To OTC Journal Members: 
 

Our Day Is Coming

Our day is coming. Industrial production numbers out of China announced on Monday confirm the Chinese economy is just rocking, and there's nothing but growth and upside continuing to emerge.

Industrial production rose 13.9% in August over the previous year. This number suggests to the markets the world is still demanding more goods than previously thought. To me, this suggests more demand within China. On the Hong Kong exchange, grocery stores, appliance manufacturers, and pharmaceutical stocks soared on the news.

There's an interesting disconnect happening between stocks trading on US markets and those on the Hong Kong exchange. China based stocks with US listings have fallen nearly to 2008 crash multiples of about 5x this year's earnings.

Equivalent China based companies on the Hong Kong exchange are trading with real liquidity at anywhere from 10 to 30 times this year's earnings. In short, the US investment community's aversion to risk right now has created an interesting arbitrage play. 

Here's the chart of FXI- the NYSE ETF that reflects the 20 largest publicly traded China based companies. These are partially government owned behemoths. This ETF simply refuses to break out, but is holding up reasonably well in this US Bear market for China stocks.

There's a lot of smart money in this world. This money is going to figure out this temporary inefficiency, and money will flow in the direction of these stocks at some point in the future. Water seeks its own level, and the flow of this monetary water will head this way. It's inevitable. 

A great many of the US listed China based companies came public via the reverse take over- or RTO. Barron's recently published a hatchet job article claiming to have studied the "performance" of this generation of stocks, and claiming they did poorly.

After the article came out, a real study using actual data was done. Barron's looked at these stocks from the time the mergers were completed, but long before there was any recognition or volume. There were 10 stocks in the study.

Rames El Desouki, and writer on China stocks, did the same study, but from the point at which the same stocks started to trade 10,000 shares plus per day. There was just a minor difference in the conclusions.

Here's are the facts. If you had purchased those same 10 stocks 18 months ago and sold in March of '09- 378% roi. Bought in Sept of '08 and held to today- 176% gain. Bought on their first day of trading 10,000 shares or more, and held to the day before the Barron's article came out: 145% return.

To read this unbiased review of the facts, just click here.

There's been a lot of negative press of late on China stocks. There have been a couple of companies that have financial reporting issues, and the short position in many of these stocks is growing. There will come a tipping point, and these stocks will all go nuts. It's going to happen this year.

In the meantime, I keep finding irresistible small stocks that are so cheap it boggles my mind. This is the same nervous feeling I had when I put my own money into NF Energy at $.60 in June of '09, and bought into CREG at $1.31 in October of '09. They both treated me pretty darn well when the market tipped back to growth, and the same thing will happen here.

I've got two more fantastic new companies who's top and bottom lines are just exploding to share with you over the next week or so. Stand by to updates.

In the meantime, here's a couple of updates on current followings:
 

Bohai Pharma (OTC BB: BOPH): Now You Know Why I Love It

While the stock is certainly not charging out of the gates, the company is. I'm a bit surprised today's news hasn't put more of a charge in this one, but that's today's climate. A little patience should be rewarded in this stock- based on growth and profits we have huge upside. Based on the markets- we're not quite there yet.

Today, just prior the open, BOPH announced the addition of 5 new products to its current line of 10 products. 2 of the new products are OTC, and 3 are prescription drugs. The company is currently achieving about $60 million in annual revenues and $9 million in net profits from the 10 products it currently markets.

If the company can achieve equivalent results to its existing product line, one could surmise these new products could equate to an additional $30 million in sales. No sales forecasts were provided in the news release. However, the company did disclose marketing initiatives began in May, and top and bottom line growth would start to show up in FY'11, which began July 1st.

More expansion capability comes from the other 14 approved products the company has in its portfolio. BOPH has approvals to market 29 products. That's a pretty good sized portfolio for biotech. 

The new products are "specifically tailored to address a particular area of the body, ranging from stomach aches to chronic joint and back pain." Give me some of that stuff for chronic joint and back pain- I could use it. Look at the way these great little companies are trading, I need a headache treatment as well.

The stock has not found any footing yet. We started at $2, have since seen a high of $2.40, and are already back to the $2.00 starting point- all in 3 trading days. However, it's worth noting this is the first week with any real volume. 

As noted in this week article on China RTOs, if you bought the stocks featured in the Barron's article the first week they traded an average of 10,000 shares per day, you'd be up 145% today. Also worth noting: $12 million from over 100 individual investors went into this company at $2.25 last January. It's a much better company today, and you can own it at $2. Seems like a bargain to me.
 

China Media Express (NASDAQ: CCME) Update

It's coming- I can sense it. There is going to be some sort of smear campaign on this stock, and when there is, it is likely to be the buying opportunity of the year- assuming the company is not fraudulent in some way.

Orient Paper (AMEX: ONP) has been the target of a smear campaign this year. I'm not in the stock, and don't know whether the claims of detractors have any merit. They say the company is reporting numbers from a subsidiary it doesn't own.

Once the shorts got their unsubstantiated rumors fully disseminated, a couple of ambulance chaser law firms piled in with high profile class action law suits. This really cracks me up. Eventually the smoke will clear and we'll know what's going on. I don't have any real interest there beyond curiosity.

However, I do have a real interest in China MediaExpress (CCME)- I carried them as a recommended idea in the OTC Journal, own it, and the stock is trading extremely poorly right now. 

The company should deliver at least $80 million in profits this year - about $2.25 per share. As of last report, the company has $139 million in cash (about $4 in cash). 

This stock, currently trading at $8.20, is really worth about $30 if the numbers are for real. I have had numerous associates check their operations and licenses, and they all seem to believe the company is absolutely for real.

They have delivered huge growth this year, so detractors could point out those numbers could be cooked. They won't be audited until December 31.

However, you can't fake cash. I'm hanging on to the stock despite owning it at much higher levels. 

There's a lot of rumor going around the company is going to declare either a cash dividend or a stock buy back. If the company announces a stock buy back, it might be a good idea to sell it on the inevitable surge up. In a stock buy back, the company doesn't really have the obligation to do anything.

I believe the company should simply pay a $.25 per share quarterly dividend, which it can easily afford. According to their financials, the company generated about $25 million in cash last quarter. A $.25 cash dividend would only be about $8.5 million, allowing them to keep $16.5 million in cash. At $8, this would provide a 12.5% yield.

In my view, an announcement of this kind would eradicate any credibility issues. You can't pay a dividend without the cash.

The short interest in this stock has increased 1 million shares pre month since June, and stands at about 3 million shares as of the end of August. Today, the stock has hit a new multi month low, and there's nothing a chart can tell us at this point except it's not likely the bottom is in, and the stock is in a downtrend until proven otherwise.

I'm guessing the shorts believe they has some sort of silver bullet that will kill the company. They appear to be hammering the stock down, and it looks to me like the perfect time try to nail the coffin lid shut.

If some kind of unfounded yet high profile smear materializes, it could be the buy of the century. In the meantime, I'm just watching and waiting.

Disclosure: Long CCME and BOPH

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