To OTC Journal Members: 
 

Just an Old Sweet Song Keeps China on My Mind

This song has been playing for over 20 years. It's the song of GDP growth, and after a couple of quarters of retracting growth, it seems China is investing it's 20 years of consistent profits back into its own economy, and the investment is paying off.

I don't think anyone quite gets it- save a few investors like Warren Buffett, Li Ka-shing (The Warren Buffet of the Far East), Jimmy Rogers, and former Lehman Brothers global guru Barton Biggs. They are all believers in China, and all suggesting the next 10 years will offer significant growth opportunities. The Chinese Government continues to invest billions in the country's massive infrastructure build out, and the Chinese consumer is now fueling domestic growth.

Take for example this gentleman: Li Ka-shing. This investor is considered the Warren Buffet of the Far East. This is the second richest man in the Far East, and Forbes says he is the 16th richest man in the world. The Hong Kong media has dubbed him "Super Man". 

Li Ka-shing is famous for buying assets at the darkest time. He was a buyer of both stocks and real estate just after the Tinamen Square incident, and is worth billions. He is known for buying in times of crises. LI was recently out with public comments stating "China’s economy will be the fastest in the world to recover, but the U.S. economy's recovery wont be too late also, he went on to say “If you have the cash, you can consider buying equities and property.”

Data coming out of China of late is suggesting the Oracle of Omaha, Superman, Rogers, and Biggs are on the right track. Here's more factoids for you to consider:

• China's Q1 GDP growth was 6%- better than the rest of the world, but the weakest quarter in 20 years.
• China's Q2 GDP growth came in at 7.7% last week, suggesting the Chinese economy is back on track and headed for the 8% GDP growth the government has targeted.
• Growth is being fueled by the massive stimulus program and surging bank lending

Most of China's power generation comes from Coal burning power plants. Hydro Electric, Nuclear, Wind, and Solar run far behind in the distance. 

The Chinese Government is hell bent to get rid of these dirty, inefficient, hastily built plants, and replace with modern versions. JP Morgan equities chief Jing Ulrich predicts in the coming months, China will emphasize industrial restructuring and energy efficiency.

To that end, I recently read about a new China Clean Tech fund- former Credit Suisse Banker Chan Ka-keung is in the process of raising $350 million for Nature's Element Capital- a fund that will invest in regional companies involved in the transition to clean energy.

"Now is best time to invest clean energy which, despite the crisis, remains very robust and could easily outperform all other industries," said Chan in an interview just last week with Reuters.

The market seems to be willing to take its directional cues from commodities consumption as a proxy for recovery. When commodity prices go up, at this point the market seems willing to bet it's a forecast for economic recovery as increasing commodity consumption equates to increasing commodity prices.

There's lots of positive data coming out of China on domestic coal consumption. Recent June figures show daily coal consumption (a proxy for power consumption in China) rose to 185 tons- that's up 15.6% since the May figures were published. That's a huge rise for one month.

While plenty of coal remains in storage around the major Chinese ports, power plants only have about a 16 to 17 day stock pile on site. 

Of late, coal output in China has risen 12.3% to a new high of 279 million tons annually. That's a lot of coal, and a lot of dirty air.
 
 

China Ideas- A Quick Review

On the large cap side, the OTC Journal is simply kicking butt. FXI is my crown jewel in China today, but I hope it gets replaced by one or two of the small cap ideas. 

Here's the chart. I called this China ETF a "buy" on December 13th, and a "Strong Buy" when it dropped a bit in late February to $25. FXI is an ETF (Exchange Traded Fund). It trades on the NYSE, and is a pool of China equities representing the 20 largest publicly traded companies in China- the DOW of China if you will. From the strong buy at $25 in February, FXI has now appreciated a cool 60%- 120% on invested capital if you bought on margin. This is my best China performer so far, and I believe there is a lot more upside. 

FXI is trading at an 11 month high now, but it's down from $75 a mere 20 months ago. Lots more upside here.

NF Energy (OTC BB: NFES) is my second best idea as things stand today. This company is just kicking butt on the fundamental side, and has had a great year in terms of price appreciation.

I picked up on it at $.69, but it was as low as $.17 earlier in the year. Today, the stock is trading at about $.86- that's about a 25% gain, but it's only the beginning. Today, I read a research report forecasting a $2.50 price target in the next year. NF Energy makes valves and other parts that make Energy producers and more efficient. The company delivered $4.3 million in profits last year on $15.8 million in sales, and now has a backlog of $36 million in signed contracts.

