As Fear Recedes in Shanghai

09/07/2010 10:21 am EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, says that big brokerage firms are finding Chinese stocks attractive again, and he recommends one stalwart.

The Shanghai Stock Exchange has been operating under a cloud of fear, but not be­cause of poor [gross domestic product] numbers. China’s GDP growth is still in the double digits, although it is cooling as expected.

That expectation of cooling helped lift the Shanghai Composite Index from its low point in July when fears of overheating, a real estate bubble, and a potential government crackdown on credit held sway.

JP Morgan, Nomura, and Citigroup have joined the chorus saying the Chinese stocks are poised for a rebound. Nomura says valuations are cheap. Citigroup says low interest rates and a weak dollar will push investors to seek higher returns in emerging markets. JP Morgan credits Beijing’s pledge to continue efforts to sustain economic expansion for its increasing optimism.

While I agree that many Chinese stocks are cheap, it’s difficult to predict exactly when market trends will drive more investors to pay a premium for Chinese equities.

China Medical Technologies (Nasdaq: CMED) continues its effort to return to profitability and showed improvement over the previous quarter.

CMED reported results for the first fiscal quarter (ended June 30, 2010) on August 16th. During the period, revenues decreased by 10.9% year over year to $27.5 million, but increased by 5.9% sequentially from the previous quarter. Non-GAAP net income decreased by 21.4% percent year over year to $8.4 million, but increased by 10.8% over the previous quarter.

In its encouraging outlook for the coming quarter, CMED said target revenues are expected to be not less than $29.5 million, representing a year-over-year increase of not less than 20.4% and a quarter-over-quarter increase of not less than 7.4%.

Impressively, CMED said target non-GAAP net income is expected to be not less than $9.6 million, representing a year-over-year increase of 267.9% and a quarter-over-quarter increase of 14%.

The company’s [chief executive officer, Xiaodong Wu,] was optimistic about the coming year, saying, “We are pleased with the third consecutive sequential growth in quarterly revenues. Following the approval for our HPV-DNA chip and positive feedback from the trial use of our chip by hospital customers, we believe that we will achieve accelerated sequential growth in the upcom­ing quarters.”

With its revenue growth, CMED has an impressive [price-to-earnings-to-growth] (P/EG) ratio of 0.24. It is also one of the best dividend producers in the segment, with an annual return of 5.21%.

CMED continues to be a Buy, still selling well below its buy-up-to price of $22 a share. Our price target for this medical equipment maker is $50.00. The stop sell for CMED is $10.00. (Its ADRs closed below $12 Friday—Editor.)

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