As many of you know, we are very bullish on the long-term future of Chinese small cap and mid cap companies for two reasons:
1] The obvious reason – China is the fastest growing economy on the planet and nothing is going to slow down its ascent over the next 50 years and beyond. Investing in growth companies there just makes too much sense.
2] Great Results and Valuations – Many Small Cap Chinese Companies are listing in the US (OTCBB, NYSE Alternext and NASDAQ) with great financial results. Unlike many dubious US Small Cap Companies, Chinese Companies don’t seem to believe in losing money or failing to execute in a business plan. As such, 7-digit revenues and profits are very common.
From a valuation point of view, many Chinese companies became a victim of their own success in Q4 2008 and Q1 2009. Why? When the world needed to start liquidating, one of the first places they looked were China where most investors had significant gains to sell into. This resulted in the proverbial baby being thrown out with the bathwater and some great valuations.
TODAY’S FEATURED COMPANY
China Kangtai Cactus Biotech, Inc. is a leading grower, developer, producer, and marketer of cactus-derived products, including nutraceuticals, nutritious food, health and energy drinks, beer, wine and liquor, extracts and powders, and animal feed.
On Augsut 13th, the company announced Record Results for the Second Quarter of 2009.
Check out the full details below!
HIGHLIGHTS
- Second quarter revenue increased 30% to $6.5 million from $5.0 million in Q2 2008
- Gross profit increased 80% to $2.7 million from $1.5 million in Q2 2008
- Net income increased 37% to $1.4 million from $1.0 million in Q2 2008
MY COMMENTS:
The pace of Kangtai’s revenue growth accelerated in the second quarter with a year-over-year increase of 30% and a sequential increase of 96%. Anytime I see that kind of sequential growth, I pay attention and I’ll watch for the next Q to see if this was an extraordinary event or not. The 30% Y-O-Y growth isn’t anything to sneeze at either.
The company generated EPS of $0.07 this quarter, which translated into sequential growth of 105% and about 15% Y-O-Y. My suspicion is that we have a company that is back on track after suffering from the global issues in Q1.
Now, given the fact the company is trading around $1.00 and we know they’ve generated about $0.10 EPS in the first half of the year, we can probably safely guess a year-end EPS of $.20 on the low-end and $.25 on the high-end. I prefer to work with the low-end, which still gives the company an extremely attractive P/E of about 4.5 given the fact the stock is trading around $.90.
My only caveat here is that I can’t wrap my head around the Cactus business. It obviously has some legs in China but my lack of our experience with it here in North America means you have some research to do. This isn’t necessarily a negative. In fact, we may have stumbled onto a great business that the majority of North American investors are unaware of.
As always, this is my view in a snapshot. It is intended to give you a running start into your research. Now, you have to do your own due diligence to make sure the valuation is not impaired by other factors including balance sheet items, lawsuits or any other negative events.
If you have any comments, I’d love to see them below.
YOUR RESEARCH STARTING POINTS FOR CHINESE SMALL CAP AND MID CAP COMPANIES
We’ve provided investors with two great starting points to research great Chinese small cap and mid cap companies.
1. ChinaSecurities.com – ChinaSecurities.com tracks 250 of the best small cap and mid cap companies trading on North American exchanges. It provides you with the best of the best in two ways. First, the front page lists the best news of the day coming out of the space. It does so by giving you a text view of the best press releases by industry and via Chinese Stocks TV, a 5-minute broadcast every morning just after the open. Chinse Stocks TV is archived, so you can catch up on shows you missed.
Second, if you want to research each of the 250 companies to find candidates for your portfolio, it has a very intuitive directory that lets you quickly review each company on the master list, or parse it out by industry and exchange if you have a particular sector of interest. Cool stuff.
2. Right here on AGORACOM, you can refer to our China category for other featured Chinese Small-Cap Companies. As always, we will disclose any IR relationship with any public company. Given the sheer number of great Chinese Small-Cap Companies out there, you can expect us NOT to have an IR relationship with most of these companies.
Regards,
George
