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Thursday January 21, 2010
China trio: High growth small caps
In his Small Cap Investor PRO financial newsletter, the advisor reviews a trio of favorites among his buys: China Natural Gas (NASDAQ: CHNG), China Green Agriculture (NASDAQ: CGA) and China TransInfo Technologies (NASDAQ: CTFO). "China Natural Gas is currently trading at only 10.9 times trailing earnings, yet the company grew net income in 2008 by 66%. I expect growth in 2009 will be only marginally higher than in 2008 due to the severe drop in gas prices. "But the fact that the company could grow at all after a 70% decline in natural gas prices is a testament to its growth prospects and solid operations. And if natural gas prices rise in 2010 as I expect, than look for China Natural Gas to reap big profits. 
"China Natural Gas should grow earnings by more than 25% in 2010, which would mean the stock is currently trading at 9.3-times forward earnings. This is very inexpensive – Chesapeake Energy is trading at 11.6-times analyst estimates for 2010, yet is forecast to have essentially flat earnings growth. "China Natural Gas is a buy here. The stock should trade at least 25% higher in the next few months and push past its October 2009 high of $14.81. I expect to increase my target price in January. "This agriculture sector has been red hot, and China fertilizer companies like China Green Agriculture have been huge beneficiaries as sales volumes are increasing. While subscribers are already up 124% on the stock, I think it still has more upside. "With China Green Agriculture trading at 18-times my 2010 EPS estimate of $0.94 (note that the company will be reporting its second quarter 2010 results in February), and if it continues to execute its growth strategy, earnings could reach $1.50 in 2011. "Should this be the case, the stock would be trading at only 11.3-times forward earnings – a virtual bargain for a stock that could grow 2011 earnings by 60% over 2010. This is another company that I expect to increase my price target for in January. "China TransInfo Technologies has benefitted from new contracts that show transportation infrastructure spending in China is still strong. "The company recently won a $3.9 million contract to design a transportation emergency response command platform that will connect 23 Shanghai city government agencies to Minhang District’s emergency response command center. "It was also awarded $600,000 in funds to help commercialize its TransPLE system which tracks passengers in high density urban areas and helps to design better traffic flow systems. "The ongoing infrastructure spending in China leads me to believe that this stock will continue to rise. The company is on track to grow 2009 revenue by 90% over 2008 and the addition of new contracts could mean 2010 will be another banner year. "Analyst estimates are very conservative for 2010, and the stock is trading at just 11.7-times forward earnings estimates of $0.80 per share. I think the company will beat that by a fair margin." 
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News Flash
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Growth stock specialist Ian Wyatt remains particularly bullish on the long-term outlook for Chinese stocks, particularly high growth, small cap issues.