China's High Flying Micro Caps

by: Markos Kaminis

Several China-based micro caps took to flight this week. If you followed the biggest movers list, you probably took note of the trend. A slew of micro-cap stocks dominated the list, a good number of them based in China. So with the intensifying concern about China's economy these past few months, can these stocks really keep it up? The answer may be yes, given that there appears to be a common denominator connecting the moves.

Four Chinese micro-cap stocks and one small-cap stock marked moves of over 20% Thursday, and another made a huge two-day move this week before giving back some of its gains Thursday.



Market Cap

% Move

NF Energy Saving

Nasdaq: NFEC

12.5 Million

+180% (2 days)


Nasdaq: HEAT

24.3 Million

+130% (3 days)

China Recycling Energy

Nasdaq: CREG

80.4 Million

+74% (2 days)

Shengkai Innovations

Nasdaq: VALV

25.5 Million

+34% (1 day)

Charm Communications

Nasdaq: CHRM

447 Million

+27% (1 day)

Ossen Innovation

Nasdaq: OSN

27 Million

+22% (1 day)

While a few of the Chinese stock movers this week had their own reasons for rise, there was also one common denominator that seems to be behind the action. I think that much is clear, since some of the companies had no real company specific driver. Also, the businesses of Ossen Innovation (NASDAQ: OSN), Charm Communications (NASDAQ: CHRM), Shengkai Innovations (NASDAQ: VALV), China Recycling Energy (NASDAQ: CREG), SmartHeat (NASDAQ: HEAT) and NF Energy Saving (NASDAQ: NFEC) vary from advertising services, to rare earth metals, to energy savings and industrial products.

The common factor tying them all was China's decision to open up to more foreign investment. Specifically, a few select institutions will be allowed to invest in China's capital markets. The move opens the spigot for $50 billion more in foreign funds (over the $30 billion allowed before) to find the shares of China's micro-cap and small-cap companies suddenly in need of capital.

I expect China is opening up for purely selfish reasons, not because of some new regime openness to the west, as you may have read elsewhere. It's evident in the anecdotal, through simple review of corporate communications. The Chairman of NF Energy Saving stated in a recent news release, "These achievements were despite the difficulties the company encountered in raising additional financing to pursue its expansion and development efforts…" The Chairman and CEO of SmartHeat said, "Our decrease in sales and deliveries in the fiscal year of 2011 compared to the fiscal year of 2010 resulted primarily from a continued slowdown in China's general economy…," which is no secret any longer.

SmartHeat , a proudly self-described "highly profitable clean technology, energy savings company," makes plate heat exchangers. The company also got significant lift from its improved quarterly performance posted this week. The stock was up 130% over 3 days.

NF Energy Saving mapped its way to a 180% gain over two days, marking a 96% gain Thursday alone. The company engages in the "energy technology business" in China, including consulting, engineering and design work. The company also makes energy saving flow control equipment and intelligent flow control equipment.

Each of these companies could benefit from the newly opened capital stream. Of course, the capital will flow smartly into companies where it can add value, like perhaps the two outlined here. So, in this case, it might be wise to follow the money, or the stock performance. Those stocks that the market believed would benefit early probably will, though you will want to apply a little more due diligence before choosing. Unfortunately, I expect that as the days increase since the capital spigot news broke, an increasing number of China-based firms will appreciate on speculation. In the end, the Chinese government may get the spark it sought more broadly than deserved, but over time, the stocks that deserve it will attract the capital and keep it based on performance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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