company and its fairly-valued price, and that is a gap which we can use to our trading advantage.

So here are three interesting companies I've come across:

1) China Redstone Group (OTC:APBS). Formerly known as Artistry Publications, this company did a reverse merger to get on the OTC in February. China Redstone is interesting in several ways.

First, it is the only listed Chinese company I know in the business of cemetery real estate and services. Based in Chongqing, it operates a ~67,000 square meter plot near Chongqing, and is currently expanding to another plot that is ten times larger. It is the number one cemetery operator in Chongqing.

For nine months ending 12/31/2009, the company earned revenue of $26.5 million and net income of $10.1 million. The bottom line represented a whopping growth of 168% from a year ago. Given its plot expansion, and given the evergreen nature of its business, this looks like a (relatively) low-risk but high-returns investment.

2) China LianDi Clean Technology (OTC:RMSI). Formerly known as Remediation Services, this company provides clean technology, downstream flow equipment, and engineering software and services to China's leading petroleum and petrochemical companies.

Reported revenue for nine months ended 12/31/2009 was $45.6 million, an increase of 456% from $8.2 million in 2008. Net income for the period totaled $11.3 million versus $0.8 million a year ago. The company has over $11 million in cash and no long-term debt.

I like the space the company is in. It is growing rapidly, has a great list of customers including Sinopec and CNPC, and is pioneering several types of clean technology including "unheading" units for the delayed coking process. The latter industry is expected to grow to over $1 billion in the next ten years, and RMSI expects to participate in a significant portion of that.

3) Kingold Jewelry [KGJI.OB]. Wuhan-based Kingold is, according to the company, "China’s leading designer and manufacturer of 24-K gold jewelry sold by weight". KGJI sells both directly to retailers and through major distributors, and is a member of the Shanghai Gold Exchange.

Given China's growing middle class and its love of all things golden, this is an interesting play. Revenue for FY2009 was $250.5 million, with net income of $9.0 million. Cash at year-end was almost $8 million. According to statistics provided by the Gems and Jewelry Trade Association of China, the company ranked first and second in China's gold industry nationwide in total volume of production in 2007 and 2006, respectively.

While wholesaling gold is a slim-margin business, the company is expanding in more elaborate design of its jewelry, where a typical mark-up could range from 4% to 6%. If the company is able to position itself as a luxury goods provider and create a strong brand, I think this could be an excellent proxy of the Chinese consumer market.

Our index currently has 35 stocks, and we would like to increase that to 40. In the long term, we think the index should be comprised of 50 component companies, so we will be moving to that number in incremental steps.

Disclosure: None.