9 Top China Plays
by
Glen Bradford
The financial crisis has sent the markets plummeting. For those who believe that companies that make more money than other companies should be priced higher than other companies, boy do I have some bargain bin deals for you. In the past 6 months, I’ve hand sorted through over 5000 companies. The steals are all in China.
1. China Architectural Engineering (NASD: CAEI) specializes in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects. It just got added to the Halter USX China Index. Trading at $37.24M with a book value of $78.2M for a company that does specialty construction projects looks like a steal, especially when they made $22.6M in the first 9 quarters of 2008. They lowered their guidance for Q4 2008 and they are eating some cost overrun costs. Recent news includes that they were awarded two new contracts for projects valued at $80 million in Dubai and Singapore. The Company also reported that its project backlog has increased to a new record of $245M.
2. China Yongxin Pharmaceuticals (OTC: CYXN) has three segments: the wholesale of pharmaceuticals and other medical-related products, the operation of retail drugstores, and the cultivation, processing of ginseng. Currently trading at $2.19M when they made $4.0M in the first 3 quarters of 2008 and $2.6M in the first 3 quarters of 2007 is absurd. Not to mention that the book value is $12.5M. Yongxin also just put up a new, more flashy website. The investor message boards were very concerned when their old website went down. I sat by and let the people who don’t understand website development sell out. Same thing happened with New Dragon Asia (NWD).
3. New Dragon Asia (OTC: NWD) is engaged in the milling, sale and distribution of flour and related products, including instant noodles and soybean-derived products, to retail and wholesale customers throughout China. I find trading at $9.14M with a book value of $74M mildly entertaining. The company made $14.12M in 2008. In my opinion, investors are shaky because their operating margins got squeezed by the ridiculous expansion in commodity prices. Good news, the whole bubble collapsed. As I see it, this is an opportunity for the company to make some huge numbers in 2009, not to mention that they’ve been religious about growing revenues over the past 5 years with high predictability. Their website crashed about a month ago and the stock price hit the chopping block, getting cut more than just in half. Look for the catalyst at $0.83 of the Halter USX China Index.
4. Gold Horse International (OTC: GHII) is principally engaged in three business sectors in China: construction, residential and commercial real estate development, and management and operation of the Inner Mongolia Jin Ma Hotel. Top line revenue guidance for 2009 is $90M and the company is priced at $2.63M. In 2008, they made $4.53M on revenues of $66.91M. The book value is about $25M. Gold Horse is located in Hohhot, China; a city that has been growing at 23.5% for the past 7 years. Gold Horse has contracted to build a wind power manufacturing plant. This company is located in the middle of china, not on the outskirts where the exports have fallen and hurt the economy. There are two issues that I see. The first is that their cash is low and are burning through cash to maintain operations. The second is that there are some big shareholders that look to be slowly selling the stock down.
5. Orsus Xelent Technologies (AMEX: ORS) is engaged in the business of designing, manufacturing and distributing cellular phones for retail and wholesale distribution. What we have here is a company trading at $7.44M that has a book value of $42.4M. In the last 9 months they made $6.34M. According to their annuals, they are trying to advance along with technology into the 3G markets and are targeting China’s rural population. They grew 16% in 2008 even with the economic crisis slowing them down in the end of the year.
6. Lotus Pharmaceuticals (OTC: LTUS) manufactures branded drugs and distributes them along with products produced by third-party manufacturers throughout China. Lotus just came out with a new website in the last week. Trading at $8.06M with a book value of $38.3M and making $6.3M in the first 9-months of 2008 makes Lotus extremely attractive. There is downside for the risk-averse. Lotus East has historically funded its capital expenditures from their working capital and has advised us that they believe this capital is sufficient for their current needs. Lotus East has contractual commitments for approximately $65.5 million related to a Technology Transfer Agreement and the construction of the new manufacturing facility. If Lotus East is not successful in obtaining all of the funding necessary to complete the construction of the new facility, it would lose the approximately $17,219,000 spent to date, including the $17,000,000 for the deposit on the land use rights which is non-refundable. That said, it’s still trading below book value and has several huge projects in the works setting the stage for huge growth potential.
7. China Sun Group High Tech (OTC: CSGH) mainly engages in the production and sales of cobaltosic oxide and lithium cobalt oxide, both anode materials used in lithium ion rechargeable batteries in the People’s Republic of China. Trading at $12.29M with a book value of $27.45M with a 2008 annual net income of $6.74M, I immediately started digging deeper into the growth potential of this company. Not to mention that every quarter in 2008 trounced the comparable quarter in 2007. I don’t really mind reading headlines like: Quarterly Revenue Up 42% to $7.6 Million; Net Income Increases 145% to $1.8 Million. You can’t find headlines like those with your average run of the mill blue chip.
8. Asia Cork (OTC: AKRK) is a rapidly growing leader in the development, manufacturing and marketing of cork-based building materials. Asia Cork is currently valued at $4.64M, even though it has a book value of $17.1M and pulled down $2.54M of profit in the first 3 Quarters of 2008. In my conversations with flooring experts, Cork seems to be trending back into fashion as a “green” alternative. Another set of great headlines: Asia Cork Q3 ’08 Revenue Up 117% to $8.96M; Net Income Up 220% to $1.40M. The issue here is the daily volumes are low and Asia Cork isn’t off it’s 52-week high as much as I’d like it to be.
9. China Kangtai Cactus Bio-Tech (OTC:CKGT) is principally engaged in the production, research and development (R&D), sales and marketing of products derived from cacti. Again, I see a big deal since the company is trading at $3.93M with a book value of $22.69M and a yearly net income of $2.1M including a -1.09M adjustment in Q1 2008. The downside here is that there are rumors that the market maker, NITE, has a lot of excess shares. For the three months ended September 30, 2008, revenues increased by $2,229,213 or 56.4% to $6,184,685 from $3,955,472 in the corresponding period of the prior year. The increase in revenues was attributable to the fact that the Company is continuing to expand its productions and distribution, and its products are better accepted by the Chinese market customers.
In an environment like this, where game theory is prevailing, there’s no question in my mind that a lot of these companies are likely to become more attractive in the short term. The long term tradeoffs and value price tradeoffs warrant further investigation. Price is what you pay and value is what you get.
Disclaimer: I own NWD, GHII, CAEI, ORS, and LTUS in my accounts and the accounts I manage. I am working around Ameritrade to acquire exposure to CYXN and AKRK. I also plan on purchasing the other companies mentioned in this article.