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China Stocks to Bet on Consumers - Part 2

Editor's note: Following is part 2 of an article that looks at China stocks focused on the newly emergent Chinese consumer. Here is part 1.

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage.

BEIJING ( TheStreet) -- Aside from travel, another promising China consumer play is the food and beverage sector.

I carefully evaluated China Nutrifruit Group (CNGL), SkyPeople Fruit Juice (SPU - Get Report) and Country Style Cooking Restaurant (CCSC - Get Report).

Of these three China stocks, I like SkyPeople the best and recently have been buying its shares. I also like Country Style Cooking Restaurant, but its shares are simply too high for my criteria, so I am holding off for now on that name.

SkyPeople Fruit Juice is a small-cap China stock with a top 10 auditor and a booming high-margin business that caters directly to consumers with a rising disposable income.

The stock is not widely followed and trades with a price-to-earnings ratio of only about 5, so it has the potential to easily double this year.

I recently toured the company's two factories in Xi'an. I also met with its distributors and purchased its products from WalMart (WMT) in Beijing as well as from several retail locations in Xi'an.

In total I spent four days on the ground to get a better feel for the company and its prospects.

I was so impressed that after my visit I went back to my hotel and started buying shares as soon as the U.S. markets opened.

SkyPeople has a net margin of nearly 25% and has cash of roughly one-third of its market cap.

The reason the stock trades so cheaply is that investors still don't seem to understand the seasonality of the company's business, something that is dictated by the seasonal fruits that it processes.

By the end of the second quarter, the company effectively runs out of inventory, putting a cap on sales potential.

The December quarter is the strongest quarter and will show the strongest financial performance -- sometimes as much as 50% of annual net income.

Despite the obvious seasonality, investors have sold off in the past after weak quarterly results in the slow season and then started buying again in stronger quarters.


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