Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

More Profit in Chinese Stocks

Wednesday, October 10th, 2007
By for Profit Confidential

You would not believe how many U.S.-listed Chinese stocks have soared in price on the stock market lately. Not only are Chinese stocks roaring at home, but there’s renewed interest in this sector from domestic investors. The only sub-sector of domestically traded Chinese stocks that’s experiencing some consolidation is solar energy.

Back in August, I wrote about China Fire & Security Group, Inc. (NASDAQ/CFSG) in this column. Growing fast, this company is a kind of consolidator in China’s fragmented market for fire and safety products. Like many Chinese companies, it is growing both organically and by acquisition.

Around the end of August, this stock was trading for approximately $8.00 per share. Now, China Fire & Security is trading right around a new record high of $12.00 per share, and trading volume has increased substantially. All this, and the stock is still reasonably priced considering the company’s growth prospects.

If there’s one thing I’ve noticed about many Chinese companies, it’s that their level of profitability (once achieved) is often far greater than the profitability of Western companies.

Consider China Fire & Security as an example. In its latest second quarter, the company’s revenues grew to a record eleven-and-a- half million dollars, representing growth of 38% over revenues generated in the second quarter 2006. The company’s GAAP net income was an impressive $4.2 million in the second quarter of 2007, representing growth of 17% over the second quarter of 2006.

Now, $4.2 million in earnings on eleven-and-a-half million dollars in sales is an outstanding achievement. I’m noticing similar circumstances with most of the small Chinese companies I’m following.

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I guess the high level of profitability has to do with cheap labor and cheap raw material input costs. Whatever the reason, Chinese companies are setting a new standard in corporate profitability. This is just one more reason why the speculative investor just has to have some exposure to this sector of the market.

 

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles