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4 Chinese Stocks Positioned for the Rebound

by: China Guru October 12, 2008 | about stocks: APWR / CPSL / HOGS / JNGW.OB    

China Stock Guru

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Last week I wrote about “Irrational Despair” causing panic in the markets. Stocks had been beaten mercilessly, regardless of the fundamentals. Maybe they were too high to begin with? Or maybe not. The point is that many stocks had declined precipitously on the back of unrelated negativity. They have since fallen further. And, as a result of the recent dramatic declines, there are amazing buying opportunities.

Let’s face it; there is plenty to be worried about. The US financial system is in turmoil. Credit markets are frozen solid and leveraged companies are justifiably panicked. However, the central banks are coming to the rescue and, while business will not return to prior levels for many years, liquidity will return to the marketplace. When it does, it will be too late; stocks will rally before things get better.

The question is how to position one's self for the inevitable rebound. The market will find stable footing, but it is doubtful that it will return to the highs for some time. The US is entering recession…tread lightly on anything exposed to the American consumer. Financial stocks will be a minefield and best to avoid the group unless you have insight into credit default swap exposure that I don’t have. Meanwhile, the US government is printing cash like there’s no tomorrow. The dollar will fall (maybe not against the Euro, but that’s another story).

My solution is simple: instead of placing bets in large cap US companies, look abroad for the next generation of leaders. I continue to believe that China has the cash, the people and the political motivation to remain the best investment opportunity for years to come. Companies with exposure to insulated areas such as the Chinese consumer and energy production will be the first to rebound when the market has ceased its decline.

In the past few months I have written about four companies: A-Power Energy (APWR), Zhongpin (HOGS), Jingwei (JNGW.OB) and China Precision Steel (CPSL). From August 1st through October 9th these stocks have declined respectively; 82%, 41%, 38% and 50%. On the surface, this type of performance would lead one to believe these companies are on their way out of business. Nothing could be farther from the truth. Quite to the contrary, all of these companies have come out with positive news regarding earnings and state of their business. Nobody cares…Irrational Despair has taken over the trading in these stocks.

A-Power appears to be the best candidate for a tremendous rebound in this group. The stock’s decline borders on insane. The likely cause of the drop is found in the ownership filings: JLF Asset Management has a 10% position. Purely based on speculation, it seems quite possible they have been selling as this is a huge position for them and must be weighing on performance. Judging from the stock, it is certain that someone has been selling, and hard.

And that selling has created quite an opportunity. While APWR has trended down, business has remained strong. Last week the company announced a major contract and on October 10, management reiterated guidance. Guidance is for earnings of over $2 per share in 2009, making the forward P/E a meager 2.2x. I’m betting this stock hits $20 again sometime in 2009. Ten times earnings for a clean energy company focused on smog filled yet power hungry China seems very reasonable.

Zhongpin is another example of a stock going south while business keeps chugging along. With the Chinese consumer’s demand for pork ever increasing, and being a consolidator in the highly fragmented industry, HOGS is perfectly positioned. Don’t listen to me, however: management raised guidance last week. Zhongpin trades at around 6x 2008 estimates now but won’t for long.

Similarly beaten up is Jingwei. Like HOGS, Jingwei is a direct play on the increased strength of the Chinese consumer. The middle class in China numbers around 200 million and growing. Accessing this group is key for global consumer focused firms and Jingwei is the premier firm for this. While recent news for Jingwei has been lacking, recent insider buying suggests that business remains on pace. The P/E based on 2009 estimates is 3. Don’t expect to buy it at these levels for long.

Along with the rest of the market, steel stocks have been traded dramatically lower recently. Steel pricing has started a rapid decline, putting earnings at risk for the group. A global slowdown in demand is lurking and sellers have leaned all over the steel stocks, CPSL included. The selling of steel stocks is probably justified. The selling in CPSL is definitely not.

CPSL is a steel processor, not manufacturer. As a cold rolling processor, steel is the major component in their Cost of Goods. In other words, lower steel prices are positive for their margins! On their mid-September earnings conference call, after reporting record earnings, the company hinted towards better margins going forward. They also said that business was booked out three months in advance; the most in company’s history. CPSL is focused on import replacement and its final products are benefiting from the surge in the Chinese consumer. Yet, the stock continues to decline. Irrational Despair has taken over and, at 5 times trailing earnings, it has created a buying opportunity .

