Here is the usual sequence of emotions when shares of Anhui Conch (600585.SH), the cement company that we bought with more than half our fund’s RMB10,000 in early June, fall 10% in a single day, as they have done today and yesterday:

Shock-> questioning -> frustration -> regret for having bought it -> wondering how much money we’ve lost since buying in  -> light amusement -> regret for having held it -> resolve to finally sell it -> unwillingness to cut losses/hope that things will turn around -> frustration -> STRONGER resolve to sell it -> STRONGER unwillingness to let go -> wondering how much money we’ve lost buying in …

Other than that, we’re taking pleasure where we can find it. It looks like last week’s escape from Hubei Guangji Pharmaceutical (000952.SZ) was a good move: it continues to fall, with no sign yet that it’s hit bottom. ICBC (601398.SH) remains, well, ICBC. With the markets tanking as a whole (anyone want to place bets on when the SCI will drop below 2,000?), ICBC has fallen, too, but it’s still only down 17% from our initial purchase. Right now, that’s sounding pretty good.

We started this week making good on last Friday’s vow to sell our 100 shares of Hubei Guangji Pharmaceutical (000952.SZ). We’d watched the riboflavin producer plummet with that familiar whistling free-fall sound that we first heard after buying into a certain cement company based in central China. We bought Hubei Guangji on July 25 at RMB17.00 per share and sold on Monday at RMB9.58 share. That’s a 44% dive in six weeks for those of you keeping score at home. We watched (with no small bit of relish) Guangji continue on its downward trajectory after we jumped ship. It finished the week at RMB8.58.

So, for now, our fund is back to our dynamic duo: Anhui Conch Cement Company (600585.SH) and Industrial and Commercial Bank of China (601398.SH), of which the latter has done less poorly of late, all things considered. After hearing of ICBC’s stellar first half profits and its US expansion plans, we’re fairly convinced that things seem to be rolling along for the lender. Even the ICBC branch near this roader’s apartment has been refurbished over the past few weeks.

Well, we almost did it. We were going to sell flailing riboflavin producer Hubei Guangji Pharmaceutical (000952.SZ) after just over a month in which the stock fell nearly 40%. It was either that or Anhui Conch (600585.SH), which is down a bit more than 46%, but lost most of that in June and July. Unfortunately, as the internal battle played out between our long-term and short-term strategies, we missed the 3 p.m. deadline to place either buy or sell orders – so we’ll have to wait until Monday.

It’s been a relatively good week for the fund. We’re up about 3% over last week, down 33.02% since June 3, slightly worse than the market overall in that time (the SCI is down 30%). Friday was a particularly good day, with Anhui Conch rising almost 4.5%, and even Hubei Guangji up more than 4%. Old faithful ICBC (601398.SH) also rose modestly, and is down just 3.33% from mid-June.

On Monday, we’ll risk cracked lips and a low red-blood-cell count, and get out of riboflavin for good. We figure we can deal with losing around RMB670 on the investment since with a bit of extra cash freed up, we’ll be able to look for some better deals.

Here we go again, though not on our own: It’s safe to say that everyone with money in the mainland markets keeps searching for a rebound, but no one seems to find what they’re looking for.

We’re quite frankly running out of words to describe the state of the markets - “grim” and “dismal”, which sounded so appropriate at first, no longer seem to capture the pervading sense of inevitable doom around A-shares. That’s despite – or perhaps because of – noises from Beijing that the government could step in to prop things up. We noted in the CER Weekly Email Briefing yesterday that half-hearted moves by the government earlier this week only strengthened the sell-off. As trading stops for lunch on Friday, the Shanghai Composite Index (SCI) is down another 2.4%, to around 2,372. Remember when everyone was so sure that the government wouldn’t let the SCI fall below 3,000? Ha.

So how is the fund doing? We’re down 36.9% as of this writing, meaning that the value of our initial RMB10,000 fund has been reduced to RMB6,310. Of course, those are just paper losses (or so we keep telling ourselves) because we still haven’t sold anything. As has been the case, the only good news is that the bad news isn’t getting significantly worse. Anhui Conch (600585.SH) continues to wallow around 52% below the price we bought it, and Hubei Guangji Pharmaceutical (000952.SZ) is still down about 40% - more or less the same as last week. Industrial and Commercial Bank of China (601398.SH) has also been blessedly boring.

