Dealmaker’s Diary: A Penny Stock Play On Chinese Growth

Alpesh Patel|August 22, 2024

We’ve got a different type of stock we’re looking at in this week’s Dealmaker’s Diary…

It’s a low-priced play on growth in China… a region many U.S. investors have been ignoring recently.

But if the China growth story picks back up, this U.S.-listed company could do very well.

It’s a subsidiary of a Singapore-based company that manufactures diesel and natural gas engines for trucks, buses and industrial machinery.

And it’s also important to note that it’s a small company. Basically a penny stock. So it’s a cheap bet on Chinese growth.

Get all the details on the company – including its ticker – in my latest video.

Click on the thumbnail below to watch.

Transcript

Hi, friends. Different kind of Dealmaker’s Diary stock pick this week because it’s got China in the name. And China’s been one of those countries which, having done incredibly well for many years, then fell completely out of favor.

And really the question now is, well, when’s it gonna get back up off the ground? So what caught my eye with this one is not because I think China as a whole country is about to suddenly revamp and fly, and soar ahead. I think the United States is that place.

But for this US listed company, it seems to hit a lot of our numbers. That’s why. And as you know, we’re driven by data, not by narratives and stories. So who are they?

Well, it’s a Bermuda holding company. It’s a subsidiary of a Singapore-based company, and they manufacture diesel and natural gas engines for trucks, buses, industrial machinery in China. Okay. Now why is that important?

Well, if Chinese growth does now at long last pick up, then this company should continue doing well. But it’s a small company. Market cap sub-$1 billion, under a billion dollars. It does pay dividends.

Though what attracted me to it wasn’t the China story at all. It was some of the numbers. On my Growth Value Income rating, which you’ll know is my proprietary algorithm where I look at the valuation of a company, its share price to profitability, its growth, its dividend deals, and so on, it’s got a nine. Now anything with a seven, eight, nine, or ten meets my minimum criteria.

The forecast price-to-earnings ratio is relatively cheap. You are paying ten dollars for every future forecasted dollar in profits of the company.

Cash return on capital invested, I need that really to be higher, but 5.4 is not bad. It’s a measure of the amount of cash the company generates for the capital that it invests, and companies in the top quartile tend to do really well. 5.4 puts it out of that top 25 percent of all companies, but still is a very respectable number. Volatility, ideally, I’d prefer below 20 percent, but 21 percent, I’m not gonna quibble over one percentage point.

I could have done with a better sortino and return alpha, and you’ll know if you have the GVI Investor newsletter, our criteria is a lot more stringent. But this gives you the direction of travel and the essential things I look for. The momentum on the MACD moving well, moving in the right direction.

Okay. The kind of things that I’d like to see. Of course, there’s some overhead resistance, at the back of the $12 mark, so that could be a worry. And in the past, it has jumped up from $7 to $12 then dropped all the way back to into the $7s again, and it’s volatile. Look at that 32 percent. So, you know, we’re pretty much talking penny stock volatile.

So you’ve got to like all of those criteria in it. But if it can break above that $12, then the next resistance is closer to $14 and then you’re looking at the $16, $17 and that’s a pretty hefty return indeed by then. The volatility is reflected in the seasonality of the stock is not consistent riser month in month out as we know. But again, that’s part of the risk, you know, you’re talking basically a penny stock here.

On a discount cash flow, it’s overvalued. However, discount cash flows can be not the most reliable thing. They’re they’re interesting for me to look at, but they’re not vital by any means. So it gives you some of the flavors of the things that we want.

There are very few companies in the world which tick every single box and are what you might call absolutely perfect. Those are the ones we try and get in the GVI research newsletter. But I think out of the Dealmaker’s Diary this week, given China remains in the news every week, I thought this would be an interesting educational informative one for you.

I used to lecture, actually on the 12th of September 2001. So, the day after 9/11, I was lecturing at the University of International Business in Beijing.

And it’s an interesting thing thing about the Chinese. Their perspective, of course, is very different to our western perspective. All they wanted to know after 9/11 was will this affect their entry into the WTO because the gap round of talks were were going on and, I think it was the Uruguay round and and their entry into the World Trade Organization.

Wealth is what they were concerned about, and growth.

They weren’t concerned, of course, why should they be, about Western civilization, Western democracy, or Western growth, or security.

They were bothered about it, but they’re very focused. In many ways, they’re more capitalist than us. But I just thought I’d tell you that little anecdote from where I was on, well, 9/11 and the 12th of September. It gave me an interesting insight into, into the culture.

I have been to Beijing since and, Shanghai many times since, but I’ll save that for future videos. Thank you very much.