The problems with some Chinese Reverse Merger companies are well documented …. but if there was ever an example of babies being thrown out with the bathwater, it is the valuation hits being taken by all Chinese small-caps across the board. There is no doubt that investors are going to have to be vigilant about any investments made in the space … but one can’t ignore the fact that some incredible opportunities are now presenting themselves as well.
Borrowing from the concept of Web 2.0, in which we saw the implosion of the dot-com bubble, followed by the resurgence of “real” dot-coms and massive subsequent share gains, I fully expect to see the same thing happen with Chinese small-cap stocks. Specifically, we’re going through the implosion of China 1.0 small-cap stocks right now, thanks in large part to reverse merger frauds. This won’t last forever. Eventually – and we are well on our way there – the scam companies will be discovered and dismissed.
When the dust settles, we are going to find two kinds of companies. First, existing “real” companies trading at ridiculously cheap valuations. I see massive gains being made in these companies over the next 24 months (think Aamzon and eBay). Second, we are going to see new “real” companies starting to list on American Exchanges with great fundamentals and fast growth stories (think Google and LinkedIn).
Investors that keep their eyes and due diligence open today stand to potentially make Web 2.0 style gains in the coming years from cheap Chinese small cap stocks.
Below are just a few I’ve discovered over the past year … and I’m going to keep a rolling list going forward. Today’s new addition is China Botanic Pharmaceuticals (see my notes below)
If you wish to see original entries for each of these companies, just click on my Cheap China Small Cap Stocks category to see each entry and accompanying notes. Moreover, I have covered these companies on Chinese Small-Cap TV (Today’s Show) (Archives).
Babies are being thrown out with the bathwater in the Chinese Small-Cap Space. I don’t see any need to rush into them as I expect this period of lost confidence to extend into the late summer at the very least. On the other hand, I see plenty of reason to begin building positions in these and other candidates over the next few months for long-term holds.
|COMPANY||Q EPS||EPS (EXTRAPOLATED)||PRICE||P/E|
|China ACM (CADC)||$0.19 May 13||$0.76||$2.34||3.1|
|US China Mining (SGZH)||$0.22 May 16||$0.88||$4.00||4.5|
|China Industrial Waste (CIWT)||$0.08 May 16||$0.32||$1.08||3.4|
|China Green Material (CAGM)||$0.04 May 16||$0.16||$0.66||4.0|
|China BCT Pharmacy (CNBI)||$0.16 May 16||$0.64||$2.40||3.8|
|Nutrastar Int’l (NUIN)||$0.18 May 16||$0.72||$3.00||4.2|
|China TMK Battery (DFEL)||$0.09 May 17||$0.36||$0.55||1.5|
|HQ Global Education Inc.||$0.15 July 15||$0.60||$0.36||0.6|
|China Botanic Pharma.||$0.33 Mar 19||$0.88 guidance||$0.75||1.2|
You will note I have a column for “extrapolated” EPS over the entire year. This assumes these companies will continue to generate EPS at the pace on the day we covered them. Yes, this is a major assumption … but it also assumes these companies won’t be increasing EPS over the current fiscal year as well. That’s a pretty big trade off considering they are more likely to grow EPS than remain stagnant or even drop.
With those assumptions out of the way, the prevailing theme seems to be P/E multiples of ~ 3.5X. That is damn cheap for any company, let alone companies that are growing their top and bottom lines by 40, 50, 60, even 100%.
In the case of of China Botanic Pharmaceutical, the company has actually provided earnings guidance of ~ $33,000,000 for 2012. That translates into about $0.88 EPS for fiscal 2012. At a current price of just $0.75 the company is trading at 1.2 X EPS. That is not a typo …. 1.2
CHINA BOTANIC PHARMACEUTICAL NOTES
The company released their Q1 numbers for the period ended January 31, 2012. Here are the highlights:
First Quarter 2012 Highlights
- Net sales increased 24.4% year over year to $28.1 million
- Gross profit increased 25.4% to $17.3 million from $13.8 million in the first quarter of fiscal 2011
- Gross margin increased to 61.6% from 61.1% in the year ago period
- Net income rose 12.4% to $12.3 million, or $0.33 per diluted share, from $10.9 million, or $0.29 per diluted share, in the first quarter of fiscal 2011
At a market cap of just $28,000,000 as of Friday, the company is ridiculously cheap by ever metric. For example, it is essentially trading at 1X revenue after just the first quarter of revenue. Add that to 1.2X EPS at this point and CBP is super cheap.
As of January 31, 2012, China Botanic had cash of approximately $21.4 million and total current assets of approximately $70.6 million. The Company had working capital of approximately $56.9 million on January 31, 2012, as compared to $40.8 million at the fiscal year end of October 31, 2011.
If the company has $21.4 million in cash on hand, you are buying the actual business for just $7,000,000 ($28M market cap – $21M cash)., which makes the revenue multiple and EPS multiples above so cheap it is almost embarrassing.
For fiscal year 2012, China Botanic reaffirms its guidance of revenues of between $91.6 million and $93.1 million, representing an increase of 26% to 28% over fiscal year 2011 revenue of $72.7 million. Revenue growth is expected to be driven largely by sales volume increases from the existing product portfolio. The Company expects net income to be in the range of $32.7 million to $33.2 million
Not only are you buying the current company at embarrassingly cheap multiples, you are also buying its growth for even less.
Unless China Botanic Pharmaceutical is about to be shut down as a major reverse merger fraud scam, investors stand to make a lot of money from any investment in it.
* I have no share position or affiliation with the company. I would really like to change that on both fronts over the coming weeks and months.