Alluring Chinese Growth Stocks

John Wong, CFA, CPA, Portfolio Manager, Oberweis China Fund, Oberweis Asset Management, Inc.

John Wong: Oberweis focuses on small-cap growth companies. We believe many stocks in the small-cap space are mispriced, especially in Asia and China, because so many of these companies are not widely followed. And key events can have a major impact on the company's future earnings. So what I do is to identify such companies through bottom-up fundamental research coupled with an understanding of macro events and policies implemented in China.

Wally Forbes: Are these companies' stocks available in ADRs and do they have reasonable trading volume in them?

Wong: Yes, there are many Chinese companies that are listed in the U.S. Many are technology companies, internet companies, and these are the business areas that we are positive on. One sector we are very positive on is e-commerce in China. We believe that e-commerce which has become very popular, is going to grow very strongly in the next few years. We have identified and invested in a number of e-commerce-related companies.

Forbes: You can buy them without problems of supply and demand for the stocks?

Wong: Yes. Most of them have reasonable trading volume on a daily basis.

So we believe, and our experiences have shown, that investing in many of these smaller companies in the early stages of their life cycles will lead to a better performance over time — especially in the growing economies like China. Unlike other China funds, which focus more on the blue-chip, large-cap companies, our fund focuses on the smaller, emerging companies — and that has served us well in the last couple of years. And we think that, as the economy in China continues to change, investing in such companies will provide better returns.

On the macro side, we continue to be optimistic about the economic outlook in China this year, and over the next couple of years. While we believe that there will be short-term challenges as the new leaderships that took their seats last year implement reform policies to rebalance the country's economy, if investors have a longer-term outlook, they will benefit from the changes that are going on in China. We think that going forward it's more important to look at the quality of growth than the absolute growth in China.

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Forbes: Very good. Maybe you can name some of the ones that you think are attractive at this time?

Wong: A couple of companies that we have invested in that we think will continue to do well are in the e-commerce and technology space in China. One of them that we have invested in and we are positive on is a company called 500.com (NASDAQ: WBAI).

This is a leading online lottery service provider in China. They have 12 years of operating experience. The company currently distributes sports lottery products. This is one of the few companies that have the licenses to operate sports lottery. The company reported very strong fourth quarter earnings just last week. Q4 revenue grew by more than 130% year-over-year.

Forbes: Wow.

Wong: Of course, it is coming from a low base. The company is relatively small. But we think that it will continue to grow. It has about $122 million of net cash, which is about $3.68 per share. The World Cup soccer competition will be held in Brazil this year so we think there will be more interest in online betting in China, and we believe 500.com will benefit.

Another company that we like and is more geared towards e-commerce is called 21Vianet (NASDAQ: VNET). This is the largest carrier-neutral Internet data center in China. It hosts customer servers and networking equipment and provides the interconnectivity for customers. Basically, this is the backbone of Internet in China. As e-commerce grows, there will be more demand for infrastructures, and more demand for such service. The market cap is $1.5 billion.

We have been an investor in this company for the last three years and we continue to be bullish on it. I'm sure you heard and read about the big online sales day in China, which is on November 11th every year. They call it the Singles' Day sales.