It's Finally Time To Buy Into C.H.I.N.A.
May 20, 2010
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RELATED TICKERS: NIVS
, HEAT
, HRBN.DL
Yeah, I know what you must be thinking. For one, who in the hell would buy into China with the risk of a freefall given the already fast paced growth there and the possible risks of inflation and the government curbing growth. You're also probably wondering why in the hell I would put a period in the word CHINA in the title... all will be answered my friends... all!
China is in the midst of one of the fastest growth spurts I've witnessed for such a large nation and they need to make sure they don't screw it up. Recent economic data showed that their consumer price index is up 2.8% and the producer price index is up 6.8% year over year. These are some pretty hefty figures given that Chinese money supply has grown by almost 100% over the past 50 months. Everything here points to the fact that China is experiencing growing inflation. So where's the juicy goodness you might ask? Well China is actually doing something about it rather than allowing it to get stuck in debate for six months while parties bicker.
China has begun combating inflation by remember its roots and not allowing banks to run with such low levels of liquidity as we recently saw in 2008 with many US and European banks. Chinese banks are required to now carry almost 17% in reserves compared to loans outstanding, which is significantly more than US banks carry for instance, so there is solid liquidity there. The Chinese government is also battling inflation from the housing front which helped do the United States in. Chinese banks are now requiring considerably higher down payments on second homes and 20% down on land auctions which is a marked change from their recent policies.
The Chinese government is being proactive about its inflation rather than reacting to it as an after-effect and I feel strongly they are making smart moves for their economy. Their overall debt situation looks really good compared to other larger nations and their trade surplus continues to be a source of economic growth. The interesting thing about their surplus it is has decreased by roughly 80% in the first few months of 2010 compared to 2009 putting less pressure on the yuan for revaluation which should help perpetuate continued exports of Chinese products and in turn keep their bull market rolling higher.
So why not invest in China given the above, right? Let's analyze those abbreviations a bit more... what does CHINA stand for?
C... The C in China stands for Cash. The multiplicity of companies I've come across that trade on US markets have an abundance of cash on hand and they are using it to buy smaller businesses, repurchase shares, pay off any existing debts, or expand their own businesses. Very few of the companies I've found are significantly indebted and manage their cash on hand wisely.
H... The H stands for High Growth. With GDP for the most recent quarter tipping the scales at 13% it should come as no surprise that most Chinese companies which have found their way to market are growing between 20% to 40% year over year which is far and away better than anything you'll find regularly in the US or Europe.
I... The I stands for Integration. No culture or economic region has so throughly adapted to and utilized new technologies to their advantage as quickly as the Chinese. In addition, most Chinese companies have been quick to work out any kinks involved in mergers. It seems any merger these days is followed by the following phrase, "immediately accretive to earnings."
N... The N stands for No Comparison. There are simply no comparisons in the world where you can find companies trading for such low multiples to growth or cash as you can in China. In addition, there is also a general lack of real competition in some of the sectors that Chinese companies operate in. I don't know where else you can regularly find forward multiples in the 3-9 range with lots of available cash.
A... The A stands for A$%holes. This broad encompassing definition goes out to both the management of these companies which consistently dilute shareholder value by issuing shares to themselves and to the first-year analysts who seem to have absolutely no clue on how to value Chinese stocks. It seems to every upside there must always be a downside and consistently this is it for Chinese based US equities. If you can deal with the occasional re-statement and some huge beats and misses because one analyst read a blog on myspace about the next hot sector then you should be good to go with Chinese stocks.
So that my friends is CHINA in a nutshell and I think it looks like a great place to begin building a position, especially with a few names at levels which are more than undervalued, so let me highlight a favorite few (and for those of you who have followed my blogs regularly, most of these will not come as any surprise to you).
NIVS IntelliMedia Technology (AMEX: NIV)
NIVS IntelliMedia Technologies valuation here makes absolutely no sense. NIV is down over 45% from its highs after reporting consistently great quarterly reports and it makes less sense than the Chewbaca and Twinkie defense combined! Tell me how the following numbers strike you...
