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Aggressive Growth

Bill Wilton

China XD Plastics

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China XD Plastics Company is up sharply after a record-setting quarter. Shares are priced at a deep discount though, thanks to several controversies surrounding reverse mergers.

But, if you are looking to take a risk, this stock offers an excellent potential reward.

Company Description

China XD Plastics Company makes plastic parts primarily for the auto market. The products are used in over 70 brands including Audi, BMW, Buick and Toyota.

Great Quarter

On Aug 15 the company said that it second quarter revenue was up more than 42% to $88.2 million. The record-high top line drove gross profit 49% higher to $22 million.

A year ago the company had a $3.1 million loss, so this period's $14.4 million profit was quite a turn around. Earnings per share came in at $0.26, which was a penny better than expected. China XD has topped estimates in each of the past 4 quarters.

Reverse Merger

One important factor to keep in mind is that China XD did go through a reverse merger, which is enough to get most people to stay away. But, with that added risk there should be an added reward if this company pays off.

Good Enough for Morgan Stanley

Also on Aug 15, the company announced a $100 million deal with Morgan Stanley Private Equity Asia. The minority stake in the company will involve redeemable convertible preferred shares.

Estimates Moving Up

Analyst coverage is on the lighter side, but full-year estimates are on the move. This year's Zacks Consensus Estimate is up 6 cents, to $1.06 in the past month. The 2012 average projection is up 31 cents, to $1.49.

If those levels are met the growth rates will be 10% and 41%, respectively.

Valuations

Because of the controversy involving accounting practices amongst many Chinese companies, just about every stock in the area is priced with extremely cheap valuations. China XD is no exception.

CXDC is trading at less than 5 times forward estimates, which leaves it PEG ratio at just 0.2. The price to sales is coming in around 0.8 times.

The Chart

Shares of CXDC popped on the earnings news and given the valuations, there is still plenty of upside. If you are willing to take a risk on a Chinese company, this Zacks #1 Rank (Strong Buy) is a good candidate.

China XD Plastics Company   - ticker CXDC>
 
 
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Bill Wilton is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Small Cap Trader service

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