So, still no action from us, and we won’t make any forecasts for the coming weeks. We just hope that we don’t keep going down the only road we’ve ever known.

Inauspicious omens for our fund on Olympic opening day. Our initial RMB10,000 investment is now hovering around the 7,000 mark, tethered as it is to the sinking stone of Anhui Conch and the anemic Guangji Pharmaceutical. Anhui has now lost nearly half its value since we scooped it up in early June, and riboflavin producer Guangji is down 25% since we bought it a couple of weeks back.

ICBC, our third stock, continues to stick around at about the level we bought in, which is not bad considering that the Shanghai Composite Index is once again nearing the 17-month low it hit back in mid July. These are grim times, but who’s watching the markets today anyway? All eyes are on Beijing’s National Stadium for tonight at least. Maybe next week we’ll gain the fortitude to make some moves that take us in a positive direction.

The week started off well enough for the fund, but as of noon on Friday, things are once again looking grim. Our purchase last week of Hubei Guangji Pharmaceutical (000952.SZ) nicely encapsulates the kind of volatility we’ve been dealing with. A brief rally on Monday saw it rise 2% from the RMB17.00 we paid for it, but the days since then have seen it fall steadily. When the markets closed on Thursday, Hubei Guangji was trading down 10% from our purchase price, at RMB15.30.

But with the Olympics a week away, we’re not making any moves. Part of that is due to the government’s widely reported warnings to fund managers to avoid saying anything around the Olympics that could harm the stability of the markets. While expecting the government to come to the rescue might be unthinkable in markets like the United States (coughFannieMaecough), the Chinese government has shown before – as with the relaxation of the stamp duty earlier this year – that it can and will intervene in the market to try to preserve a harmonious environment for investors.

We continue to be encumbered by Anhui Conch Cement (600585.SH), now down 35% from June 3. That has helped pull the CRF down more than 21.5% since we entered the market on June 3, which means we are now officially doing worse than the Shanghai Index, down about 20%. But Anhui Conch has fallen so far that we don’t see any point in selling it while it’s so low.

So we’ll continue to wait things out for now. Here’s hoping a smooth Olympics and lots of gold medals will help boost everyone’s optimism.

Call us impatient, but we’ve got a new riboflavin-of-the-month. And no, it’s not that Riboflavin.

Yesterday we bought 100 shares of Hubei Guangji Pharmaceutical at 17.00, our first foray into the Shenzhen market. Guangji is the world’s largest riboflavin supplier by production capacity, with a 90% market share in China, itself one-third of the global market. Also known as vitamin B2, riboflavin is mainly used in animal feed and as a food additive.

For the uninitiated, 2007 was something of a banner year for riboflavin, with prices sky-rocketing and Guangji riding the tide to post a 14-fold sales growth for the year. German chemical-making giant BASF must have noticed and summarily crashed the party by resuming regular riboflavin production in the third quarter of 2007.

Prices have plummeted since, down 70% from their 2007 peak, as of March. Guangji’s shares have dropped from its October high of 48.90 to 17.00, as of Thursday.

Still, Guangji is bullish on B2, announcing earlier this year that it expects net profits in the first half to grow by 170-270%. Not exactly 14-fold, but not too shabby.

Also, Guangji’s P/E ratio is currently at 17.82, lower than the average P/E ratio for others in the pharmaceutical industry, which leads us to hope we nabbed while it’s undervalued.

Another rough week-and-a-bit for the Capitalist Roader Fund, but we’re still not taking any action other than biting our fingernails. Anhui Conch (600585.SH), once hoped to be the foundation of the fund, has been acting more like a pair of cement shoes: it’s now down more than 31% since June 3. We still believe in the company’s fundamentals, but we’re starting to wonder if it might be worth dropping it for now and picking it up again later at what would almost certainly be a lower price. We’ll probably just wait it out, but watch this space.

Our other purchase, Industrial and Commercial Bank of China (ICBC) is down a less-grim 6.47%, meaning we’re out 18.3% for the fund overall. On the bright side, we’re still outperforming the Shanghai index which is down a bit less than 22% since June 3.

The volatility of the markets has meant we’ve seen a couple of encouraging days here and there, but the overall picture has not been bright. China Southern Airlines (600029.SH) is the least-poorly-performing of the stocks we’ve been monitoring closely, but it’s still down more than 5% since July 7, when we started watching. Fortunately, a “five-star” safety award, given to the airline for 169 consecutive months of trouble-free flying, suggests the airline’s fleet is faring better than its share price.

