Investment opportunities and risks are changing constantly.
Consequently, investors must periodically adapt their investing
activities in order to safeguard portfolios and boost long term
Whilst this maxim may seem obvious to short-term traders it is
equally valid for long-term investors. For them too it can be both
wise and profitable to selectively allocate an amount of resources
towards attractive short term opportunities which the market
periodically throws up.
One such short-term opportunity exists today. It has evolved via
the confluence of several factors and resulted in stocks of small
US-quoted Chinese companies becoming compellingly cheap ahead of
their 4Q 2009 reports. These stocks have been buffeted by a barrage
of negative factors including;
- Small companies, by their very nature, do not have broad
analyst coverage and stock prices often suffer from a lack of
media support caused by infrequent news publications. This leads
to stock prices sinking during times when positive news is scarce
i.e. typically between earnings release dates.
- Global issues such as sovereign debt default concerns are
shaking markets everywhere and again small/mid-cap stocks with
high betas tend to experience more than their fair share of the
- US investors are increasingly ethnocentric during worrying
times, leaving stocks of many foreign US-quoted companies to
languish at a discount to their US peers.
- In the face of accelerating economic growth, and in order to
guard against the emergence of an asset bubble, China is starting
to curtail new bank lending and tighten existing criteria. Such
news stories often lead to negative over-reaction by individual
investors who then sell indiscriminately.
Behind these headlines lies the reality that the Chinese economy
is growing at over 10% per annum and, with its tremendous
competitive advantages, will surely continue to grow strongly for
the foreseeable future.
Moreover, because China's economy experienced accelerated growth
in late 2009, it seems inevitable that many Chinese companies will
report better-than-expected earnings for 4Q 2009. In the
circumstances one could reasonably expect share prices for a number
of carefully chosen US quoted Chinese companies to have performed
Instead, the opposite has happened - almost all have pulled back
sharply since mid January, even where the underlying business is
booming and profits soaring.
Thus, the current plethora of negative news items has thrown up
an attractive short-term trading opportunity:
US quoted Chinese companies with low valuations that report
good results are well positioned to experience upward share price
moves into and on earnings release day.
This short term opportunity may well transmute into a long term
buying opportunity but this note concentrates simply on the
Some early reporting Chinese companies are already verifying the
validity of this thesis.
- On February 8, China Fire & Security Group (Nasdaq: CFSG)
issued preliminary but slightly disappointing 2009 results
together with improved 2010 guidance. The stock rose from $12.06
to close at $14.47, a 20% gain on a day the Dow Jones lost 104
- On February 10, Baidu Inc (Nasdaq: BIDU) jumped 10% on its
solid 4Q earnings release.
- On February 11, Xinuan Real Estate Company (
) reported strong 4Q results and issued in-line outlook - its
stock rose over 12% in two days into and during earnings
- Also on February 11, J.A. Solar Inc (Nasdaq: JASO) stock rose
almost 15% in the two days into and during earnings release on
better than expected results.
Reassuringly, since reporting, and without any exception,
these stocks have held on the gains achieved at earnings
A common theme is emerging: In today's difficult markets,
beaten-down Chinese stocks are experiencing lively gains at
reporting time, provided that; (a) 4Q results are in line or better
than expectations, and; (b) the company is able to confirm via its
forward 2010 guidance that the underlying business remains in
This second point is particularly important in allaying
investors' overdone concerns about a possible slowing of the
From over 200 Chinese stocks quoted on US markets, I extracted
the following list of six which I consider to have the best
criteria: cheap stock with good upside potential, healthy
continuing business into 2010 and beyond, likely to meet or beat 4Q
2009 earnings estimates, and good stock trading liquidity. Observe
that all companies have single digit 2010 p/e ratios and all are
forecast to experience 2009-2010 sales growth of greater than
Est Earnings Release date
Market Cap, mil
Sales 2009, mil
Sales 2010, mil
Est 2010 p/e ratio
Daily Shr Vol '000
Notes: All data from Yahoo Finance except CSR 2010 p/e which
is based on company guidance. Stock prices are market close
There are two stand-out prospects on the list:
- China Security & Surveillance Inc (
) is a $502m market cap company in the nascent Chinese
surveillance and security industry. In order to carefully monitor
its vast population in an age of growing disparity between the
rich and poor, and thereby try to minimize social discord in the
country, the Chinese Government will rely more and more on
surveillance technology. This provides companies such as CSR with
a long term business platform. At earnings time CSR is expected
to announce new business wins of potentially up to $1.8 billion
since the beginning of September 2009 thus suggesting that 2010
sales estimates of $812m and CSR's EPS guidance of $1.20 approx
should be within grasp. CSR is expected to report on March
- China Housing and Land Development Inc (Nasdaq: CHLN) is a
real estate developer in Xi'an city (pop 8.5m). Whilst there is a
serious property bubble threat in eastern seaboard cities such as
Beijing where the average property prices per Sq meter in
December 2009 was Rmb 13,000 ($177/Sq ft), the picture is very
different for tier 2 inland cities such as Xi'an - its average
pricing in December 2009 was a mere Rmb 5,000 ($68/Sq ft). CHLN
is set to report 4Q'09 figures best described as blowout. Sales,
for example, will be about 130% greater than broker estimates.
