Investment Capitalist

I love scanning the headlines these days only to read all of the incredible pessimism pertaining to Chinese stocks. There are even backhanded references to 1998, after a dizzying run in Internet stocks had thrown all rationalists (aka EMT) into the holding tank where reality often goes into hiding. Although we have seen quite a few high double digit moves since August, we are nowhere remotely close to stock behavior during 1998, which I vividly recall in detail. During the rip roaring mania of 1998 and 1999, the moves were in the high triple digits in the same time frame.

Not that I am advocating embracing the type of risk that would have allowed a trader to truly benefit in that type of environment. The only way to have caught that entire move was to be naïve enough to believe that the move was warranted and not a bubble. It appears nobody is speaking about the move in Chinese stocks being warranted. On the contrary, it appears that most of the talk is centered on the move in Chinese stocks actually being a bubble that needs to be avoided because of 1998! If you don’t see the trading implications of this, then you probably wouldn’t see it if it ran straight into you or if Cramer came into your dreams and screamed it in your face. If you do see the potential trading implications, then let’s roll up our sleeves, pretend it’s 1998 again and trade this incredible run that appears to just be getting underway.

This chart of China BAK Battery (OTC: CBAK) from July 31, 2007 accompanied an entry in my trading journal. China BAK Battery Inc. is one of the largest manufacturers of lithium- based battery cells in the world, as measured by production output. It produces battery cells that are the principal component of rechargeable batteries commonly used in cellular phones, notebook computers, cordless power tools and portable consumer electronics, such as digital media devices, portable media players, portable audio players, portable gaming devices and PDAs (Personal Digital Assistants). China BAK Battery, Inc.’s 1.9 million square foot facilities are located in Shenzhen, PRC, and have been recently expanded to produce new products. China BAK Battery, Inc. is the largest manufacturer of lithium-ion battery cells for China’s cellular phone replacement battery market. At the time of this trade, the PE for the stock was 14.

Screen clipping taken: 7/31/2007, 5:00 AM
The stock traded near $9.50 early this month, as the following chart illustrates:

Even with updated fundamentals, including a PE of closer to 35, China BAK Battery is one of those Chinese stocks that should be in a trader’s arsenal. Specifically, if you can catch this stock offered below $6 in the next few weeks, you will have to pinch yourself first to make sure you are not dreaming about Chinese stocks again.

Another Chinese stock that I keep a constant eye on is Sinovac (OTC: SVA). Sinovac Biotech is a Chinese stock that has an incredibly promising opportunity. As a leading Chinese biotech company, Sinovac Biotech Ltd. is a provider of biopharmaceutical products in China.

On August 1, 2007, Sinovac announced it has entered into an Exclusive Promotion Service Agreement with GlaxoSmithKline (China) Investment Co., Ltd. (or “GSK China”). GSK China and Sinovac will market and promote Anflu(R), a seasonal influenza vaccine developed and manufactured by Sinovac.

Sinovac is one of the most active Chinese vaccine manufacturers, in both seasonal and pandemic flu franchises, and we anticipate a lot of synergy between GSK and Sinovac. Sinovac Biotech Ltd. is a China-based biopharmaceutical company that focuses on the research, development, manufacture and commercialization of vaccines that protect against human infectious diseases. Sinovac’s vaccines include Healive(TM) (hepatitis A), Bilive(TM) (combined hepatitis A and B) and Anflu(TM) (influenza).

Sinovac is currently developing human vaccines against the H5N1 strain of pandemic influenza, Japanese encephalitis and SARS. In the “Government Working Report” presented in March 2007 at the Fifth Session of Tenth National People’s Congress, China’s Premier Wen Jiabao indicated that the government will expand its immunization program and purchase vaccines, which could prevent 15 types of infectious diseases, such as hepatitis A and meningococcal.

The Chinese government will increase funding for the vaccine program to RMB 2.8 billion. Sinovac is seeking regulatory approvals in targeted international markets to tap US$10 billion global vaccine market with estimated 10% annual growth. Regulatory approval has been received and Sinovac is marketing three vaccines for hepatitis A, hepatitis B and influenza in expanding China market. Sinovac is by far the largest supplier of hepatitis A vaccine among any Chinese companies, public or private.

Although Sinovac Biotech recently broke out from an accumulation base between $2.50 and $4.00, and is currently trading around $6.25, look for a pullback under $5 as an opportunity to buy this potentially high flying Chinese stock. There is no doubt that there is a tremendous macroeconomic play for this Chinese stock.