That’s not to say there aren’t stocks with that type of potential residing in China — in fact, someone asked an unrelated, but an interesting, question on picking small-cap stocks in China:

“How would you go about picking small-cap stocks in China?”

So this got me thinking — let’s say I took the analysis I began in my article from last week, and went a step further and tried to identify some small cap plays in China using a similar strategy.

My approach to the market, and this sector in particular, has always been to take a top-down approach. I try to find the strongest companies, in the fastest growing sector of the hottest markets. So let’s apply that thinking here…

The “hot” market is China and one of the fastest growing sectors is wireless technology. And now we’ll add some market capitalization requirements — let’s say that we’ll be examining wireless companies that are trading under a $500 million market cap.

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Immediately, three companies show up on my radar:

• China TechFaith Wireless (CNTF: NASDAQ)
• Qiao Xing Mobile Communication (QXM: NYSE)
• Orsus Xelent Technologies (ORS: AMEX)

China TechFaith designs and manufactures mobile handsets for the Chinese market and abroad. They’ve had a rough go of it for the last two years, but the last 12 months have treated the company well.

Next we have Qiao Xing Mobile, which also produces wireless handsets and has done very well over the last 12 months. However, the company has had a recent hiccup in the stock that has brought prices down a bit.

And finally we have Orsus, which produces more multimedia-oriented phones for the Chinese mobile market.

So now the question is, how do we narrow these down so we can find the strongest company out of the three?

Let’s start by setting up some basic criteria:

1. Since we don’t want to fish in a pond where the fish might be dirty, we’ll limit ourselves to a market cap of over $100 million.
2. Because I’m a value-oriented investor, I want to make sure the fundamentals are sound in any company I invest in. So, the next criterion we’ll setup is that the company has to be profitable for the last three years.
3. And finally we’ll want to make sure we’re investing in a company that has had some solid momentum behind it — so we’ll only look at the best performers for the last 12 months.

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So here goes…

The best performers over the last 12 months, in order are: China TechFaith, Qiao Xing and Orsus. The only two companies that have been profitable for the last three years were Orsus and Qiao Xing. And since Orsus’ market cap is below $100 million, Qiao Xing is the only company that meets all of our criteria:

If you take a look at a chart of QXM you’ll see that the stock is down almost 15% in the last few weeks on a disappointing fourth quarter (even though they beat expectations). To me, it’s a temporary blip on the radar and it might be smart to buy on weakness here for the long term.

Click here to check out some other short-term China plays or to share some of your own.

Until next time,
Wayne Mulligan

P.S.: Penny Stock Fortunes editors Greg Guenthner and Jim Nelson recently recommended a tiny Chinese pharmaceutical company that is set to become the clear industry leader. So far, it’s paid off. In exactly one month, it’s up 45% for their readers. No worries though… If you check out this report today, you still have time to catch their latest two picks, which are due out any minute now…

Source: How to Pick Small-Caps in China

Why U.S. automakers can’t import smartly designed, well-made little cars that get 50 miles per gallon into the United States is absolutely beyond my comprehension.

Particularly because they already make those cars, and because oil prices (as well as gasoline prices) are destined to move even higher from here.

If you don’t believe me, let me tell you about the little beauties I saw in downtown Shanghai early one recent morning.

They’re made by Buick – a General Motors Corp. (GM) nameplate that’s on its way to extinction in its home U.S. market.

Here in China, on the other hand, Buick is a luxury car of choice. Buick’s also known for making sporty “econo-boxes” that offer a little bit of zip.

Ford Motor Co. (F), too, seems to have gotten back to its once-successful roots by “bringing a better idea” to the Chinese market. It’s not a luxury car, but it does demonstrate some global thinking. The car I’m referring to is the Ford Focus, a “world car” designed so that a common chassis can be adapted for virtually every key market around the world. The car started out as the “Euro Focus,” so it was imbued with a sporty, sophisticated design and image right from the starting line. And it shows – it gets very high marks from Chinese buyers.

