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Separating Winners From Losers in China

A123 Systems went public in September at $13.50 per share, immediately soared over 50% to over $20, and subsequently hit a high of $28.20. Stock prices are unpredictable, but fundamentals are often very predictable. In November, the first quarter reported after the IPO, The Wall Street Journal reported "A123 Systems Inc.'s third-quarter loss widened, hurt by higher costs and expenses, even as the electric-car battery maker saw revenue rise slightly."

For a company with negative gross margins, an increase in revenue means they lose more money, so this shouldn't really surprise anyone, and thus an increase in revenue shouldn't really be much to cheer about.

Compare this to Orient Paper. Two days after A123 released its results, Orient Paper posted quarterly results and commented on its outlook. Revenue increased 67% year on year, while gross and net profit more than doubled and the company expects the growth trend to continue. Once again, fundamentals are often predictable -- companies that lose money tend to keep losing it, while companies like Orient Paper that make money tend to keep making it.

But once again, stock prices are not predictable. Not surprisingly, Orient Paper has risen sharply on the back of its strong results and positive guidance. However, A123 Systems has (surprisingly) also remained very strong, holding in the low $20s. In my opinion, A123 Systems is not being driven by fundamentals but by hype and speculation.

A123 Systems has announced several great new contracts, which are clearly very exciting. These include a joint venture with Chinese automaker Shanghai Auto (a partner with General Motors and Volkswagen). This could be huge. Even Goldman Sachs initiated coverage on A123 Systems in November -- with a polite Wall Street neutral rating.
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