China Small-Caps That Weathered the Storm Are Opportunities in 2012

Many investors will remember 2011 as the year that China small-caps imploded. Accusations of shoddy accounting and deceptive business practices at a few Chinese companies turned into a full-blown witch hunt that engulfed the sector. During the first half of 2011, it became a guilty-until-proven innocent environment for China small-caps. The Bloomberg Chinese Reverse Mergers Index is on track to be down 61% for 2011.

Big-bank Chinese IPOs also suffered in 2011 due to high-profile scandals such as Longtop Financial (LFT), which was dumped by its Big 4 auditor and recently deregistered by the SEC. The average China-based IPO was down 48% in 2011, according to Forbes.

Even legitimate companies got swept up in the deluge. L & L Energy (NASDAQ: LLEN), a U.S.-based coal mining company operating in China, was targeted by a short-selling outfit and subsequently hit with an attempted class-action lawsuit. Although the short seller’s “report” was easily refuted and the lawsuit never found its lead plaintiff, the strong negative sentiment sent LLEN’s stock into a tailspin from which it has yet to recover.

These days, the storm amongst China small-caps appears to finally be over. The hysteria surrounding the sector died down as the short sellers moved on to new targets. Financial journalists moved on as well, drawn by the eurozone crisis and the Occupy Wall Street movement. During the first six months of 2011, TheStreet.com published approximately 30 articles on the China reverse merger implosion. Since the beginning of July, the financial website has published only two.

In the end, the sector is undeniably stronger now that the bad apples have been shaken out. Many of the companies left standing have sound fundamentals, low valuations, proven management teams, and tremendous growth. As the trepidation surrounding China small-caps continues to fade, these stocks are poised to rebound in 2012:

Longwei Petroleum Investment Holding Ltd. (NYSE Amex: LPH), a fuel storage and distribution company operating in Shanxi Province. The Company achieved record earnings in FY11 and is set to nearly double its storage capacity with the planned acquisition of a 100,000-metric-ton storage facility. Currently trading at a steep discount to earnings, LPH has significant upside potential for investors.

Lentuo International Inc. (NYSE: LAS), an auto dealership operator based in Beijing. China is the world’s largest vehicle market, and Lentuo has a well-regarded brand name with a 16-year market presence. The Company has nearly doubled its dealership network over the past seven months and continues to grow its high-margin repair and maintenance segment.

China Bilingual Technology & Education Group Inc. (OTC BB: CBLY), which operates three private schools in central China. CBLY has 50% net margins and strong historical annual revenue and net income growth. The Company is expected to generate large returns in 2012 due to the addition of its recently acquired third school.

Dehaier Medical Systems Ltd. (NASDAQ: DHRM), a medical device developer and supplier. DHRM’s products capitalize on the rapidly growing demand for respiratory and oxygen homecare products in China. The Company grew revenues substantially for the first nine months of 2011 and recently entered the European homecare market.

To learn more about LPH, LAS, CBLY and DHRM, you can visit our Research homepage to download the most recent analyst reports on these four companies. You can also visit the archive of our latest virtual conference, which featured executive presentations from LPH, LAS and CBLY.

Disclosure: The subject securities are a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.