China Growth Stocks

[ratobranco]

CGPI - Everyone here should take a look at this one. Excellent buy below 3.80 IMO.

Three specific points to look at:

1) Their guidance for FY 2011 (ending March of next year), is 1.45. So the P/E right now is 2.55.

However, if you crank through their actual sales for the last three months, as well as their selling prices, you will see that they are set to earn much more than their guidance. They have always guided low--when they first went public, they guided for FY 2010 EPS of .94, and came in around 1.15 (actually 1.53 using their old share count).

The CFO Michael Wang was pressured on this point at the CC, why isn't the guidance higher given their strong numbers for the 1Q, and he basically said because they like to be conservative.

When I crank out the numbers, I get something closer to 1.60. I'm not going to hold management to that, but it's nice to know that kind of upside is possible with respect to such a severely undervalued stock.

2) There is a catalyst for multiple expansion. Unlike other OTC stocks in our space with extremely low P/E's (e.g., LTUS), CGPI can easily sustain 4.00, and is therefore NASDAQ eligible. So the potential buyers won't remain limited to retail investors here and on yahoo (as it is with LTUS).

Per the CC, they have everything needed for NASDAQ except the required number of shareholders and the 4.00 bid for 5 days. In my view, it's just a matter of time.

Additionally, they say they are going to report plot sales and ASP's every month. So you have a continual information feed that will attract attention to the stock. After the last earnings report in July, which was spectacular, the stock languished for a week or so (as is happening now). But then the information feed kicked in, as they started to tell investors what they had sold in May, June, and so forth, and it moved up to around 4.25.

3) I've been specifically impressed with the CFO. He is an American born Chinese, and seems to know how to speak to the street. They asked him why the share price was so low, given the strength of the business and the earnings growth, and he said it is a problem that applies to the entire space, a problem that has been exacerbated by the cases of ONP and NEP. So he seems to have a clue.

He said that management is going to visit the US in September for two weeks to help attract interest.

He also had some good comments on dilution. He said they eventually want to raise money on NASDAQ to help fund the Longqiao Lake expansion project, which he said is expected to offer excellent returns on capital. By developing the site as a natural scenic attraction, they generate income from tourism, restaurant consumption, boat rides, and so on, but more importantly, they substantially increase the average selling prices for the cemetery plots.

http://www.cqfg888.com/en/Company_7_M.asp

HOWEVER, he said that managements knows the value of their company, and gave the assurance that shares will not be sold below 7.00. That's nice to know when you're buying at 3.80.

I'll write more later about the business itself and why I think it is such a good investment.