Are Concerns Back In China New Borun?... Chart Neutrality (BORN)

China is supposed to be the land of opportunity for companies banking on the growth of the Chinese consumer marketplace.  If more prosperity is coming to a large portion of well over one billion people, Western logic would dictate that there is going to be more eating and drinking.  China New Borun Corporation (NYSE: BORN) fits right in here on the surface.

The company produces and distributes corn-based edible alcohol in China and it is primarily selling its production as an ingredient to producers of baijiu, a grain based alcoholic beverage that has become more popular in China.  The biggest problem in China today for American investors is that there is no way to know which companies are really doing exactly what they say and doing it as well as they claim.  We have argued that the highest form of free speech in China is held by CEO and CFO positions at public companies because there have been so many made up financial figures.
 
China New Borun shares were gutted over the last year as the stock fell from about $14 down to about $3 per share in the fourth quarter.  The good news is that the stock bottomed out.  Then in January came the news that not only was business going well, but that it signed pre-sales contracts worth about 90% of its total 2012 production capacity.

The production news created a two-day from $3.35 after a period low volume to $4.47 on higher volume.  The volume has remained above the recent average of late and shares have since traded as high as almost $4.90.  While U.S. stocks are holding strong and while the iShares FTSE China 25 Index Fund (NYSE: FXI) has risen in the last two weeks, China New Borun has not.  China New Borun has even tried to challenge the $4.00 handle by breaching it in two of the last three trading sessions.

The stock options are just too far apart in strike prices to be of any use at all, so we are going to just focus on the chart.  The stock chart brought by stockcharts.com is currently nestled in between the longer-term 50-day ($3.78) and 200-day ($4.86) moving averages.

Can you use a chart on a Chinese stock when there are concerns over the legitimacy of any of the country’s financial statements in public companies?  We have no reason to believe that China New Borun is doing anything wrong with its books.  We are taking it at face value that 90% of its production is already booked.  But we also have to acknowledge that you could go fly to Shouguang in China and show up at the company to get a clean look at the books and you’d still probably have to just trust what the company claims.

If the few analysts who make predictions on earnings and sales are correct, then this stock trades at barely two-times projected earnings.  Again, if…  The analysts that covered it before broader concerns about China’s public companies got burned.  It looks as though earnings are compressing and revenue growth is maturing.  After such a dramatic share price drop, that is frankly expected.

The company also recently made two internal promotions as the CFO moved to the Chief Strategy Officer and the VP  of Finance moved up to the CFO position.

The recent downside is a concern.  No doubt about it.  Hopefully it is just profit taking after a big short-term gain.  Still, a pure chart review does not  give any answers either way today.

JON C. OGG