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Three 'Probe-Proof' China Stocks for 2011

In short, the stock looks cheap with perhaps 50% or more upside, there is a Big 4 auditor and the potential for dividends. But given the presence of vocal short sellers, I would like to get further comfort on CCME's business before diving in. I hope to arrive at a conclusion in January, once I have had time to do some channel checks in China.

New Energy Systems

I have owed and written about NEWN off and on since it was a $2.00 stock on the OTCBB. Now it trades on a senior exchange at a price of $7.28 and has completed three major acquisitions. I have followed the stock fairly closely over the past two years and I had told myself that if I could buy in the $5.00 range, I would take a significant position.

During the summer of third-quarter 2010, the stock traded as low as $4.60, but investor sentiment (including my own) for this and every other China small cap, was so low that I chose to remain on the sidelines and not buy in. Within six weeks the stock hit a high of over $9.00, so I am kicking myself about my lack of conviction and missing the chance for a quick double on the stock.

Each time the company has made an acquisition, it has been done with stock or a combination of cash and stock, which I like because it means the target company "has some skin in the game" and, of equal importance, these acquisitions have not involved a public offering of stock, which often can crush the share price of a small-cap.

NEWN recently raised guidance for 2010 to $1.40 per share and Rodman&Renshaw recently initiated coverage with a price target of $12.00. Despite these factors, NEWN still trades at $7.28 per share, which represents only 5x earnings. I believe that the primary issue holding the shares back is a lack of understanding of the most recent acquisition of Kim Fai Solar Energy Technology, which NEWN acquired for $24 million (with a combination of notes payable and stock) in November.
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