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China Numbers Coming In Very Strong- Charts Shaping Up

The numbers from US listed China companies are starting to come in, and for the most part they are very strong. More importantly, I see a number of the charts starting to look a bit better, suggesting the July lows might be the low point for 2010, and eventually it will be onward and upward from here.  If you want to look at some good China charts, check out BORN, CGA, CMFO, CVVT, SEED, SPU, TSTC, WWIN, and ZSTN.  Those are a few of the ones I follow, but there's 200 to keep an eye on.

China got a bit of a black eye today on the International front. More dire predictions of a slow down based on the July oil consumption numbers. They keep predicting this slow down, but GDP growth simply chugs along at 9% plus, and the "experts" just continue to be wrong. 

As it turns out, net crude oil purchases fell to 18.8 million tons, down from the new all time high record of 22.1 million tons in June, and 19.2 million tons in July of '09. The market doesn't like it, but it's a bit absurd when one considers the term "stockpiling". Around my house, when we stock up on paper towels at Costco in June, we're likely to need less in July. We need at least 3 months of declining consumption to determine there's any kind of slow down. It's just a blip in the news cycle of the day.

In other interesting news out of China- I continue to keep CREG and NFEC on my "must own list". On our Sunday (Monday in Beijing), the Chinese government ordered the closing of 2087 obsolete, energy guzzling plants. The government has a stated goal of reducing energy consumption by 20% per unit of GDP this year. 

This move bodes extremely well for quiet, stalwart, past winners CREG and NFEC- both energy efficiency companies. I can't wait for earnings from both- I believe NFEC will deliver a giant improvement of Q1- CREG might not deliver big growth as I don't believe they completed a major installation in Q2, but those recurring revenue rental figures should keep growing and make this a very attractive stock to own. In Q3 and Q4 CREG will deliver the goods. Once money flows back into this sector, I expect both of these stocks to do well.

In the meantime, there's 3 stocks on my Top 10 list to review- numbers are in, and some changes will be made on the list.
 

China Integrated Energy (NASDAQ: CBEH)- Delivering the Goods

This is an integrated, non state owned energy company that focuses on biodiesel, wholesale distribution of heavy oil products, and owns a bunch of gas stations. Owning this stock is like owning Shell, Texaco, or Mobil in 1960.

This bad boy delivered $104 million in Q2, up 60% over Q2 '09. Net income was $13.4 million, up 52% over the same quarter in '09. EPS came in at $.30 for the quarter- a new all time high for the company.

My estimate for the year was $1.15 in EPS, which is clearly now going to be too low. The company is already at $.57 for the first six months of the year, which equates to annual EPS of $1.14 with zero growth. However, growth was 60%, which is hardly zero. Therefore, it is safe to assume growth will continue for this company in the back half of the year, and far eclipse the $1.15 estimate- the final EPS number for the year is more likely to be in the $1.25 in EPS, or higher.

The balance sheet is simply awesome- total current assets are $131 million against total current liabilities of $6.7 million. There are 2.5 million shares of preferred out there, which is down from 3.115 million at the end of December. This represents some potential dilution - however, the EPS is presented as a fully diluted number.

There is only one issue the market might not like- there's a little slippage in gross margins, which relates to varying product mix from Q1. 

Looking out to the future, CBEH is rapidly expanding its Biodiesel production- expanding from 100,000 ton production capability to 200,000 tons. A new plant that will be able to process 50,000 tons comes on line later this year, and the company is planning an acquisition to complete the remaining 50,000 tons. 

All in all, this is a great long term China stock to own. Fantastic growth, strong profits, great balance sheet, and very undervalued. When I published the Top 10 list in early June, the stock was about $9.43. Today, it's trading at $9, but up from a low of $7 in July. Today's news on oil consumption from China is having a negative effect on the price, but I'd be looking for strong performance between now and the end of the year.

It's hard to find 60% growth in a company trading at 7.2 times this year's EPS, but those are the times we live in. 
 

China Information Security (NASDAQ: CPBY)

Unlike CBEH, this stock is actually up a bit from the June entry level, and up quite nicely from the July low. The June entry level was $5.32, and the stock is now $5.73 for a moderate 7.7% gain in a rather ugly market environment. 

This is a technology company that provides computer security, hardware and software, and enterprise systems for First Responders and health care service companies. 

CPBY reported a 30% gain in revenues over Q2 of '09- which equates to $33.52 million. Gross margins improved, which the market loves, while net income lagged at bit. CPBY delivered EPS of $.19 for the quarter.

This growth isn't quite in line with the most robust of China based companies, but the stock continues to trade relatively well. The market is a forward looking animal, and likes what it sees out in the future for this one. 

At present, their backlog is at $52.3 million, up a whopping 50% over the company's back log a year ago. This one is assured of hitting my 2010 of $.73 in EPS- We're already at $.31 for the year, and strong growth is expected in the back half. 

There's nearly $150 million in current assets on the balance sheet against $76 million in current liabilities. By US standards this would be a great balance sheet- by China standards it could be better.

Since this stock is actually higher than the June 1st level, I would expect it to be much higher in Q4. This a simply a great sector to be in for China growth. The next 9 months of robust growth are assured by their backlog, and if the company can deliver around $.80 in EPS this year, and reasonable price target in a better market would be around $10. 

If the stock can find its way to $10, it's about an 80% gain from today's levels. The company is doing its part. Let's see if the market will as well.
 

China Cast (NASDAQ: CAST): Cast Out By the Market

China Cast, a company deeply embroiled in China's higher education business, delivered it's numbers last night. They were pretty much in line with expectations, so the market has of course sold this one off quiet handily today.

I suspect there are a number of issues the market doesn't like about this release. Total revenues were up 46%, but gross profits were only up 25%. That's a 20 point difference, and suggests the company is expanding in less profitable directions.

The company made $4.8 million on $16.3 million in revenues. Therefore, 30% of revenues are passing right through to the bottom line, which is pretty darn good. That number falls in the plus category.

Here's another issue the market probably doesn't like. CAST has about $170 million in cash and cash equivalents. This is a very high cash balance for a company doing about $65 million in annual revenues. 

EPS growth was far weaker than the top or bottom line because there more shares issued and outstanding. Shares I&O now stand at 49.7 million, up from 35.6 million last year at this time. This is because the company did a financing back in December.

Here's the problem, and it's similar to one we saw with CEU as well- the company is expected to invest this cash to fuel growth. A cash balance of over twice their annual revenue stream represents dilution with no return in the form of growth. 

Hence, the market was no doubt disappointed in the amount of cash that is not being put to work. The shareholders paid for that cash in the form of dilution, but now it needs to be deployed to create more rapid growth to make the market happy.

I might find a new idea as a substitute for this one in the top 10. When you have good top line and bottom line growth, you want to see the Earnings Per Share rise in concert, and the dilution is preventing that from happening here.

Hence, the sell off in the stock after a really nice rebound into the numbers. 

This one will likely try to come up and fill the gap, but longer term I'd like them to figure out some way to put all that cash to work. Until then, I see this one languishing a bit. I still expect this stock to be a lot higher over the coming years, but in the short term it might struggle a bit.

CAST is currently trading at $6.71- and in June when I put it on the list it was $6.63. No harm, no foul, and not too exciting. We had a nice profit here until these numbers. Probably good for a trade back up to fill the gap, then quiet until the company puts some money to work.

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