2005: 22M in revenues, .07 in full-year EPS
2006: 38M in revenues, .19 in full-year EPS
2007: 78M in revenues, .31 in full-year EPS
2008: 144M in revenues, .41 in full-year EPS
2009: 185M in revenues, .59 in full-year EPS
2010: 215M-230M(est) in revenues, .68 (my est.) in full-year EPS
Oh yeah, these guys have no clue what they're doing. Internal growth is averaging, AVERAGING 25%! They just launched their mobile phone business in the past year and it is already expected to generate 60-90M dollars in revenue in 2010. Shareholder equity has been on the rise from 2006, rising from 2M then to over 86M now, placing this at a price to book of just 1.2! It's forward price to earnings ratio is just a tad UNDER 4! With a long-term growth rate closer to 22%, that means a PEG ratio of just 0.18 which makes it one of the least expensive growth stocks around I'm sure. Every sector of their business is showing double digit growth... this drop in share price makes no sense at all and is the perfect opportunity to dive into a great growth story on the cheap! I think I am being fairly conservative in my forward estimates, but I fully expect NIV to be worth $6.50 based on the growth we've witnessed over the last few years and given their current growth projections. The timeframe is 12-16 months.
China Sky One Medical (NASD: CSKI)
It's time to re-visit an old friend in China Sky One Medical which has once again dipped to absurdly low valuation levels. China Sky reported yet another stellar quarter earlier today in which they raised revenue guidance by 4M and revised 2010 EPS higher by 1M. Now we're looking at a company with $3.90 in cash per share, trading at 5.55 times 2010 figures and growing revenues by a handy 16-20% per year. Doing the math conservatively and you get a company trading at a price earnings to growth of just 0.35 roughly. Let's also take a look at some of their more recent figures...
2007: 49M in revenues, 1.15 in full-year EPS
2008: 92M in revenues, 1.87 in full-year EPS
2009: 130M in revenues, 2.22 in full-year EPS
2010: 164M (est.) in revenues, 2.45 (my est.) in full-year EPS
2011: 187M (est.) in revenues, 2.70 (analysts est.) in full-year EPS
Most of their 90 product line is showing double digit growth and their guidance, though conservative, suggests this. Back out the nearly $4 in cash and you're paying under 4 times earnings, that is just not right! You are now clear for some uninhibited buying!
Harbin Electric Inc. (NASD: HRBN)
Harbin Electric is great and awesome rolled up into a blintz and served with maple syrup. The company makes three types of motors in China: Rotary, Micro and Linear. HRBN's big business right now is in the rotary motor with specific attention paid to the energy sector. Their goal seems easily achievable based on their current growth rate that they'll have an 8% share of the market by 2011 (they currently are just over 3.5%).
Let's take a look at some of this goodness. Revenue growth rates of 60-80%, earnings per share jumps of 30-40% and a future price to earnings ratio of under 7 with net cash per share of $1! They have logged some impressive earnings beats of 35%, 31%, 90% and 18% over the last four quarters and increased guidance every time. Don't believe me? I think it's time to look at some figures, don't you?
2007: 65M in revenues, .91 in full-year EPS
2008: 121M in revenues, 1.19 in full-year EPS
2009: 223M in revenues, 1.71 in full-year EPS
2010: 435M (est.) in revenues, 2.63 (est.) in full-year EPS
2011: 517M (est.) in revenues, 2.78 (est.) in full-year EPS
Gross margins are up! This company is absolutely amazing and I think you need to jump all over this pullback. True valuation here to me is $32-34.
