Three U.S.- Listed China Stocks to Watch

Editor's note: The following article was written by Maj Soueidan, the founder of The Markets Edge Hedge Fund and GeoInvesting. Soueidan's "GeoTeam" of researchers and analysts uses fundamental criteria to analyze micro- and small-cap stocks.

NEW YORK ( TheStreet) -- The avalanche of U.S.-listed Chinese stocks with the potential for above-average returns shows no sign of stopping.

Three companies that we are currently tracking are China MediaExpress ( TMI), Winner Medical Group ( WWIN) and China Yida Holding ( CNDH).

China MediaExpress

Last Thursday, TMI Entertainment & Media approved its business combination with China MediaExpress Holdings. China MediaExpress operates the largest television advertising network on intercity express buses in China and generates revenue by selling ads on its network of television displays installed on express buses.

This is exciting for two reasons. First, on June 25, we coded TMI Entertainment as a bargain at $7.91. We were somewhat leery of doing so because the consummation of a merger was not yet a done deal.

However, based on the company's aggressive financial performance targets and clean balance sheet, we felt that TMI Entertainment offered a nice opportunity to participate in a hot China industry sector. Based on financial targets, set by the company's management, that call for net income of $42 million in 2009, $83.5 million in 2010 and $130 million in 2011, we believe investors may find value in TMI shares.

Second, the approval of the business combination justified the warrant arbitrage strategy we highlighted on Sept. 1, 2009.

The warrants saw an increase in price from 16 cents to $1.81 in roughly six weeks from our first mention. Ironically, as of Monday's close, TMI ended the day at $8.02, meaning that the warrants were still mispriced with an intrinsic value of $2.52 (warrant strike price is $5.50).

That doesn't even include a premium for time value as the warrants have a two-year expiration. To read more about these warrants and the associated restrictions, view the latest PRER14A Proxy, page 4..

We need to be cognizant of the fact that to complete its business combination, TMI had to purchase shares from certain investors. We are speculating that at some point the company may have to issue shares to recoup funds spent for this transaction.

This was a great example of the Internet creating a social medium for investors to get together and formulate an incredible opportunity that we all could profit from.

Winner Medical Group

On Oct. 7, 2009, we liked Winner Medical at $5.20. The company manufactures a product associated with the medical dressing and accessory industry. Most of its products are exported.

Winner Medical is a private-label manufacturer that allows customers who put their own name on the final product.

Through the first nine months of its 2009 fiscal year, Winner Medical's revenue increased 17% to $71 million and GAAP EPS increased 75% to 8 cents. We prefer to calculate EPS on a U.S. fully taxed basis, stripping out unusual gains and charges. Doing so yields a nine-month adjusted EPS of 24 cents.

Analysts have the company with a EPS of 40 cents (Geo-adjusted 34 cents) for fiscal 2009 and growing 30% in fiscal 2010.

Export sales to developed countries accounts for 80% of the company's revenues. In order to spur future growth, Winner Medical plans on significantly penetrating China and underdeveloped areas with its own brand of products.

The company has also recently introduced a new product of nonwoven fabric made from 100% natural cotton that has applications in the medical and consumer markets.

The company feels that its patented manufacturing process enables it to produce environmentally friendly PurCotton at a lower cost than competitive woven cotton products. This product line still represents a small portion of Winner Medical's total revenues.

China Yida Holding

China Yida has two divisions. The first division is contracted to provide managerial and media services to three tourist destinations in China; the second division receives advertising revenue by providing programming through one TV channel and Railroad-on-board program-infomercial programming.

Here are some positive points to consider about the company:
  • Industry growth rates of both company divisions have been experiencing growth well on excess of 10%.
  • The China advertising sector is becoming a "hot" sector on Wall Street.
  • Until recently the tourist division has been only receiving revenue from its Great Golden Lake resort venture, one of its three contracted tourist destination agreements. CNDH helped increase visitors to this resort to 320 thousand people in 2008, from 30 thousand in 2001. This track record bodes well for its two other tourist ventures. Beginning in the fourth quarter of 2009, the Company should begin to receive revenue from a second agreement (Hua'an Tulou destination). The third destination (Yunding) is slated to contribute to revenues in 2010. Revenue has grown from $10.2 million in 2006 to $30.6 million in 2008 with a commensurate growth in net-income.
  • The company has pre-tax profit margin is around 66%.
  • China Yida has a total debt to equity of less than 10%.

We are speculating that revenue will get an immediate boost from its new tourist ventures. If we can verify that dilution won't be a factor going forward, then this story becomes more appealing. Also, the company has recently affected a 1-for-4 reverse split, a common precursor to an exchange uplisting.

Please note that CNDH has a wide bid ask spread.

To see more details on our thoughts please visit our Web site,

-- Written by Maj Soueidan in Skippack, Pa.

At the time of publication, Soueidan was long China MediaExpress warrants, Winner Medical Group and China Yida Holding.

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