US-listed China shares have plummeted like a pudding and I really don’t know if this is going to change soon. This year was a year to forget in the US-listed China space.
In the case of Chinese reverse mergers, this year is turning out to be a very disappointing year, as events like the cautious stance of the U.S. Security and Exchange Commission (SEC), the NASDAQ’s proposal of new listing requirements for reverse-takeover stocks, and Moody’s Red-Flags report on China-based companies has dampened this speculative area.
Only 37 reverse mergers were completed during the second quarter of 2011 (down 50% over the same quarter last year), according to the Reverse Merger Report. Third quarter will not be much better for reverse mergers in general.
A precarious economy, fraud concerns in China and negative mainstream press coverage continue to buffet the reverse merger market.
The weakness of the reverse-takeover stocks is also evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies that trade on U.S. exchanges following reverse mergers.
As of October 21, the index is down 58% since December 31 2010. CHINARTO is trading at a Price to Earnings (P/E) ratio of 4.7X and a Price-to-Book (PB) ratio of 0.5X.
At this juncture, investors are bearish towards equities, especially China Reverse Merger stocks, due to the enormous volatility in the share prices. The last nine months have been a harvest season for the short sellers in the Chinese space and it didn’t required one to be a “guru” in selecting which ones to short.
The majority of China reverse merger stocks (Trading China) have taken a hit following the SEC announcement, irrespective of the strength and growth prospects of the business, solid financial performance and clean reputation of the management. This gives an opportunity to investors to be selective and invest in such firms, earning higher returns.
The Chinese economy continues to show strong gross domestic product (GDP) growth at near 10%, so it may be an opportune time to accumulate some Chinese stocks selectively. I am still long on the following reverse merger stocks. Of course with a big loss, but “no guts, no glory”
American Lorain (ALN)
American Lorain Corporation products include chestnut products, convenience food products and frozen food products. The company currently sells over 240 products to 26 provinces and administrative regions in China as well as to 42 foreign countries. The company operates through its five direct and indirect subsidiaries and one leased factory located in China.
The stock price and volume are depressing for a company that is holding up very well despite the inflationary climate.
China Botanic Pharmaceutical (CBP)
China Botanic Pharmaceutical Inc. is engaged in the research, development, manufacturing, and distribution of botanical products, bio-pharmaceutical products, and traditional Chinese medicines (“TCM”), in China. All of the company’s products are produced at its three GMP-certified production facilities in Ah City, Dongfanghong and Qingyang. The company distributes its botanical anti-depression and nerve-regulation products, biopharmaceutical products, and botanical antibiotic and OTC TCMs through its network of over 3,000 distributors and over 70 sales centers across 24 provinces in China.
With the appointed of Mr. Pan, who is a Certified Public Accountant, certified by the Oklahoma State Board of Accountancy and also a member of the American Institute of Certified Public Accountants (AICPA) and the Oklahoma Society of Certified Public Accountants (OSCPA) they bring a high-caliber director to their Board. So in the end it will help enhance China Botanics’ corporate governance and integrity.
China Marine Food Group (CMFO)
China Marine Food Group Ltd. is a food and beverage manufacturer of Mingxiang(R) seafood-based snack foods and “Hi-Power” marine algae-based health drinks, and a wholesaler of frozen marine catch in five provinces in China. Founded in 1994, China Marine has grown steadily and positioned its Mingxiang(R) brand as a category leader in 3,200 retail food sales points and 15,000 beverage sales points in China. The company has received “The Famous Brand” and “Green Food” awards. The company is committed to the highest standard of quality control with the ISO9001, ISO14001, HACCP certification and EU export registration.
Beginning in the second quarter of 2011, sales of the company’s seafood snacks were negatively impacted by consumers’ concerns stemming from the nuclear disaster in Japan and the safety of ocean-based products. China Marine has taken several actions to alleviate those concerns, including increased advertising and more frequent communications with its distribution partners. Sales have stabilized since June, with month-over-month data showing positive sales trends and a return of consumer confidence in July and August.
The company is also in discussions with prospective distributors in new and existing regions sales territories. Management is committed to expanding distribution to untapped cities and provinces as a long term goal.
China Nutrifruit Group (CNGL)
Through its subsidiaries Daqing Longheda Food Company Limited and Daqing Senyang Fruit and Vegetable Food Technology Company Limited, China Nutrifruit, is engaged in developing, processing, marketing and distributing a variety of food products processed primarily from premium specialty fruits grown in Northeast China, including golden berry, crab apple, blueberry, seabuckthorn, blackcurrant and raspberry. Its processing facility possesses ISO9001 and HACCP series qualifications. Currently, the company has established an extensive nationwide sales and distribution network throughout 18 provinces in China.
Last August, China Nutrifruit’s research team completed its stringent quality assessment and market research for the company’s new fruit and vegetable powder products. This new products will complement their current product portfolio and will help diversify their customer base.
More on this company, read the article China Nutrifruit Matching Filings Make A Great Impression.
Longwei Petroleum Investment Hld (LPH)
Longwei Petroleum Investment Holding Ltd is an energy company engaged in the storage and distribution of finished petroleum products in China. The company’s oil and gas operations consist of transporting, storage and selling finished petroleum products. The company has a storage capacity for its products of 120,000 metric tons and has the necessary licenses to operate and sell petroleum products in China.
The withdrawing of their shelf registration was very good news but investors don’t seem to get it.
New Energy Systems Group (NEWN)
New Energy Systems Group is a vertically integrated original design manufacturer and distributor of lithium ion batteries and backup power systems for leading manufacturers of mobile phones, laptops, digital cameras, MP3s and a variety of other portable electronics. The company’s end-user consumer products are sold under the Anytone® brand in China while it’s commercial and OEM batteries and battery components are sold under New Power and E’Jenie.
The company had lower than expected sales volumes and margins last quarter, because results were impacted by counterfeiting. Despite this issue the company announced last month three new Anytone® consumer mobile products at Macworld Asia.
For some background about the company, read the following article. New Energy Systems Powerful Possibilities.
Sutor Technology Group (SUTR)
Sutor Technology Group Ltd is a leading China-based non-state-owned manufacturer and distributor of high-end fine finished steel products and welded steel pipes used by a variety of downstream applications.
Their EPS fiscal year ending June 30 was $0.34. They are initiating a share buy back and the management anticipated both revenue and net income to grow at a compound annual growth rate (CAGR) of approximately 25% to 35% for the next two fiscal years. With a P/E below 4 this company is undervalued like the rest mentioned in this article.
Disclosure: I am long ALN, CBP, CMFO, CNGL, LPH, NEWN, SUTR.