SmartHeat Inc. (NASD: HEAT)
I think everyone's got a case of the "nuts" around here and its about time we gobbled up some SmartHeat. I mean if you can't take the HEAT, get out of the kitchen. Not many investors can really take 38% yearly revenue growth followed by perhaps another 32%. Less than 7 times forward figures for a PEG of about 0.2. Margins healthfully in double digits, same with ROE, nearly $1.50 in cash per share...seriously what the hell is the issue here? Did I mention its also technically oversold. Yeah, go ahead and hit the buy button. Not conviced yet, you know its time for those glorious recent statistics so here goes...
2008: 33M in revenues, .29 in full-year EPS
2009: 83M in revenues, .64 in full-year EPS
2010: 114M (est.) in revenues, .65 (est.) in full-year EPS
2011: 150M (est.) in revenues, .87 (est.) in full-year EPS
So *clearing throat*.. what seems to be the officer, problem?
Xinyuan Real Estate (NYSE: XIN)
This is actually very simple. Even with tighter lending practices from the Chinese government, which may I add is a very smart idea, Xinyuan Real Estate is still going to be moderately cash flow positive. They have closed a 60 million dollar net debt position down to a 5M dollar net debt position and added almost 90M in cash this recent quarter. Even if Xinyuan faced pressure to sell off some of its real estate assets (which a rising GDP and housing market shouldn't lead to) at 70% mark to market it would STILL put Xinyuan below market value, and it would take at least a year and a half under the worst of circumstances to reach this mark in my opinion. So metrically, XIN is trading at 0.4 times book and in even my highly skeptical and conservative estimates about 5.2 times 2010's figures while growing at a fairly robust 25% per year.
2007: 310M in revenues, .54 in full-year EPS
2008: 357M in revenues, (.32) in full-year EPS
2009: 449M in revenues, .61 in full-year EPS
2010: 520M (est.) in revenues, .72 (est.) in full-year EPS
2011: 717M (est.) in revenues, .99 (est.) in full-year EPS
They have ample cash to survive almost any change in the Chinese government's lending practices and I feel this is one case where the news has been rapidly overplayed. It doesn't make sense to me to pass up XIN at these levels despite the inherent risk which I think I've shown is grossly overstated. Fair value to me given some revenue uncertainty but also taking into account the property value and cash hidden in this company is probably closer to $5.25.
CDC Software (NASD: CDCS)
Ok, so I'm cheating slightly here with CDCS being located in Hong Kong so sue me! CDC Software is a recent spin-off of CDC Corp (CHINA) and has been the consistent and primary growth vehicle of CDC for years. I honestly don't know what CDCS has left to prove to investors before it gets the valuation it deserves.
2009: 204M in revenues, 1.31 in full-year EPS
2010: 219M (est.) in revenues, 1.26 (est.) in full-year EPS
2011: 238M (est.) in revenues, 1.48 (est.) in full-year EPS
CDC Software raised guidance on January 9th and raised guidance AGAIN on February 25th proving just how strong their licensing revenue is right now. They are trading under six times 2010 profit expectations with over $1.50 in net cash and revenues slated to grow at 10% (that's a PEG of roughly 0.6 just in case you're keeping track). Operating cash flow hit record levels in 2009 and organic license growth for the most recent quarter was just shy of 30%! Top this off with a price to book of under 1, a price to sales of 1.25 and adjusted EBITDA up 37% year over year and you can tell I'm pretty damn excited about this inexpensive stock price. CDCS is firing on all cylinders and it doesn't make a difference if no one notices it, but I'll be looking down the mountain at a $22 stock by 2012.
Zhongpin Inc. (NASD: HOGS)
Zhongpin is trading incredibly low on my value scale. More than likely I attribute this move lower as a sympathy move with the Shanghai market and the inherit risk associated with buying foreign owned food companies. Seriously, it's as if we factor in that every 2-5 years a foreign outbreak of "something" will be detrimental towards earnings. That aside, there is amazing value to unlock here.
