China North East Petroleum Holdings: Too Small to Buy or Too Impressive to Ignore?

| About: China North (CNEP)
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China North East Petroleum Holdings' (CNEH.OB) performance challenges the use of many recent investing mantras such as: don't chase a momentum spike, Chinese stocks are overheated, small stocks can't weather an economic or market downturn, etc. It is true that CNEH.OB has gained over triple in less than a week with a yearly high of $1.7. The 8/23 second quarter report was the price trigger- phenomenal sales up 746 % and net profit up 221 % from previous acceptable levels.

Last year there were less than a dozen producing wells and now over 110 wells with projections of doubling . The production in four Chinese fields is over 1600 barrels a day with operating margins at 49% - a lot of cash is dropping to the bottom line. The company has a long term guarantee for 100% purchase of it's output to Petro China, which is a big player in China. There is no doubt that China is starving for more local and foreign sources of energy, especially oil and gas. US and Russia are not anxious to help China grow- no problem with demand here!

Some other positives are: experienced management hired from China's big oil cmpanies, great financials that are riveting, well controlled expense and debt while expanding rapidly, low number of shares at 19 million with only a float of 3 million, and forward PE approaching 2. The marginal current ratio of assets to liabilities is not uncommon with typical high Chinese account receivables. However the cash flow from operations of 49% is adequate protection. Reserves are increasing but the life of these fields may not be world class producers. The reports to the SEC are professional and clear of suspicious accounting or problems. Sustaining growth is a challenge that it appears that CNEH's management has well planned for.

My inclination is to confirm the sustainability of the fast increase in share price before adding shares. I'm encouraged by the fact that small capitalized Chinese stocks on average have held up well in the poor market of the past weeks. Although some have referred to CHEN as the Chinese EXXON (NYSE:XOM), there is much US investor trepidation regarding ownership of Chinese stocks, even those listed here.