I’ve been following a bunch of high growth Chinese companies, and it’s almost laughable where they are trading. They are all being priced as if they were scams. China MediaExpress Holdings (CCME) for example reported 0.80 EPS for the quarter (for the Quarter!), up from 0.40 EPS a year earlier, and the stock is trading at $10.50. Lotus Pharma (LTUS) reported 0.12 EPS for the quarter and the stock is trading at $1.00. I could rattle off a bunch of other ones trading a low single digit PE’s with huge cash positions growing 50%+ yr/yr. Many of these companies are being priced as frauds/scams which is why there is such opportunity right now. I’m sure over time companies such as these will find higher bases as investors become more comfortable with their geography risk. Are these low priced situations the result of too many Chinese companies going public over the last 24 months? Is it simply a perceived risk equation in the sector? Most of these companies have a big 5 auditing firm doing the accounting, but maybe we as investors still don’t trust the numbers. Anyway I think it’s an interesting topic for discussion and can probably be answered in a myriad of ways.
Most Chinese small caps went on huge runs from April 09'-April 10', as almost all of them were trading at 2 PE’s in April 09' and the multiples expanded into the high single digits over the course of a year. Notice the companies were still way undervalued when compared to non chinese peer groups. Now in just 3-4 months it seems the multiples have contracted back to this 3-5 PE range even while the companies continue to put up impressive numbers. The only Chinese company I bought was CHOP around $5 and quickly sold a couple months later at $6.50-7. I didn’t sell because I was smart, I sold because I didn’t own enough of it to really make a difference either way. And the reason I wasn’t going to own enough to make a difference was because I wasn’t about to take a flight to China to see if the operations existed. That rudimentary thought process is one that I as well as many other investors probably find themselves in.
I think Chinese Small Caps should be owned as a basket (maybe 10-15 companies) to alleviate some of the geographical risk. China represents a phenomenal opportunity for investment. I find the overall mindset to write off the whole China small cap space as a “fraudulent” non invest able investment class very similar to those investors that will never invest in a OTCBB company. I love when people say that because that is why I invest in them and why you can make 2-5-10x on your money. Whether its a 2 PE Chinese small cap or another OTCBB security…We buy them at $0.50/share, the market accepts them/smart money buys them from us at $5.00/share
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