Global Hunter China Recap (From 11/17/2010)

Our Comments/Thoughts/Changes: CVVT CRTP CHC CMFO CCME CNYD CAAS CAST CHOP DEER FSIN GPRC HRBN LIWA QKLS SIHI WATG YUII

Positive: CVVT CMFO DEER GPRC HRBN LIWA SIHI WATG YUII

Mixed: CCME CAST CAAS FSIN

Negative: CRTP CHC CNYD CHOP

Liquidity Events: CIVN SGLA

China Valves Technology (CVVT/Positive) Action: Increasing FY10 + FY11 Ests; Reiterate Buy

Net/Net: reported strong Q3 results well ahead of our estimate and consensus. Q3 revenue grew 98% YoY, primarily driven by the three acquisitions completed early this year. Gross margin declined, but was offset by better control of operating expenses. Q3 EPS beat consensus by $0.08. Management indicated strong backlog, raised FY10 guidance and anticipated 30% organic growth in FY11 which is to be driven by robust demand and capacity ramp-up at its new subsidiaries. We increased our FY10 and FY11 estimates. We are also encouraged by management's discussion to improve corporate governance and build better infrastructure as a public company. Shares are trading at 7.5x our FY11 EPS estimate. We reiterate our Buy rating and 12 month price target of $17, which is 11x our FY11 EPS.

China Ritar Power Corp. (CRTP/Negative) Action: Lowering FY10 + FY11 Ests

Net/Net: preannounced Q3 results on Wednesday morning, which were below our and consensus estimates. Management cited multiple adverse events that contributed to the shortfall, including a sharp increase of raw material (lead) price, delayed delivery of a couple of large orders, appreciation of the RMB exchange rate, and increased SG&A expenses. The company also provided Q4 revenue guidance below our and consensus estimates. We are lowering our ’10 and ’11 estimates. Although Q3 preliminary results and Q4 guidance are disappointing, we continue to like the long-term outlook of the company. Shares dropped 15% yesterday on the preannouncement and are trading at just 6.6x our lowered FY11 EPS estimates. We maintain our Buy rating and price target of $5.50, which is 12x our ’11 EPS estimate.

China Hydroelectric (CHC/Negative) Action: Downgrading from Buy to Accumulate/Reducing FY11 Outlook

Net/Net: reported Q3 results that were below our and consensus estimates, primarily due to less than expected rainfall in Zhejiang province (where ~1/3 of CHC’s total designed capacity are located). Management cited caution on Q4 results, as it is typically the driest season of the year. They now expect to achieve the lower end of its previously announced FY10 guidance. The company's acquisition pace seems to be slightly delayed by the prolonged bank lending process. The 44MW of capacity it planned to acquire within the year may be pushed off to 1Q11. We continue to like the long term fundamentals of the company given strong electricity demand in China, favorable government policy towards the renewable energy industry, potential tariff increases, and a highly fragmented market which provides a large pool of acquisition targets. However, we are reducing our FY11 outlook as we expect the tightening lending environment and uncertain equity market to slow down the company's acquisition pace. As such, we are lowering our rating from Buy to Accumulate and reducing our price target from $12 to $10.

China Marine Food Group (CMFO/Mixed) Action: Selloff presents buying opportunity. Reiterate Buy.

Net/Net: reported Q3 results that were in line with our/consensus estimates. Q3 sales grew 69% YoY, driven by organic growth in processed seafood and contribution of Hi-Power beverage. While gross margin was flat sequentially, operating margin declined from Q2 as expected, due to increased marketing spending to build brand awareness of its Hi-Power beverage. We remain positive on the growth prospect of CMFO's business and believe the ongoing marketing campaign will greatly improve brand awareness and therefore help boost sales in the coming years as well as expand into new regions. We continue to expect a strong year in FY10 and view the selloff as a buying opportunity. Shares are trading at 5.9x our FY11 EPS estimate. We reiterate our Buy rating and $10 price target, which is 9.3x our FY11 EPS estimate.

