Chinese Stocks Starting to Move Again

— by Mitchell Clark, B. Comm.

Chinese stocks are starting to come alive again and this is evident in their domestic market as well as in U.S.-listed Chinese stocks.

Two companies that we’ve talked about a lot in this column are moving higher in the stock market right now because of good corporate developments, but also due to a major change in sentiment. Investors are eager for growth and there isn’t much of it around. Chinese stocks still offer a lot of growth, along with unique investment risks. In my experience, enthusiasm for U.S.-listed Chinese stocks occurs in waves. I think a new upward move in this group of stocks has already started. I still also contend that domestic Chinese equities will lead the global equity market going forward.

One company I’ve written about in this column many times before is A-Power Energy Generation Systems (NASDAQ/APWR). This U.S.-listed Chinese company is in the business of designing and building micro power grids for industry and small communities in China. The company is now also selling large-scale wind power generating systems. In its latest fourth quarter of 2008, the company’s revenues grew 94% to 81.4 million dollars. Net income grew 198% over the fourth quarter of 2007 to reach 10.0 million dollars.

This fast-growing company just announced that it has signed two new contracts with Anhui Wenergy Co., Ltd. to build two micro-grid electricity-generation systems in China’s Anhui Province. The two contracts are worth over 75.0 million dollars and the primary fuel for these power plants will be biomass (wood, grains, used vegetable oil, garbage, and sewage, for example). This stock has been very flat since last October, but has since come alive once again.

Another interesting company that we follow in this column is China Sky One Medical Incorporated (NASDAQ/CSKI). This Nevada-registered holding company owns a portfolio of pharmaceutical companies in China. Still small, but growing fast, China Sky One Medical wants to become a leader in the sale and distribution of over-the-counter pharmaceutical products in that country.

This company’s fourth-quarter 2008 revenues grew a substantial 104% to 26.0 million dollars. Net income for the fourth quarter was $6.9 million, or $0.45 per diluted share, as compared to net income of $4.1 million, or $0.25 per diluted share, generated in the fourth quarter of 2007. For all of 2008, the company’s revenues grew 86% to 91.8 million dollars. Net income for 2008 was a substantial 28.9 million dollars, representing growth of 89% over 2007.

This small company continues to be awarded government approvals for new drugs on a regular basis and is branching out to sell lifestyle products like vitamins and items for shedding weight.

I really like small, but fast-growing Chinese stocks, especially when they get close to breaking the 100-million-dollar mark in sales. For me, this artificial yardstick is a sign that a company has made it past the difficult and arduous task of actually creating a self-sustaining enterprise. Once you have over 100 million dollars in sales, customers, suppliers and investors take you more seriously.

Chinese equities remain one of the only growth sectors of the global equity landscape. Any equity speculator has to have some exposure to this market, even if it’s a basket of large-cap stocks.