China Dips Create Opportunities

03/03/2010 1:00 pm EST


Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor of China Stock Digest, says Sino-US unease masks substantial upside in individual Chinese shares.

Many US investors have been spooked by predictions of doom from the likes of Dr. Doom, Marc Faber, and the legendary Jim Chanos.

[The] increase in Sino-US tension has also caused some unease among those investing in China. A report from Bloomberg indicates that options traders are betting on further declines in Chinese shares.

But a market downturn can create buying opportunities, according to Gary Evans, the Hong Kong-based strategist with HSBC Global Research, who sees a buying opportunity because of corporate economic expansion. Evans tells “The market looks attractive on several valuation gauges, with most companies’ earnings forecast to grow by one-fifth (on a per-share basis) this year.”

China Medical Technologies (Nasdaq: CMED) is positioned to benefit from China’s burgeoning middle class, longer life expectancies, and increased government funding for health care. CMED will report its unaudited financial results for the third fiscal quarter ended December 31st before the US market opens on March 3rd. (Wednesday morning CMED reported a third-quarter loss from continuing operations of $3.2 million on revenue of $25.2 million—Editor.) The company’s 2009 fiscal year ends on March 31st.

For the upcoming quarter, the company’s outlook calls for a return to profitability. CMED forecasts third-quarter earnings from continuing operations above $5.6 million, on revenue of $24.9 million to $26.4 million. CMED is still a Buy, still selling well below its Buy Up To Price of $22 a share. CMED is a value play with dividend yield better than 4%. (CMED closed Tuesday at $14.46—Editor.)

Himax Technologies (Nasdaq: HIMX) beat analysts’ expectations [last month]. Analysts were expecting Himax to report earnings of five cents per share for last quarter, but Himax beat expectations with actual earnings of six cents. Himax also issued earnings guidance for next quarter in line with analysts’ expectations.

Himax reported revenues of $178.7 million for the fourth quarter of 2009, representing a 43.8% increase from the fourth quarter of 2008 and a 12% decrease from the third quarter of 2009. Gross margin was 20% in the fourth quarter of 2009, down one percentage point year over year.

President and chief executive Jordan Wu told analysts: “We believe that 2010 will be a promising year for our LCOS pico-projector solutions (liquid crystal mini projectors). Both orders and design-ins are picking up strongly and we’re planning to expand our in-house capacity to fulfill the increasing demand. We expect to see increasing adoptions of our LCOS pico-projectors.”

Wu added, “[In the first quarter] we are seeing rather healthy demand in a traditionally low season. Compared to the previous quarter, we expect revenues to remain flat or go up slightly with a slight gross margin decline of less than one percentage point.” Himax’s EPS [earnings per share] are up 100% from the same quarter a year ago.

Our price target for Himax is $4.00. It has an estimated dividend yield of 10.6% at [recent] prices. (Himax closed Tuesday at $3.01—Editor.)

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