China Media Express (CCME/Positive) Action: Downgrading from Buy to Accumulate/Raising Fair Value PT to $24 + Raising FY10 and FY11 estimates

Net/Net: reported strong Q3 results that beat our/consensus estimates, driven by continued network expansion and favorable margin mix. The company generated strong operating cash flow and further strengthened its balance sheet with $170MM in net cash by quarter end. Management raised its FY10 net income guidance. We are increasing our FY10 and FY11 estimates. Shares are trading at 8x our FY11 EPS estimate, which we still consider as inexpensive. However, shares have rallied 180% from its bottom since September, and exceeded our previous price target of $21. We expect some profit taking after this substantial rally. We wait for further indication from management on the use of cash, including a potential dividend policy. We believe a dividend distribution would certainly help unlock the remaining value for shareholders and could serve as the next catalyst for the stock. However, given the appreciation in shares, we are lowering our rating from Buy to Accumulate while raising our 12-month price target from $21 to $24, representing 9x our updated FY11 EPS estimate.

China Yida Holding (CNYD/Negative) Action: Q3 saw severe flood damage/ Lowering PT to $15

Net/Net: reported Q3 results well below expectations due to worse than expected revenue losses in the Great Golden Lake caused by this summer's floods. Management lowered FY10 guidance and also tuned down its outlook for FY11, expecting a gradual recovery for the tourism business. We are certainly disappointed with the Q3 miss, however, we believe the company’s long term value remains the same. The company has long term operating contracts with local governments to operate six parks, three of which are under construction and expect to add significant revenue growth from 2012. The company is also receiving over 4,000 mu of free land from the government, which should provide substantial value in the next few years. CNYD shares are trading at 7x our lowered FY11 EPS estimate. We maintain our Buy rating but lowered our price target from $18 to $15, or 9.5x our FY11 EPS estimate.

China Automotive Systems (CAAS) Action: Upgrading to Accumulate from Neutral

Net/Net: reported Q3 results that were roughly in line with our estimates and consensus. Despite a seasonally slower quarter, Q3 revenue grew 18% YoY, driven by growth of both passenger and commercial vehicle power steering segments. Management raised FY10 revenue guidance to 30% YoY growth from 25% previously. We expect gross margin to be sustained at current levels despite pricing pressure from OEMs, as the company plans to focus on margin improvement in FY11 through cost control and new product launches. We continue to like the fundamentals of the company due to its market leading position, solid customer base and R&D capabilities. We believe it is well positioned to benefit from the long term growth of China’s auto market. Shares had been trading at a higher multiple than its peers in the last few quarters. But they have dropped 20% since our last update and 40%+ from January, and are now trading at 12.7x our FY11 estimate, which we believe represents a more attractive entry point. We therefore are upgrading our rating from Neutral to Accumulate and reset our price target to $18.50, which is 15x our FY11 EPS estimate

ChinaCast Education (CAST/Mixed) Continued to execute growth strategies. Maintain Buy

Net/Net: reported mixed Q3 results. Revenue was slightly lower due to the delayed closing of the HIUBC acquisition. Bottom line results beat due to a one time gain related to acquisition, excluding which results were roughly in line with our estimate. The brick and mortar TUG business now accounted for the majority (60%) of CAST’s business. In the quarter, the company continued to develop its international programs and progress with its CUP joint venture, which is expected to contribute earnings in Q4. The company generated strong operating cash flow ($50MM) this quarter, as CAST collected tuitions at the beginning of the academic year in September. The strong cash position of ~$150MM should allow the company to self fund one or two more acquisitions and help accelerate EPS growth. We continue to like the university business model for its stable growth, high profitability, and strong cash flow. We maintain our Buy rating and $10 price target, which is 15x P/E and 7.5x EV/EBITDA based on our FY11 estimates.

 
China Gerui (CHOP/Negative) Action: Lowering FY10 + FY11 estimates due to Capex delay; Maintain Neutral.
 
Net/Net: reported solid Q3 results which were relatively in line with our estimates and consensus. The slight miss on the top line was attributable to a one-time issue related to timing (two customers picked up products in the beginning of October instead of the end of September). The demand for CHOP’s products remains very strong and the company continues to operate at full capacity; however, due to the flooding in Northern China, the completion of Phase 1 of the capex plan was postponed until Q1 FY2011. As a result of this delay, we lowered our FY2010 and FY2011 estimates, essentially delaying the incremental benefit by a quarter vs. our original plans. We continue to view the company as attractive at current prices on a fundamental basis, but believe that the unresolved warrant situation and the recent filing of a $100MM shelf will continue to act as an impediment to new investors in the near term.
 
