Small, Innovative and Growing

by Mitchell Clark, B. Comm.

Chinese stocks are bouncing around tremendously and the action over there must be creating and simultaneously spoiling some well-earned fortunes. For the first time, Chinese equities are leading the global equity landscape. What happens to Chinese stocks now affects what happens to the trading action in New York.

There is so much opportunity in that economy, even if GDP growth is slowing. There’s also a lot of opportunity in the equity speculation business in that country, but, like in all capital markets, you have to know what you are doing or you can easily get wiped out.

There are a lot of very interesting Chinese companies that have listed on U.S. stock exchanges; partly because that’s where they could raise the money to expand, and partly because a lot of these small companies want to legitimize their operations in the eyes of global investors.

Along with quite a few new IPOs, there are a number of very interesting small Chinese companies listed on the NASDAQ that are experiencing significant growth. Naturally, the marketplace has already speculated on this potential growth, but because the infrastructure needs of the Chinese economy are so great, it’s fair to assume that today’s small company will very likely be tomorrow’s big company.

One very interesting micro-cap company that’s growing with the basic infrastructure needs of the Chinese economy is China TransInfo Technology Corporation (NASDAQ/CTFO). This small firm sells technology that helps monitor and regulate the flow of traffic in cities. The company’s business plan is to become the largest transportation information products provider in China. Currently, its main product offering is GIS technologies. GIS stands for geographic information system and, in this case, it’s related to the collection, analysis, and data mining of vehicle traffic. The company owns software copyrights on 75 software products and is currently developing electronic toll collection (ETC) technology for use on major highways.

In its latest quarter, ended June 30, 2009, the company’s revenue increased 87% to $9.6 million. Now this is still pretty small, but the growth is impressive. Net income for the second quarter of 2009 increased 30% to $2.8 million, with fully diluted earnings per share growing 15% to $0.13. The company finished its second quarter with $9.2 million in cash and working capital of 34.5 million dollars.

Recently, China TransInfo was awarded a new contract worth about $4.7 million from the Wuhan Municipal Transportation Management Bureau. The company will construct an information center that will analyze and process real-time traffic data flow for this city of over nine million. The company’s current expectations are for 2009 total revenues of approximately 45.0 million dollars, with net income expected to come in around 13.0 million dollars.

Still small and at an early stage of development, it’s exciting to come across small companies like this that seem to have such a bright future. When companies like this break the 100-million-dollar mark in annual sales, then they can really go national and experience significant growth.

Chinese stocks have been in a bit of a bubble lately, so it’s likely that they will be under pressure as a group for quite a while. Large-cap Chinese stocks have performed tremendously since the financial crisis earlier this year and, if they get a meaningful correction, they’d be a buy once again.