What Are the Top China Small Cap Picks of 2011?

by: Natty Greene

The popular and well respected China Growth Stocks (CGS) board on Investor Hub has compiled its annual Emerging China Small Cap (ECSC) Index Top 10 List, based on submissions by many of its nearly 1,000 followers. Traders were asked to list their personal top 10 China Growth Stock picks for the next 12 months (hold for a year, no in and outs).

The final top ten list for 2011 ranked in order of votes:

1. China MediaExpress Holdings (OTCPK:CCME)

2. Universal Travel Group (UTA)

3. China North East Petroleum (NYSEMKT:NEP)

4. Longwei Petroleum (LPH)

5. China Ceramics (CCCL)

6. ZST Digital Networks (NASDAQ:ZSTN)

7. Yongye International (NASDAQ:YONG)

8. China Redstone Group (OTC:CGPI)

9. Biostar Pharmaceutic (NASDAQ:BSPM)

10. Asia Entertainment and Resources (AERL)

CGS stockpickers are not the only ones buying up CCME and UTA because of their undervaluation with hopes of big gains ahead. Both have recent bullish insider open market buys by their CFOs. On Dec. 8, UTA’s CFO Jing Xie purchased 39,850 shares of UTA at $6.20 valued at $247,070. A day later, CCME’s CFO Jacky Lam purchased 1,000,000 shares of CCME at $15.00 valued at $1,500,000.

I agree with the CGS Board stockpickers on their 2011 top picks of CCME and UTA, but I would personally switch their order based on their relative undervaluation to their sector peers. If both start to trade closer to the multiples of their sector brethren, UTA will dramatically outperform CCME in 2011.

Let’s take a look at a comparative analysis based on 2011 EPS estimates to make my point:

UTA, 2011 PE is 4 ($1.51 EPS)
CTRP, 2011 PE is 35 ($1.31 EPS)
Bottom line: UTA is priced 8.75 times less than CTRP on 2011 EPS

CCME, 2011 PE 6 ($2.87 EPS)
FMCN, 2011 PE 16 ($1.35 EPS)
Bottom line: CCME is priced at 2.66 times less FMCN on 2011 EPS

UTA is much more undervalued relative to its China peer than CCME. And a quick look at the ESCS’s Top Ten’s institutional support seems to show that others are betting the same way too in the UTA to CCME matchup.

1. YONG: 34%
2. UTA: 22%
3. CCME: 11%
4. ZSTN: 11%
5. CCCL: 8%
6. LPH: 4%
7. NEP: 3%
8. BSPM: 2%
9. AERL: 0 %
10. CGPI.OB: 0%

I own both and love both stocks, but remain more overweight UTA based on this peer/value analysis and my belief that UTA will outperform CCME in 2011.

Disclosure: I am long UTA, CCME.

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