I believe these three China stocks, Sino Clean Energy (SCEI), Shengkai Innovations, Inc. (VALV) and Agria Corporation (GRO), could double in the next 12 months. They are all trading substantially below book value or below cash balance. Seasonality factors should favor Sino Clean Energy in the coming months. I think all these three stocks should start trading closer to their fair value at the beginning of 2012 when the tax loss selling is done.
Sino Clean Energy is the third largest producer of coal-water slurry fuel by sales in China, a cleaner alternative to burning coal aggregate in heating, industrial and power generation for residential and industrial applications. The company has seven production lines located in Shaanxi, Liaoning, and Guangdong provinces. The ongoing winter heating season in China should help revenues in the near future. Most of Sino Clean Energy's revenue has come from heating customers in the past.
Sino Clean Energy has also announced that its major customer, Shenyang Haizhong Heating, has completed pipeline modifications and is expected to resume operations in October as scheduled. This customer has accounted for 30% of Sino Clean Energy's revenue in past quarters.
Sino Clean Energy has a large cash position of $2.49 per share. Company's management has fiscal year 2011 revenue guidance of between $101.5 million and $110.7. The company expects Non-GAAP adjusted earnings to be in the range of $23.02 million to $24.80 million and full year adjusted earnings per share of between $0.98 and $1.06.
There is one analyst covering Sino Clean Energy. Crystal Equity Research has updated their Sino Clean Energy report on November 28th. They have a speculative buy rating with a $2.75 price target. Sino Clean Energy's share price ended year 2011 at $1.00. There is more than 100% upside potential for the company's share price if it was to trade just at the cash at hand value.
Shengkai Innovations is a leading ceramic valve manufacturer in the People's Republic of China. The company's industrial valve products are used by companies in the electric power, petrochemical and chemical, metallurgy and other industries as high-performance, more durable alternatives to traditional metal valves.
Shengkai management has decided to gradually phase out its less profitable domestic market segments including the electric power market and focus on expanding the company's presence in the more profitable domestic and foreign oil and chemical industries, where ceramic valve products typically command higher prices than the domestic Chinese market.
Shengkai Innovations has a cash balance of $1.89 per share. The current market valuation is one third of the company's cash balance. Shangkai Innovations is expected to produce positive cash flow from business, albeit less than in previous quarters.
I am expecting company's share price to correct closer to its cash balance based on company's past performance, which would translate into 100-200% upside potential from the current share price. Geo Investing has a price target of at least $2.79 for Shengkai.
One of the reasons why Shengkai's stock price has been so depressed lately is because Vision Opportunity of China Fund has been selling its block of over 10 million Shengkai company shares. As of September 30th they only had 1,512,275 shares of Shengkai left to sell. Latest insider buys of Shengkai are from November which is a positive sign.
If you believe that Shengkai Innovations will keep making positive cash flow in the future as it has in the past, I see no reason why a rational investor should not buy this company. My recommendation is to buy this stock as long as it is trading below its cash balance.
Agria Corporation is a China-based agriculture company with operations in China and internationally. In China, the company engages in research and development, production and sale of seed products, including field corn seeds, edible corn seeds and vegetable seeds.
Agria's revenue increased to US$158.8 million, with net income attributable to the company of US$4.0 million for the six month period ended June 30, 2011. This compares to revenue of US$3.3 million, with a net loss of US$16.3 million for the six month period ended June 30, 2010.
Agria Corporation owns through Agria Asia a majority equity interest in PGG Wrightson [PGWFF.PK], New Zealand's largest agricultural services company. PGG Wrightson reported turnover of NZ$1.2 billion (US$1.0 billion) for the 12 months ended June 30, 2011.
Agria owns a 50.01% stake in PGG Wrightson. PGG Wrightson is listed in New Zealand's stock exchange under symbol PGW. PGW has 757,985,639 ordinary shares issued. PGG Wrightson is currently trading at NZD 0.38. Agria's stake in PGG Wrightson is worth 757,985,639 x 0.50001 x 0.38 x $0.77 = $110,895,517.
Agria has 55,383,300 ADSs outstanding as of June 30, 2011. Agria's stake in PGG Wrightson is ($110,895,517 / 55,383,300) $2 per share. Agria's share price was $1.04 at end of 2011. I would not be surprised if Agria traded again at $2 share price in coming months. I see Agria as a free lunch currently. I think every rational investor should be selling PGG Wrightson and buying Agria because of this arbitrage. If you buy 1 share in Agria you get 1 share in PGG Wrightson for free.
Disclosure: I am long SCEI, VALV, GRO.
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