Ninetowns, One Lesson

Investors chasing China's red-hot economic growth should heed the moral of Ninetowns' (Nasdaq: NINE  ) story. A year ago, the software company was poised to be the next great Chinese growth stock. I bought in, tantalized by the possibilities of the provider of import/export software.

If you wanted to move goods in and out of China, Ninetowns was the preferred middleman. Then the government decided to open up the process. Ninetowns had to supplement its premium iDeclare enterprise software with a free iProcess package that cost-conscious importers and exporters turned to instead. In an attempt to make lemonade out of lemons, Ninetowns decided to broaden its offerings to become what it called a "one-stop international trade service provider," but the reality hasn't played out that way.

Last night, the company posted soft second-quarter numbers. Net revenues fell by 38% to hit $5 million. Profits were more than halved to $0.06 a share. Thankfully, Ninetowns has a cash-rich balance sheet. The company has the equivalent of more than $3 a share in cash. As long as Ninetowns remains profitable, the downside appears limited, with the company's stock trading just below the $5 mark. However, the catalysts to propel the shares higher aren't there, either. For now, Ninetowns will likely be stuck in neutral -- and that's not what growth investors are looking for when they buy into China.

Ninetowns never made the cut in our Motley Fool stock newsletters, but other companies have. Online gaming specialist NetEase (Nasdaq: NTES  ) and Shanda Interactive (Nasdaq: SNDA  ) were singled out to Motley Fool Rule Breakers subscribers towards the end of 2004. Tom Online (Nasdaq: TOMO  ) and SINA (Nasdaq: SINA  ) have made the cut as active recommendations for Motley Fool Stock Advisor newsletter readers.

They haven't all been smooth rides. Shanda and SINA have had their share of hiccups, but they have yet to face the model-smashing circumstances that Ninetowns has had to deal with in enterprise software.

If you're patient, Ninetowns may make an intriguing value play with an exotic mailing address. If you're not, there are plenty of more public companies bidding for your attention in the world's most populated country.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. T he Fool has a disclosure policy.