The Invasion Has Begun

by Mitchell Clark, B. Comm.

Stocks are bouncing around in a choppy manner and this is evidence of a market that doesn’t know where it wants to go. The market is due for a period of consolidation, but there still remains a positive bias to the trading action.

U.S.-listed Chinese stocks continue to be where most of the best action is for traders, although there hasn’t been much in the way of new listings of late. This is no big surprise considering the turmoil the market was in just a few months ago. You can expect the number of new Chinese listings to increase as the year progresses.

One company that continues to be an attractive security for traders is A-Power Energy Generation Systems (NASDAQ/APWR). I last wrote about this company in this column back in April, and the stock has made an enormous amount of money since then. This U.S.-listed Chinese company is in the business of designing and building small electrical power stations for industry and small communities in China. The company is now also in the business of selling large-scale wind power generating systems in that country.

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This stock has tripled since the last time I wrote about it, largely due to the more positive tone in the broader market, but also because that change in sentiment brought speculative investors back into the game. The big money has now already been made in the speculative end of the stock market. I think the trading action is going to slow down substantially in the third quarter.

A-Power just reported its first-quarter numbers and, in an unusual event for a U.S.-listed Chinese stock, the business missed consensus estimates by a wide margin. The stock sold off on the news, but it didn’t fare too badly, all things considered. The first quarter of the year is often the slowest for many Chinese companies and that economy did slow substantially along with the rest of the world.

For A-Power, even with a first-quarter performance that came in below consensus estimates, the company still raised its guidance for the entire year. The company increased its minimum revenue estimate for 2009 to 320 million dollars, up from previous guidance of 290 million dollars. After-tax net income also was revised higher to a minimum of 32.0 million dollars, up from the previous 29.0 million dollars. This is why the stock didn’t sell off as much as it could have.

It’s a peculiar circumstance to have a company raise its guidance for the year, but just report weaker than expected numbers for an entire quarter. The expectations for China’s economy are certainly going up.

At its current valuation, I think A-Power’s market capitalization is very low. For a company that will soon breach half a billion dollars in annual revenues, this stock should be much higher. Once again, that’s the risk premium associated with U.S.-listed Chinese stocks. But, as I’ve written before, you can’t find this kind of growth anywhere else.