Inside Wall Street: A Tiny Chinese Stock U.S. Investors Should Get to Know

Gene Marcial's Inside Wall StreetIt's Chinese New Year's week. Do you have a Chinese stock in your Year-of-the-Rabbit buy list?

Unfortunately, a good Chinese stock is hard to find. That's largely because some of the country's fast-growing and truly successful companies publicly traded in the U.S. are virtually invisible -- even on Wall Street. So, most American investors know little of Chinese enterprises traded here.

Only a few high-profile large-cap entities, such as Baidu (BIDU), a Chinese-language Internet search engine (trading on Nasdaq at $117 a share), or Focus Media Holding (FMCN), China's major advertising company (trading at $26 a share), have caught the eye of major U.S. institutional investors. Wall Street cares little about the swarm of small-to mid-cap Chinese companies that aren't household names, even though some trade in the U.S. Only analysts and money managers who probe the globe for value opportunities get to discover some of the attractive and undervalued, if tiny-cap, Chinese stocks.

Little wonder then that NIVS IntelliMedia Technology Group (NIV), whose consumer-electronic products and brands are widely known in China -- and marketed in some 80 countries -- hasn't attracted much investor attention in the U.S.

A Play on China's Rising Middle-Class Consumer

Based in Guangdong, China, NIVS is listed on the NYSE American Stock Exchange. The integrated consumer-electronics company designs, manufactures and markets a wide array of products, including LCD TVs, music players and digital video set-top boxes, as well the ubiquitous mobile phones. NIVS has also developed a Chinese speech interactive technology, which forms the foundation for the company's "intelligent" audio and visual systems.

NVIS is an investment play on the increasing popularity of electronic devices and gadgets in China aimed at that nation's fast-growing consumer class. NIVS "represents an extraordinary opportunity as China's rising middle class continues to fuel the country's high-growth electronics industry," says Richard Rappaport, CEO and founder of WestPark Capital, a major stakeholder in NIVS. According to McKinsey Global Institute, the growth in urban China's disposable income is projected to reach $36 trillion by 2025.

During the first nine months of 2010, mobile phones accounted for 29% of NIVS's total sales. "This is a significant revenue ramp since the launch of this business in January of 2010," says Amit Dayal, analyst at investment firm Rodman & Renshaw, who rates the stock as "market outperform-speculative risk." It's indicative, he adds, of the strength in handset sales trends in China. Its partnership with China Telecom, one of China's three largest carriers, has already contributed more than $30 million in revenues in 2010.

Exceeding Forecasts

Dayal says his channel checks show that Chinese telecom carriers are preparing to ramp up their sales and marketing efforts for 3G smartphone services in China in 2011. "This should boost demand for higher-end/feature-rich phones to deliver these services," he says, and it should help boost revenues and profit margins at NIVS.

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In the third quarter, the 61% revenue jump from a year ago, to $84.5 million, exceeded Dayal's forecast of $77.7 million. Earnings, however, lagged the year-ago numbers. But Dayal notes that NIVS's core business is performing well, contributing more than $130 million in revenues over the first nine months of 2010, with gross margins of about 22% to 25%.

For all of 2010, Dayal expects NIVS to report earnings of $23.9 million, or 52 cents a share, on revenues of $315 million vs. 2009's earnings of $23.5 million, or 59 cents a share, on revenues of $185.5 million. For 2011, the analyst predicts earnings of $31.5 million, or 64 cents a share, on revenues of $362.2 million.

Dayal's 12-month price target for the stock, which closed at $2.02 on Feb. 4, is $7 a share. NIVS went public in the U.S. in March 2009 at $3.50 a share. It has since tumbled.

A Victim of Guilt by Association

The fact that NIVS has very little institutional following in the U.S. is one reason behind the drop, after initial post-IPO profit-taking hit the stock. Probably more important, the stock has been hurt by a probe initiated by the Securities and Exchange Commission, announced last November, into reverse mergers by some Chinese companies.

"For sure, some of these Chinese companies are engaging in fraudulent accounting," notes investment research outfit Seeking Alpha in a report by Tyler McKendry. NIVS has been a victim of guilt by association, says McKendry, who views shares of the company as a "high-risk, high-reward investment at an attractive price of $2.16."

Investors, he says, must consider that NIVS has shown "exceptional past performance and has great future prospects." The company also has a concentration of insider ownership and accredited investors who have shown confidence in the firm when they bought shares at a price much higher than the stock's current price, notes McKendry.

NIVS Chief Financial Officer Alex Chen, who joined the company in October 2010, says can't he can't explain why shares of NVIS declined so much, except for the impact of the SEC probe. NVIS isn't under investigation, he adds.

An Enticing Entry Point

Looking forward, Chen says he expects nothing but positive news for NIVS, including continued high sales growth. Chen says the company has tightened its financial controls and improved its auditing system following a recent study by Protiviti, an internal audit and business consulting firm, which recommended steps to improve and streamline financial systems.

Of course, NIVS is just one of many Chinese companies that have started to list their stocks in the U.S. exchanges. It won't be easy sorting out which deserve even a first look. On the other hand, NIVS has earned significant investor attention, assets WestPark Capital's Rappaport, because of its "years of experience in China's electronics industry, strong management team and initiatives in the country's booming cell-phone market."

Indeed, on NIVS's valuation and past performance, as Seeking Alpha's McKendry points out, the stock is selling at an enticing entry level at its depressed price. And with China's apparently huge appetite for all sorts of electronics products, NIVS looks like an electrifying bet.
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