Further, due to a burgeoning projects pipeline in the second half
of 2010 the company is likely to beat brokers' 2010 EPS estimates
by a wide margin. But what makes CHLN stand out is that, beyond
its existing and planned construction projects, it owns a prized
390 acre tract of development land in Baqiao, a mid to upper
income suburb of Xi'an, that is valued at over $1million per acre
(CHLN sold an 18 acre parcel for $24.4 million cash in 2007).
Even ignoring CHLN's strong earnings cycle for 2010 and beyond,
the value of the Baqiao land alone is worth over $400 million.
Yet, the total market cap of CHLN is a mere $131 million
(enterprise value $165m). CHLN is a company with an unusual
amount of hidden value. Expected reporting date is March 25.
The other four companies on the list also have great stories to
tell and they too should be examined:
- Advanced Battery Technologies Inc (Nasdaq: ABAT) designs,
manufactures and sells rechargeable lithium-ion batteries in
China, the USA and Europe. It also owns a small but growing
electronic scooter and vehicle business. On February 3, 2010 ABAT
announced it had won orders to deliver significant numbers of
scooters to distributors in both Turkey and The Netherlands. It
is on a 2010 p/e of 8.6, anticipates sales growth of over 50% in
2010 with further strong growth expected in future years. ABAT is
expected to report earnings on March 15.
- China Information Security Technology Inc (Nasdaq: CPBY) is a
provider of digital security, geographic information and hospital
management solutions. On January 14 CPBY announced that it had
signed a record $36.7 million of new contracts in 4Q'09. The
company has a 2010 p/e of 7.6 and expects 2010 sales to be about
40% above 2009. CPBY is anticipated to report 4Q on March
- Zhongpin Inc (Nasdaq: HOGS) processes and distributes pork
and food products in China and some export markets. It has a
strong record of sales and EPS growth. Sales increased in 2009 by
nearly 50% and are expected to increase in 2010 and future years
by about 30% annually. On January 11 HOGS released favorable
preliminary results for 2009 and on February 8 announced the
successful opening and initial production at a new large
processing plant. HOGS trades on a 2010 p/e of 7.1. Expected 4Q
earnings release date is March 16.
- China North East Petroleum Holdings Ltd (
) is an ultra-low cost oil producer and driller in North East
China. It sells all its oil to PetroChina on the open Singapore
market. NEP owns a well drilling company and in the past 2 months
the company announced 2 significant well drilling contracts.
NEP's consensus estimates for 4Q 2009 were built using an average
oil price of $65 per barrel. Since the true average oil price in
4Q 2009 was greater than $65 we can expect NEP to beat brokers'
estimates. 4Q earnings should be released on about March 29.
The 4Q 2009 reporting dates used are provisional - they have
been estimated with reference to previous earnings announcements.
Hence, investors/traders must keep an eye on the companies in
question for news of the official earnings dates.
After earnings release, there is a risk that some share prices
may drift lower if the reporting company does not follow-up with
good PR and if the stock does not get broker upgrades but all this
very much depends on the specific results and on other external
Being a long term investor, I won't attempt to offer expert
advice as to the best timing for entering these short-term
opportunities. Best time may be immediately before earnings or it
could be several days ahead of earnings. Time will tell.
Within a wider portfolio I hold core long positions in [[CSR]],
[[NEP]] and [[CHLN]]. Additionally, I have already taken short-term
trading positions in some of the mentioned stocks. I intend to do
further short-term trades with all of them by the time they report
their 4Q earnings.
Faber Calls 2010 'The Year of Capital