But it, too, remains “unavailable” in the U.S. market – at least the sporty designs that I’m seeing here [although our crack Money Morning research team back in the States did some digging and were able to tell me that the Focus could debut in the U.S. market by 2010 or 2011]. European competitors such as Germany’s Volkswagen AG (OTC: VLKAY), and France’s PSA Peugeot Citroen SA, with its Citroen and Peugeot nameplates, both, also are clamoring for share on Chinese streets.

There’s a good reason for all this interest: Here in China, auto sales are growing by 15% to 20% a year, with no signs of slowing down. Where as this used to be bicycle heaven, it’s now bicycle hell.

Much of that torrid growth is being “driven” by locals who are buying their first cars. But, believe it or not, rental-fleet operators are becoming more-frequent customers, especially in such major cities as Shanghai and Beijing, and in Hong Kong, one of the two “special administrative regions” in the People’s Republic of China.

And “rental fever” is reflected in the emergence and fast growth of such companies as the Anji Rental and Leasing Co Ltd., which expects profits to soar beyond its usual 50% growth rate in 2008 and revenue to exceed the normal 25% to 30% rate the company consistently has been booking in recent years.

Much of that recent acceleration in sales and profits, according to company representatives, is being fueled by the looming Summer Olympic Games in Beijing. But Anji – a joint venture between Shanghai Automotive Industry Sales Co. Ltd., and Avis Europe PLC, expects this higher-than-normal business volume to continue after the Olympic games, because of the World Expo to be held in Shanghai in 2010.

To prepare for this, Anji is opening offices all over China, including locations at Beijing’s International Airport and at both of Shanghai’s airports. The rental firm is also taking steps to align itself with Avis’ globally available services, including – for the first time ever – enabling foreigners to reserve cars before arriving in China.

And in China’s red-hot competitive markets, companies like Hertz Global Holdings Inc. (HTZ), Bole International Car Rental, RuiJie Auto Rental and ShangCar are right behind them – pun absolutely intended.

Unfortunately, both the auto-manufacturing and car-rental businesses remain small and highly fragmented, meaning there is no clear pathway to profit – not yet, anyway.

But there is an alternative.

Many cars here lack critical safety features that are standard in both Europe and North and South America. Take air bags. Here in China, less than 60% of the cars come equipped with them. But as demand for cars and trucks continues to grow, consumers will become more informed about safety features.

The upshot: Beijing is expected to mandate higher automobile-safety requirements that fall in line with international standards within five years. That means that companies that have already started incorporating global safety requirements into their daily business operations have given themselves a real competitive advantage – both here in China, and in the growing global markets that even include the United States.

Our tour group just met with the top two executives – the chief executive officer and the chief financial officer – of one such company: Jinheng Automotive Safety Technology Holding Ltd. (HK: 8293).

If you’ve never heard of the company, don’t worry. You probably will in the near future.

Jinheng is the leading automotive safety airbag supplier in China, and will likely become a global force in the very near future.

The company already makes products used in more than 60 different vehicle models produced by 30 different manufacturers in China, the Middle East and Europe. And the company is growing rapidly, with the expectation that it will be adding new international customers this year.

Jinheng’s shares are trading at a compelling eight times earnings, right now, and is arguably undervalued. Furthermore, the company has fulfilled the requirements needed to advance from Hong Kong’s secondary board (exchange), to the larger and more prestigious main board.

When that happens, expect the company’s visibility to increase, making it much easier to attract large blocks of capital it can then use to finance its global aspirations.

And stay tuned … as this Money Morning series continues, we’ll have many more such “on-the-ground” observations to bring your way. And we continue to believe that China will be a key to any investor’s ultimate success.

["The View From China" is an investing travelogue chronicling Investment Director Keith Fitz-Gerald’s current journey through Mainland China. Next up: A look at how China has played a key role in causing worldwide energy prices to increase.]