2007: 291M in revenues, .90 in full-year EPS
2008: 540M in revenues, 1.05 in full-year EPS
2009: 726M in revenues, 1.46 in full-year EPS
2010: 933M (est.) in revenues, 1.65 (est.) in full-year EPS
2011: 1120M (est.) in revenues, 2.04 (est.) in full-year EPS
Revenue seems locked into growing at 29% in 2010 and my targets are for another 20% in 2011. EPS is projected at $1.59-$1.74 in 2010 for a forward price to earnings of just 6 (remembering that 30% growth rate ) for a price earnings to growth of just 0.2!!! I'd slate their 2011 EPS around $2 per share. Book value here is $8.56 per share so its hardly over that and margins are very healthy. I don't know what's up here, but I like it. Two thumbs up.
A-Power Energy Generation Systems (NASD: APWR)
A-Power provides power grids and power generation systems to industrial companies in China but I think the real potential here lies in their wind turbine production. It's no secret that the past three years have been spent by investors attempting to seek out the next alternative fuel generation stock. We've had solar stocks rally, fuel cell companies jump and even to some extent wind generation companies which is where APWR falls. The revenue growth and profit potential here are huge, the only problem I run into with APWR is their inability thus far to own up to those expectations. Much of APWR's stock price is built upon the expectation of making timely deliveries and receiving payment on its wind turbines. So far, APWR has fallen behind on delivery of all of its wind turbines. If APWR can get its hide into gear, they could be staring down a forward price to earnings of something like 5 times 2011 earnings. A-Power has a lot of cash on its balance sheet (over $3 per share) and could potentially see a near 50% gain in its revenue next year if all goes well. Either way, A-Power looks like a solid longer-term play if you can get by the gimmick-nature of the alternative energy generation sector right now. Now for a quick look at how they've performed over the last few years...
2007: 153M in revenues, (too lazy to look up EPS =) )
2008: 265M in revenues, .86 in full-year EPS
2009: 311M in revenues, 1.05 in full-year EPS
2010: 387M (est.) in revenues, 1.11 (est.) in full-year EPS
2011: 570M (est.) in revenues, 1.60 (est.) in full-year EPS
BioStar Pharmaceuticals (NASD: BSPM)
Perhaps the market has a blindfold on or it needs a stronger pair of glasses. BioStar Pharmaceuticals makes China Sky One Medical look like a charity case.
BioStar has Xin Aoxing, their blockbuster and only over-the-counter Hepatitis B capsule in China. This alone accounts for roughly 2/3rd's of their revenue. Speaking of revenues.... how does 34M in 2008, 53M in 2009 and 80M-82M in 2010 sound? Pretty sweet I bet! Let's throw out some other metrics aside from the 50% projected revenue growth rate. How about 74-80c in expected EPS. Operating margins over 30%. There are literally no metrics going in the wrong direction here. They are currently in 6000 outlets and should be in well over 10,000 by years end. They are buying smaller companies which will be immediately accretive to earnings. I don't know what else they could possibly do better other than giving out no stock based compensation at all, but if they keep putting out numbers like this I don't really care. So what we have here is a company growing at 50% per year and giving them a slight edge even to the downside, trading at 5 times 2010's figures for a current year PEG of 0.10... seriously.. ZERO point one! I project them to earn $1.08 in 2011 so this is by all standard obscenely undervalued with emphasis on the obscenely. Buy it, and if you're bored, buy some more. Target price should be north of $9 but we'll see how things shape up going forward. Although there has been no coverage of BSPM I can guestimate their figures below...
2008: 34M in revenues, .22 in full-year EPS
2009: 53M in revenues, .32 in full-year EPS
2010: 81M (est.) in revenues, .77 (est) in full-year EPS
2011: 107M (my est.) in revenues, 1.08 (my est.) in full-year EPS
The sick part is there are significantly more Chinese companies which I have failed to add here but these seem the most egregiously undervalued. China has come down to a reasonable valuation and the government is taking proactive steps to contain inflation and stem further growth, now is the time to start taking those initial positions.
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