Chinese disconnect

It has always struck me as strange that most of the Chinese companies traded on US exchanges (including the largest companies) sport significantly higher growth rates and, more importantly, margins than their industry peers located in the US and elsewhere.

Call it Chinese exceptionalism.

Now there are some reasonable explanations for some of it (market closed to foreign competition, govt preference, super growth part of the cycle, only the best make it to an offshore listing, etc.). Growth rates I can understand (although even some of them are suspect). Margins, however, are a slightly different story. The laws of economics talk about diminishing marginal returns to production, capital, and labor weighing on the economic surplus that can be earned in a competitive market.

In the case of the newer, smaller cap companies operating in traditional industries, it stretches credulity that they can grow as fast and earn as super-sized profits as they say.

All this in the context of Chinese companies having a reputation for being low margin, seat-of-the pants businesses.

Buyer beware. If it is too good to be true, it just might be too good to be true.

Israeli Stocks!

Israeli stocks always seem to disappoint.

They come to market with great growth, great margins, great balance sheets and great potential...and invariably disappoint.

I wonder whether the mid cap Chinese stocks will end up the same way.

Focus on Focus (FMCN)

Added Focus Media (FMCN) to the SMID accounts today. The primary rationale is that this is an undervalued asset with the potential for a re-rating event in the next month or so. The market is pricing the stock as though its acquisition by SINA is not going through. I don't know whether that is the case or not (the smoke indicates so). But on the chance that it does get done, then FMCN is worth about $10-$13 based on SINA's current price of $29 (SINA share ratio at .365 yields approximately $10.58 of value for FMCN shareholders). What is left of FMCN will be sitting on approximatley $1.00 in cash and a residual business that probably isn't worth much: $10.58 + $1.00 + $0.25 = $11.83.

Don't get me wrong. FMCN is a mess. Gone are the days when it was cranking out massive growth rates and monster margins. It was a charade supported by Goldman who did a real deal on shareholders all the way up. There is not only smoke, but fire all around. The deal sure doesn't look as though it is going through by the share price. But all the analysts say they think it will and SINA has reaffirmed its commitment to the deal. Fosan has taken a 28% stake in the company (which throws a spanner in the works), but it is unclear what its intentions are. SINA at $29 looks ok.

But as I have said before, I am not a great fan of China right now, and I sure don't trust the companies nor the govt stats that come out of the country. Short interest is 20m shares down from 23m shares a few months ago (about 16%...which is a concern). Vision China's disappointing report today and negativity surrounding FMCN could point to reasons given for scuppering the deal.

Disclosure: Own FMCN in professional accounts.

Mindray (MR) down but not attractive...yet

Mindray (MR) off as much as 15% today on a downgrade from Credit Suisse. But I missed it at $18 and will sit and watch. The news is not encouraging (March orders weaker than Jan and Feb...ouch!) and I am not a great bull on China right now. I also missed China Med (CMED) below $14 (had a big run-up over $20), but I've got no interest in chasing and am very cautious on CMED (smoke surrounds that company). MR seems like the higher quality play.


Disclaimer: No position in these stocks either personally or professionally.