There are two common threads between the four stocks mentioned here: incredibly low valuations and zero correlation in their business to the US or European consumer. Markets always bottom and this current selloff, scary as it is, will end. When it does, the world will look different from before. Yesterday’s leaders might not regain that status for a long time, if ever. There is real and possibly permanent damage to the US financial system, real estate market, and consumer. Panic has overtaken rational thinking in the stock markets of the world. Do not let Irrational Despair drive your actions. Instead, look among the carnage for the few stocks whose fundamentals remain intact and where the best chance at upside resides. For those of us smart enough to play contrarian, a very profitable future awaits.

Disclosure: I  own all four stocks mentioned in this article.

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This article has 11 comments:

  •  
    Oct 12 12:13 PM
    Great article- thanks. China's leadership MUST succeed in maintaining the people's standard of living to some degree or risk losing power. That is all that matters to the general public. Here in the U.S., people have ethical as well as economic beliefs. Our Congress is more positioned to be forgiven for mistakes and will continue to do so. Split Partisanship and the inefficient decision making that it causes will worsen this recession.
    Reply
  •  
    Oct 12 03:40 PM
    Good article.... I've been watching HOGS for quite awhile. In fact, I keep buying it only to be stopped out. Just looked at it yesterday and checked out the Yahoo message board. They are in process of opening a new processing plant which will boost their output by a large margin. (Can't remember all the details.. You'll have to check the details yourself.)

    jegan ;-)
    Reply
  •  
    Oct 12 05:18 PM
    APWR and HOGS have some insider buying. JNGW has very little info at yahoo finance, and CPSL has some very big insider selling. I personally own APWR and am hoping for a turnaround for the Chinese Wind energy stocks.
    Reply
  •  
    Oct 12 08:50 PM
    I don't see anything special about these stocks, and I wouldn't take this advice without thinking hard about it. Obviously people who own shares in stocks are going to be optimistic about the companies. Also anyone buying a chinese stock on the otc board such as JNGW.OB be prepared for the stock to go to zero. Been there, done that.
    Reply
  •  
    Oct 13 12:15 AM
    I noted that Friess Associates was a very large holder of APWR as of their last filing. They are known to be momentum players. The horrible price action leads me to assume they were blowing out their position. Also, we know by his filings that JLF sold half his position a few months back. After that, he no longer was required to file so I assume he is out as well.

    Reply
  •  
    Oct 13 12:17 AM
    Definitely worth a listen!

    A-Power Energy Announces Conference Call On Wednesday, October 15, 2008 -- Reaffirms Guidance
    Friday October 10, 5:45 pm ET


    SHENYANG, China, Oct. 10 /Xinhua-PRNewswire-Fir... -- A-Power Energy Generation Systems, Ltd. (Nasdaq: APWR - News; "A-Power"), announced today that it will conduct a conference call on Wednesday, October 15, 2008 at 9:00 am EDT to reaffirm guidance and discuss recent developments.
    Reply
  •  
    Oct 13 01:38 AM
    The author has some good ideas, I think you should post the same ideas on invest18.com. It has a new section dealing with Chinese stocks. I think you can expand your readers this way.
    Reply
  •  
    Oct 15 09:32 PM
    Thanks China Stock Guru. I found your recommendation insightful.
    Reply
  •  
    Oct 21 08:24 AM
    I would trade the steel company for SUTR steel...maybe you should look at that one too..........your welcome.
    Reply
  •  
    Nov 02 08:10 AM
    Have you taken a close look at CPSL? Because I have and it looks like the best of the 4 stocks. CPSL has a beautiful balance sheet, and is about to build another production line due to driving demand for there hot and cold rolled products. As the author stated, lower steel prices actually improves their bottom line. Korea's super huge steel company, POSCO (PKX) is trading at $71 pps and 80% of their products are hot and cold rolled steel, just like CPSL. However CPSL is in a niche market in China with no competitors. The expertise to enter this niche market is a natural barrier to competition. Another incredible point that the author should mentioned. 85% of CPSL customer base in China, imports their products from US. CPSL has only been in production for 2 years, and they will actually benefit from an economic slowdown. These 85% China customer base is looking domestically for their products to reduce shipping costs and speed delivery. CPSL is poised to recruit these China customer base.
    Reply
  •  
    Nov 11 12:46 PM
    Nothing like having someone pick 4 stocks and all of them get hammered. I personally find FEED to be a better stock than HOGS. I would think the stimulus plan would help all of the stocks listed. Who knows? I do know this article didn't help these companies a lick. Sure glad Im not in at much higher levels.
    Reply
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