Deer Consumer Products (DEER/Positive) Action: Raising estimates and price target to $18; Progress on all fronts
 
Net/Net: reported record Q3 results, beating consensus estimates and raising its full year guidance. The outperformance in the quarter was balanced as growth in branded domestic sales as well as private label international markets significantly improved. The company’s roll out of its domestic China platform and further penetration of key retail relationships is on track and management expects to reach 1,500 stores by year end, which should contribute ~50% to 2011 revenues, generating further margin expansion. International sales also showed strong growth in the Asian, South American and European markets. Management provided an update on the new Anhui facilities, which they think could add ~$250MM in revenue capacity while serving as the production center for the domestic China operations when it comes on line in 2011. Given the outperformance in the quarter and the improved outlook, we have raised our FY2010 and FY2011 estimates and increased our price target from $14 to $18. We believe that the "sell the news" market action provides an excellent entry point and we continue to view DEER as a compelling pure play on domestic Chinese consumer trends and an attractive stock on both an absolute and relative value basis.
 
Fushi Copperweld (FSIN/In line) In line Q3 results and FY guidance; Reiterate Buy rating and $15 price target
 
Net/Net: reported an in line quarter and reiterated previous full year guidance. We believe that all of the long term growth drivers remain intact, including the ramp up in the utilization of CCS capacity expansion in the Dalian facility, sustainable profitability in the Amityville, TN facility, strategic expansion into the southeastern China and the formulation of a nationwide standard for composite conductor wires. We have made only minor adjustments to our forward looking estimates and continue to view FSIN as a compelling stock on both an absolute and relative value basis, which creates one of the most attractive risk/return opportunities in the US listed China space. We would use any near term weakness in the stock as a buying opportunity.
 
Guanwei Recycling (GPRC/Positive) Action: Initiating coverage/Buy rating and $7 PT
 
Net/Net: Guanwei is one of the largest manufacturers of recycled LDPE in China; the company imports and recycles LDPE plastic scrap material into granular plastic for use in the manufacture of various consumer, industrial and chemical products. GPRC is one of few companies in China certified by PRC representatives and Germany’s TUV Rheinland, which allows them to import higher quality waste plastics from Europe directly, resulting in higher production yields and lower input costs. Guanwei is in the process of increasing its import quota, which if granted would allow the company to more than triple its current capacity to ~185,000 tons which should drive revenue and income growth for the foreseeable future. GPRC’s current valuation of only 5.8x P/E and 3.6x EV/EBITDA (based on our 2011 estimates), coupled with a strong management team and corporate governance, makes GPRC a very attractive proposition to any value or GARP investor focused on small cap US listed China companies.

Harbin Electric (HRBN/Positive) Action: Upgrading to Buy; Expect buyout deal to go through.

Net/Net: reported Q3 earnings with revenue in line but the bottom line missed our/consensus estimates significantly. Gross margin declined from the previous quarter primarily due to increased raw material costs. R&D expenses were substantially higher due to concentrated payment to a number of new R&D projects. SG&A expenses were also higher because of a $2MM bad debt reserve and $0.9MM higher shipping & handling costs as the company shifts transportation of some products from rail to truck. Despite disappointing Q3 results, we believe demand remains strong. We expect some gross margin recovery in Q4 as the company passes through rising costs to customers, and we expect R&D and bad debt reserves to get back to more normalized levels. As Simo and Weihai facilities have reached full capacity, the company is building additional capacity, which we expect to speed up growth again next year. Regarding the proposal to go private, the company’s special committee has retained financial advisor to evaluate the transaction. We expect the deal to eventually go through at close to the $24 offering price. Shares at current levels provide potential upside of ~20% for investors. Therefore we are upgrading our rating from Neutral to Buy, and maintain our price target at $24.
 
