Five Aim China shares to watch

China Shoto

What two industries will benefit most from rapid Chinese industrialisation? Forget exporters, because they will be undercut by cheaper Asian companies as the Chinese renminbi (Rmb) rises in value. There are a number of contenders but two to consider are electric motors on bicycles, so that workers can travel further to work in the same amount of time, and 3G mobile phones coming to China. And what China Shoto does is supply batteries to the major players in both businesses.

Last year, sales jumped by 81 per cent to £107.5m and profits advanced 59 per cent to £7.16m. Seymour Pierce forecasts sales this year of £136.5m and no change in profits. But the broker admits that it could seriously underestimate the company’s profit potential if a rising renminbi holds back the price of lead, which accounts for 70 per cent of input costs. Even on last year's figures, a PE ratio of five and a dividend yield of 3 per cent seems woefully low for a company supplying batteries to two of China's fastest-growing industries.

More articles and data on China Shoto

Asian Citrus

Asian Citrus is China's largest orange producer and plantation owner. Two existing plantations north of Hong Kong have 2.8m trees planted on 68sq km of farmland and that number is scheduled to almost double with the agreement to plant a further 35sq km in Hunan Province. It's true that persistent cold weather this January (the coldest since 1949) and an ambitious replanting programme have knocked trading expectations, so that higher interim profits to end-December 2007 will probably be little changed for 2007-08 as a whole at £15.2m. But Asian Citrus has great potential: the average productive life of an orange tree is between four and 30 years, with mature output at 10 years.

At end-June 2007, two-thirds of Asian Citrus's trees were five years old or less. And as Chinese citizens become richer, they are almost certainly going to drink more of Asian Citrus’s fresh orange juice. In addition, imports will be kept at bay by duties while the company will benefit from a reduced tax charge for fruit growers from January 2008. In forecasts from broker Libertas Capital, the prospective PE ratio is 8.

More articles and data on Asian Citrus

West China Cement

West China Cement continues the theme of fast-growing Chinese companies sitting on ridiculously low PE ratios. This March, it reported calendar 2007 sales up 71 per cent to Rmb526m (£38.5m) and profits a similar amount higher at Rmb150m. At 116.5p, giving EPS of Rmb2.35 (17p), this puts the shares on a PE ratio of just six – and with minimal debt. But West China is no low-growth business. When it went public on Aim in December 2006, it operated three cement plans in central Shaanxi Province producing 1.5m tonnes of cement a year. Now the figure is 3.5m tonnes and West China Cement is constructing a sixth plant in the south east of the province capable of producing a further 1.8m tonnes of cement a year.

Of course there are dangers in adding on lots of new manufacturing capacity because China's double-digit economic growth rates may not last for ever. But older, less efficient and more polluting cement plants are being closed and, as a hub for infrastructure projects, Shaanxi Province's five-year plan expects cement demand to rise from 25m tonnes in 2006 to 40m tonnes by 2010.

According to the company, production has not been affected by the tragic earthquake on 12 May in Sichuan Province.

More articles and data on West China Cement.

Geong International

You don't need to be in basic industries to benefit from soaring demand in China. Take, for example, software house Geong, which issued a trading update in April for the 12 months to end-March 2008. In the statement the company said that sales and profits would be ahead of market expectations and that 2008-09 trading "has started strongly". Geong supplies data management software to over 100 top Chinese corporations, including the top five banks and several car manufacturers as well as Smartbox management software to millions of small- to medium-sized Chinese enterprises.

A new version of Smartbox has been launched and Geong has opened a branch in Guangzhou, southern China. Following the trading statement, broker Seymour Pierce forecasts 2007-08 sales to more than double to $17.5m and profits to rise from $1.7m to $3m. For next year, turnover increases to $21.1m and profits to $5.3m, taxed at 30 per cent. On this basis, with the shares at 65p, earnings of 14.2¢ puts them PE ratio of nine. There aren’t many other successful software houses with an enormous internal market to tap on such a low PE ratio.

More articles and data on Geong.

BlueStar Secutech

Britain may be the most CCTV-ed country in the world but China has a similar thirst for intrusive knowledge. Favourable government initiatives include increasing city security and mandatory security at entertainment venues. The Olympics and Shanghai 2010 Expo are, according to broker Evolution, driving demand for digital video surveillance (DVS). And BlueStar is one of China's top four DVS manufacturers with China's top 18 banks being customers.

In calendar year 2004, BlueStar reported sales of Rmb46.9m and profits of Rmb16.4m. In 2005, the comparable figures were Rmb72.5m and Rmb31.7m; in 2006, Rmb 102m and Rmb 45m; and, last year, Rmb154m and Rmb53m. An increased share capital held back 2007 second interim earnings at 84.4¢ but that equates to 6p of earnings and a PE ratio of just seven with the shares at 43.5p.

More data on BlueStar Secutech.

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