I’ll be the first to admit that this stock never was really on my radar until a couple of days ago.  For quite some time now, it seems like all investment advisors are telling you that Chinese industries are a good place to invest your money.  I don’t know if I completely buy into that thought, but sometimes when trading stocks you have to follow the stampeding herds if you want to make a profit.   After all, volume is a big factor in changing a stock price.  This is why I would consider this play a “momentum” play since I’m expecting a price runup due to increased activity in the stock/sector.

So what does CDII do.  From their website:

We are a U.S. company doing business in China. We acquire controlling interests of Chinese business entities. We are committed to improving the quality and performance of each subsidiaries by providing an array of resources to augment their efficiency and growth. These resources include management advice, investment capital, business development services, strategic planning, internal control, macroeconomic industry analysis, and financial management. Through this ownership control, we provide resources, enabling these subsidiaries to successfully expand their operations.

The buzz around CDII actually arose because of another Chinese company having a very huge week.  China Armco Metals is up over 90% the last two days after announcing they were entering into a $100M contract with a major Chinese Steel producer for 2010.

CNAM 3 month chart (notice the huge run the last 3 days)

How does this impact the price of CDII you say?  Well, if you do your research you will know that CDII has a large holding in CNAM.  A quick look at the institutional holders of CNAM on shows the following:

Date Company Shares Type
31-Dec-08 CHINA DIRECT INDUSTRIES, INC.
Beneficial Owner (10% or more)
1,289,800 Indirect Statement of Ownership N/A

In December of 2008 CDII owned 1.28M shares of CNAM at a value of about $3.5 M ($3.50 per share). This means that the new CNAM price of about $10 per share is going to net them a lot of dough should they choose to sell and lock in some profits.  It is only a matter time that the “herd” notices this connection and begins to load up on shares of CDII.  I’m going to be eagerly awaiting a SEC filing to report the sale of CNAM shares by CDII.  CTeezy is a lot better at math than I am, but just scratching some stuff on paper I came up with the following target for CDII:

  • CDII intial investment of CNAM (approx): $3.5M (about 1.2M shares)
  • Current CNAM stock price: $9.60
  • Current value holidng: 1.2M * $9.60 = $11.52 M (~$8M profit)
  • CDII Current Shares outstanding: 27.63M
  • CDII Current PPS: $1.73
  • CDII Current Market Cap: 47.8M (47.8 / 27.63 = $1.73)
  • CDII Market Cap with estimated gains from CNAM: 47.8M + 8M = $55.8M
  • CDII new PPS: 55.8M / 27.63M shares outstanding = $2.02 per share

To me it just seems like a NO BRAINER that this stock is undervalued by $0.30 right now.  And that is just based on the effects that CNAM has on this stock price.  As a holding company CDII has several other ventures, such as contracts with some European auto makers, as well as commitments to continue growing business in China.  In time I plan on doing more DD on this company to find out just exactly what else they have to offer.  But in the immediate short term I feel confident putting my money here for the almost guaranteed 16% gains that are on the way.