Lihua (LIWA/Positive) Record Q3 driven by strong demand for LIWA’s products; Reiterate $17 target
 
Net/Net: reported record Q3 results marginally above consensus estimates. Strong top and bottom line growth was driven by the recent capacity expansion and new product introduction. We expect demand for the company’s products to remain robust due to continued infrastructure build-out, growing demand for household appliances in the Chinese countryside and ongoing urbanization, coupled with the commodity-like nature of LIWA’s products. Lihua remains our top pick, given that it currently trades at only 6.5x FY2011 P/E and 3.6x FY2011 EV/EBITDA multiples, has over $3 in net cash and $4.35 in net tangible assets per share and is expected to grow its top and bottom line by over 50% and 35%, respectively.
 
QKL Stores (QKLS/Negative) New store rollout slows down. Maintain Buy on long term value
 
Net/Net: QKLS reported disappointing Q3 results below both our and consensus estimates. The lower revenue was partly due to two stores closing, and partly because the company allocated more resources to new store openings and away from existing stores. The bottom line was hit by higher operating expenses related to new store openings. The company reduced its store rollout plans to 11 new stores in FY10 from 20 planned previously due to delays from landlords. It also tuned down its expansion plan for FY11. Shares dropped 23% yesterday after the Q3 release. Although we are disappointed with the earnings shortfall and lowered outlook, we still like the long term growth potential of the company, which focuses on tier III/VI retail markets in northeast Chinese cities with limited competition from large multinational retailers. Shares are trading at 8x our lowered FY11 EPS, a discount to the peer group P/E of 14x. Therefore, we maintain our Buy rating but have lowered price target from $7 to $6, or 12x our FY11 EPS estimate.

SinoHub (SIHI/Positive) Reiterating Buy on compelling valuation.

Net/Net: reported strong Q3 results, beating our estimates and the consensus on both the top and bottom lines. Q3 revenue increased 54% YoY and 27% QoQ, primarily driven by strong growth in the VCM business. Margins also improved in all business segments. Management raised FY10 revenue guidance from 40% to 50% YoY growth. During the quarter, the company increased its VCM production capacity, which we believe will support the company's growth momentum into 2011. Shares are trading at only 3.7x our FY11 EPS estimate. We believe the valuation is very compelling. We reiterate our Buy rating and $6 price target, which is 8.7x our FY11 estimated EPS.

Wonder Auto Technology (WATG/Positive) Fundamentals remain strong; expect near term catalysts. Reiterate Buy.

Net/Net: reported Q3 ahead of our/consensus estimates. Revenue and gross margin were both better than expected, while the bottom line was complicated by higher professional fees related to the Jinheng acquisition and a $5.3MM gain on disposal of Applaud Group. Net margin remained in line excluding non recurring items. Q3 revenue grew 34% YoY due to contribution from Jinheng in addition to 18% organic growth of legacy businesses. Management raised its FY10 guidance. We consider the Jinheng acquisition as a positive development given that it further enlarges and diversifies the offering portfolio. We continue to like the long term fundamentals of the company and believe the business is positioned to benefit from the long-term growth perspective and consolidation opportunity in China’s auto industry. Shares are trading at 7.3x our FY11 EPS estimate. We believe the company is looking for paths to unlock shareholder value. We expect several near term catalysts, including a potential upgrade to a Big Four auditor and other strategic moves. We reiterate our Buy rating and $14 price target.
 
Yuhe International (YUII/Positive) Action: Raising FY10 + FY11 Ests; Reiterate Buy with $14 target.
 
Net/Net: reported strong Q3 results, beating our and consensus estimates on both the top and bottom line as a result of increased sales volume of day-old broilers as well as significant improvement in ASP per broiler. Pricing has remained strong through the beginning of Q4 and as a result we are raising our FY2010 and FY2011 EPS estimates to $1.21 and $1.53 from $1.05 and $1.41, respectively. Following the recent acquisitions, Yuhe has grown to become the largest day-old broiler producer in China with the production capacity of 2.2MM parent breeders and ~300MM day-old broilers annually (after all recently acquired farms become operational). With approximately $50MM in cash following the recent raise, YUII is well positioned to become the consolidator in this fragmented space and we expect to see more accretive acquisitions going forward while YUII works to achieve its goals of having 10% to 12% of the total broiler market share. We continue to believe that shares of YUII remain significantly undervalued at these levels and reiterate our $14 price target.