Universal Travel (AMEX: UTA)- currently trading at $10 up from my entry price of $8 back on June 7- I'm eventually looking for $20 here. This company is catering to the gigantic emerging consumer class in China- it's a travel agency with lots of other businesses. 

UTA came in with $3.2 million in profits on $17 million in revs last quarter. It has $1.19 in trailing EPS, and was added to the Russell index this year. Looking for $20 over the next year.

China Energy Recovery (OTC BB: CGYV) is another China idea, and it's been Mr. Toad's wild ride for investors. This company designs and installs energy recovery systems for factories, and has doubled in size every year for the past three years- ending up at $23 million in revenues in 2008.

The first coverage I put out on the company was at $4 back last September when oil was just starting down and the stock markets of the world simply dissolved.

The stock made a bottom at $.90, and then rebounded this year to a high of $2.25. Then, the company release its Q1 numbers, which were just atrocious. The stock has been drifting down ever since. 

The company has a back log of over $30 million, but the market is not ready to believe yet. I am not prepared to call this one a buy or a sell. I haven't sold any of the shares I own (corporately, over 180k shares). I'm waiting to see Q2 numbers. It's a project driven company, so one quarter is not too meaningful if they get back on track. Numbers are out in about 3 weeks for Q2- I can wait that long.

Recently, CGYV raised $5 million a convertible security from a Hong Kong based fund. The conversion price is fixed at $1.80. Based on the last financial statement, CGYV doesn't need the money. However, they disclosed in a filing with the SEC they plan to use the money to build a new state-of-the-art manufacturing facility. Their current facility would max out at about $40 million- this new facility would allow them to go up to about $80 to $100 million in annual revs. This doesn't sound like the move of a company that expects business to get worse. Probably a buy right here, especially when you look at the CGYV's theme.

Last and certainly currently least is recent idea Legend Media (OTC BB: LEGE). This one has been just crazy, and I don't quite get it. LEGE is in the advertising business. The company has huge margins. 

They are in radio and print. Radio is intriguing as the government has owned most of the radio stations, and never really tried to extract the commercial value of the listening audiences. LEGE has been buying blocks of commercial radio time for about $23 per minute, and reselling for about $300 per minute.

The margins are huge. LEGE also owns the airline magazines found in the seat back on every seat of every flight for China's 4th biggest airline. I recently introduced this idea with some great video content.

The stock went crazy. It two days it went from $.30 to $.60, then did an abrupt round trip down to a low of $.11. Currently at $.19.

I just don't get why investors would love this stock at $.50, and then hate it enough to sell it below $.20 a mere week or two later. This is just nuts- the company is worth a lot more than where it's trading. It was ahead of itself at $.50, but this is just crazy.
 

Just Around the Corner

I'm a big believer in China for the next five years. The country has both the financial muscle and the will to transform itself from a cheap exporter to a more US like economy- with 70% of GDP growth is fueled from consumer demand.

In China today, only about 42% of GDP is represented by the 1.3 billion consumers, and that number is going to go up. China has the largest emerging consumer class in history, and the vast majority of those folks have next to nothing. As time goes by, the population is trending towards a western life style, and that means consumption.

To move people around you are going to need more roads, bridges, and transportation. They are going to need power to light their newly acquired homes and apartments. 

Over the next couple of years I plan to continue to deliver China based ideas focused on either the emerging consumer class or the infrastructure build out. I won't be covering any export manufacturing- that segment is dead and doesn't offer much upside in my view.

To that end, I believe I have identified a couple of new ideas I plan to introduce. They are at opposites ends of the spectrum in terms of revenues- the first is delivers $100 million in annual revenues and trades on NASDAQ- the second has no revenues, but has an asset that could easily be worth $100 million. 

Both appeal to the emerging consumer class in China, and both should grow quite dramatically over the next five years. Give me a little time to put it together, and I'll bring them both to you.

In the meantime, thematically NFES and CYGV both fit a market niche that's getting a lot of ink. I'm trying to uncover these ideas before the larger fund managers work their way down to them and start accumulating.

Home Page : www.otcjournal.com
Email Questions or Comments To: editor@otcjournal.com