MIAMI, FL / ACCESSWIRE / November 17, 2015 / China has been one of the most down-beat countries over the last few quarters with equities losing value across board. However, not everything about China is all bad, especially when looking at some of the most promising small cap plays traded in the US.
CD International Enterprises (OTCPK: CDII) is not registered as a Chinese company but its business has a lot to do with China.
However, this nano-cap stock provides an interesting opportunity for growth investors that seek to seize opportunities at the earliest stage. The company has an acceptable debt level on its books and looks impressive on the bottom line.
The company's primary business is focused on providing business services to multinational companies, but at the moment, China appears to be the first target. Its services involve sourcing and distribution of industrial commodities to companies based in China.
It also provides consultancy services to businesses by offering financial advisory on contract arrangements and settlements in accordance to various laws, as well as logistical arrangements, planning, and execution.
The company has some interesting contracts expected to come to fruition in the next few months with revenues coming in the next few quarters. Based on proceeds from these contracts, the company expects to turn profits to the tune of $10 million per year for the next few years, beginning next year.
This implies that the company's value could grow significantly in the near term as investors anticipate growth in both top line and bottom line.
However, it is good to note that CDII being a nano-cap stock, it may pose some significant trading risk related to volume and that investors should be wary of the risks associated with such stocks before going all in, in anticipation of the capital gains expected in the next few quarters.
Nonetheless, since all investments attract a certain level of risk, it may be worth looking at this opportunity as one that could result in a huge payout, albeit with some strings attached.
China Jo-Jo Drugstores (NASDAQ: CJJD) is one of the most promising small cap stocks operating in the services sector. CJJD is a retail drugstore based in China operating in wholesale, online retail and chain stores.
This company carries a strong Buy recommendation, and there are clear reasons why analysts believe that there is more upside going forward.
This company has an interesting growth story going on via its online platform. Its official branded online pharmacy sales increased 406% for the nine month period ended September 30. This is primarily due to the company's partnership with large insurance companies in China, which means a continued cooperation may see the company rake in more profits in the future.
The company has also attracted the interest of renowned growth-focused hedge funds, which increased their stakes significantly during Q2. For instance, Driehaus Capital, a hedge fund run by Richard Driehaus increased its stake by 60% to 175,377 shares, while Renaissance Technologies now holds more than 86,000 shares after increasing its stake by more than 100%.
China Jo-Jo Drugstores is showing promising signs on both top line and bottom line as illustrated in the chart above and this could be the reason why investors are paying a keen interest on the stock. Also, notice that the recent recovery is coming after a period which was marked by struggle on both revenues and income.
In the most recent quarter, the company's online revenues increased 122% to $6.6 million year-over-year, while wholesale revenue was down 5.6% as the company continues to cut on volume driven sales strategy. This means that the company's margins will continue to improve in the near future as it focusses on cutting cost of sales.
The company currently trades at a P/S ratio of 0.37x compared to industry average of about 0.92. Its P/E ratio of 19.17x is also slightly better than industry average 21.87, which means that the stock is trading at relatively attractive valuation metrics when compared to peers.
Shares of CJJD have recently plunged to trade at about $1.80 per share after hitting $4.00 per share as recent as April this year. If the company continues to improve as depicted in recent results, then investors can look at it as a growth stock for the next few quarters.
Light TheBox Holding Company (NYSE: LITB) is another interesting stock in the services sector that investors may want to keep an eye on. This is an online retail company focusing on specialized apparel products, and other general merchandise including accessories and gadgets, home and garden products, and electronics and communication devices, among others.
This stock is currently recovering from a major plunge that began in June this year and ended in October.
Shares of LITB traded at about $7.50 about a year ago but are currently down to just $3.51. The most recent up trend saw then rally to trade at about $6.00 before plunging to a multi-year low of about $2.50. However, they do appear to be on a recovery terrain as investors seek to add while price is still low.
From a fundamental perspective revenues are tipped to slow slightly this year, while earnings are expected to come out positive. This shows an improvement in margins and it should boost investor optimism. In addition, predictions for top line for next year appear a lot better which suggests there are good things ahead.
Revenues for the current year are estimated to come out at about $315 million while earnings are tipped to reach $0.23 per share. Revenues for next year are expected to top the $400 million mark for the first time in the company's history.
In the most recent quarter, the company posted earnings that beat analysts' estimates after reporting EPS of $0.15 analyst estimate of -$0.07 per share. The company currently trades at impressive PEG ratio of 0.29x compared to industry average of 0.46x while its price to sales ratio of 0.47x versus 0.97x for the industry is as equally compelling.
China Nepstar Chain Drugstore (NYSE: NPD) is one of the leading retail drugstores companies in China in terms of directly operated stores. Based on the most recent quarter results (30 June, 2015), the company had 1,948 directly operated stores across 72 cities in China Mainland.
In the first and second quarters this year, the company reported more than 10% and about 13.5% increase in revenue on a year-over-year basis and analysts expect the company to continue improving through Q3 and Q4.
China Nepstar experienced some improvement in revenues and net income during the 2nd half of 2014, but the figures declined sequentially in the first two quarters of this year. Nonetheless, the year-over-year growth and the expected continued y-o-y growth for the next two quarters imply that the current calendar year could be better than last year.
The company is concentrating its resources on generic drugs, which provide better margins. This is likely to boost bottom line as well as top line in the next few quarters.
Shares of Nepstar currently trade at a P/S ratio of about 0.48x compared to industry average of 0.92x. This implies that in terms of price to earnings ratio, the company is relatively underpriced when compared to peers.
However, when you look at price to earnings ratio, the company's P/E of 58x compared to industry average of 21.87x implies a massive overpricing. Nonetheless, this also means that if the company can improve its margins and therefore the bottom line, it could significantly trade at a lower P/E versus industry average. The company's operating margin of 1% versus the industry average of 3% illustrates why it has a better P/S ratio, but a bad P/E.
Conclusion
Now, while these stocks indicate significant opportunities for investment, investors could yet pry on recent reports that have suggested a majority of these companies are considering going private and therefore buying out themselves from shareholders.
The proposed deals as noted by Reuters are supposedly worth around $40 billion. Some hedge funds with holdings in these companies have expressed concerns and are pushing for higher premium payout. This means that individual shareholders could also benefit in the ensuing outcome if indeed the firms end up delisting.
Whenever there is a buyout, there is always some premium payment to shareholders and this could be a perfect opportunity to dig further and establish the list of 50+ companies based in China that are planning to delist.
The bottom line is that some of these stocks trade at significantly attractive prices compared to industry averages while others have a promising growth story. China has been on the docks in recent times with equity markets suffering as the Chinese economy continues to slow.
However, as many investors will find out, it is never a completely barren market under any circumstances. US-listed stocks with operations in China may yet provide an interesting opportunity to invest while others run away.
These small cap stocks could be perfect for growth oriented investors and even those chasing short-term gains could also benefit if they land one of the companies looking to buyout themselves in the next few quarters.
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