NSOM CHALLENGE
My picks are generally a combination of low forward PE, strong organic growth rates, and possess decent balance sheets along with positive TTM cash flows from operations. All are based in China, which I still think remains the most likely to prosper during the coming year.
1. China Biologic (CBPO.ob): This is now one of the top 5 producers of blood plasma products in China. Because of overwhelming demand and high barriers to entry, they have a nice combination of high margins and strong cash flow from ops. This cash flow enabled the company to self finance their most recent two acquisitions. Forward guidance from the company is for the following:
"Assuming the full year consolidation of Dalin, management estimates revenues for 2009 will be in the range of $90 million to $100 million with net income between $18 million to $22 million, including the equity investment income from the 35% acquisition of Hutian but excluding stock based compensation."
Based upon a fds of 21.7MM, FY09 eps could be in a range of 0.83 - 1.01. The company earned 0.21 fd in Q1, excluding a non-cash charge for warrants. Stock currently trades at 4.65, but I think it could trade in the low 8s later this year. Red flag: an unresolved legal dispute over early ownership transactions. A lower court has attached 66% of the equity in the Chinese subsidiary until this is settled.
2. China Kangtai (CKGT.ob): This supplier of cactus powder and related products is a bit inscrutable, as they generally have not issued many PRs, even for earnings. Customers of cactus products are generally in Asia, and the company has entered the animal feed market in the past year and has discussed making/marketing a cactus cigarette. Rev growth in the 1Q was up 20% y/y, and TTM fd eps is 0.28 (adj for any non-cash conv charges). Q1 is the seasonally weakest quarter, and the company earned 0.04. I expect sales growth of 20%+ this year, with eps growing to as much as 0.36 in FY09. Tax rate will be slightly higher this year, (20% v 15-16%), and some dilution will kick in if the stock trades substantially over 0.75. Red flags: auditor is Michael Studer. Warrants: 1.25MM @ 0.75 and 1.5MM @ 1.00.
3. Rino International (RINO.ob): An environmental remediation firm that principally serves the iron/steel industry in China. They sell flue gas desulpherization equipment, among other anti-pollution devices. The chinese govt has mandated many of these improvements for steel makers, and backed it up through issuing tax credits to pay for them. The company earned 0.50 in Q1, I expect fd eps to be 2.25+ in FY09. Stock trades in the low 6s, and could easily reach 11.25 if it gets noticed. This would represent a modest 5x forward multiple. Q1 was a great quarter for cash flow and A/R collection; this was an issue that has been a problem in the past. Red flag: they haven't been able to uplist, even though they appear to qualify.
4. Tongxin Intl (TXIC): One of the largest suppliers of vehicle bodies for trucks and SUVs in China. Had a difficult Q4 and FY08, but still managed to generate 0.59 fd, ft in FY08. FY09 has gotten off to a decent start, with improved margins leading to a modest increase in net income y/y. TTM PE is around 7x, but the forward eps is expected to be 1.10 without factoring in possible positive net income factors such as lowered tax rates and one new JV that has been in the works for the past two years. Given the cyclical nature of this business, I'd be happy to see a 5-6x forward multiple on that 1.10, or FV of 5.5 - 6.6. Red flag: 5MM warrants @ 5, callable at 10.
5. Worldwide Energy & Manufacturing (WEMU.ob): A supplier of solar modules and contract manufacturer. Tiny market cap of $15MM. Has put up some big gains in revenues, although pretax margins have suffered in the past year because of outsourcing. Recently, Q1 results showed sequential improvements in pretax margins, and this trend is expected to continue as they bring more solar module manufacturing in-house. If oil prices continue to trend up, solar prices should firm a bit around the world. The company is hoping to enter the US market, but no sales have been announced. Backlog numbers appear to indicate that they can hit their targets, but the solar industry has been plagued by overcapacity and brutal compression of margins. Company guidance is for 5MM net (or 1.42 fd eps). I'm hoping for a 5x multiple. Red flags: tax rate is low, solar industry very competitive.
6. Yongye Biotech Intl (YGYB.ob): A producer of liquid organic fertilizer. Recently announced a PIPE deal (they've been able to do two in a very tough market for financing) and significantly raised guidance for sales and eps. Including the new shares and warrants, I calculate that the company could earn 0.67 - 0.71 fd in FY09. They recently hired a big four auditor, and appear very serious about getting off the OTC soon. Competitor CGA (China Green) trades for 10x forward eps on the AMEX, and I think YGYB could trade at a similar 8-10x multiple as well. FV: 5.36 - 6.40, currently trades at 2.86. One of the larger shareholders is Black River, the capital finance/investments arm of Cargill. Red Flag: with all those recent PIPE shares floating around, someone is bound to take some quick profits.