Ultimately, we’re not in a buying mood right now, and a bit of liquidity is always nice – especially with the RMB’s biggest one-day gain in four months coming the day before the CSI 300 officially became the world’s worst-performing index this year.

But we’re not going to be selling our holdings either. We don’t expect to witness huge gains in the current environment anyway, and we think both Anhui Conch and ICBC continue to have potential. Besides, exiting the market would make for a boring fund, so we’ll continue to wait it out.

When you see us Capitalist Roaders rubbing our eyes in disbelief when looking over our portfolio, it’s usually a bad sign. But yesterday, it was eye-rubbing of a different sort.

Anhui Conch (600585.SH) the anchor (in more than one sense) of our fund had its best day for us ever, gaining 7.12%, while ICBC (601398.SH) rose by a solid 3.54%.

Yet one stock we’ve been watching for the past few weeks, China Southern Airlines (CSA) (600029.SH) did even better, maxing out with a 10% gain before lunchtime. CSA was not alone. All five listed carriers were big winners, jumping 10%, the highest one-day gains allowed for domestic stocks. According to Bloomberg, investors got all excited over the prospects that restrictions on mainland-Taiwan flights, launched last week, would be eased further.

We’ve been eyeing an airline play for precisely this reason. Mainland tourists are hungry for new travel destinations, and cross-Strait flights are milk runs with steep ticket prices. From an earlier Bloomberg report:

“Nonstop flights between the mainland and Taiwan will be very profitable, if they can be flown direct,” said Li Lei, an analyst at China Securities Co. in Beijing. “The fare for the flights is international, while the distance is domestic.”

Also, last week China’s airlines got approval to bump up fuel surcharges on tickets by up to 50%, another tidy sum for them. And though global fuel prices are hammering the profitability of airlines all over, Beijing’s price controls on fuel - a recent 25% hike notwithstanding - may still put China’s airlines in better shape as they compete with international carriers for flights in and out of the country.

But still, we have cold feet. CSA has dropped 72% in Shanghai since last year’s high, making it the second-worst performer in the CSI 300 Index. We’ll give a copy of July’s CER to the first person who can name the biggest loser (and it’s not Anhui Conch).

But a more troubling issue is trying to choose from among China’s carriers when their shares perform so similarly and they are largely affected by the same market phenomena and regulations. Not helping our decision-making confidence is CSA’s chairman, Liu Shaoyong saying he doesn’t expect a recovery of the global airline industry until the third quarter 2009.

But then again…

“Chinese airlines shares are very attractive” following the sell-off, said Martin Wang, an analyst at Guotai Junan Securities Co. in Hong Kong. “They are relatively undervalued compared to other international carriers, but the growth potential is there for the next three to five years.”

Quid pro quo.

So, we’re putting CSA on our watch list to see what pans out in the short term with the Taiwan flights. A few more days like yesterday, though, and we find our Roader spine a bit firmer and take action.

Even Capitalist Roaders need a break - we’ve decided against any action this week. Although Anhui Conch (600585.SH) has fallen 29% since we bought it on June 3, we’re not planning to unload it just yet. Both it and ICBC (601398.SH), currently down 1.6% from since June 18, were meant as longer-term buys.

And although the SCI ended Thursday at 2,901.85 points, 5% up from Monday’s close, we’re not really in a buying mood either. However, and perhaps surprisingly given this earlier post, we’re adding a new company to our watch list: Huaneng Power (600011.SH).

The major news for power producers like Huaneng this month was, of course, the announcement that the government would hike retail tariffs by just under 5% (4.7%, to be exact). In the earlier blog post, I argued the effect of this on power producers like Huaneng would be small, based largely on the grid’s historical reluctance to increase on-grid tariffs.

However, a new report by China Merchants Securities notes that the on-grid tariff will in fact be increased by RMB 0.02/ kilowatt-hours (kWh). Given Huaneng’s planned power generation in 2008 of 200 billion kWh, that means a potential increase in revenue of RMB2 billion (US$290 million), about 3% of the company’s predicted 2008 revenues. As a result, China Merchants Securities is maintaining its rating of “prudently recommended.”

Furthermore, Huaneng isn’t putting all its eggs in the China basket, and even within China it’s hedging against future coal-price increases. A recent purchase of Singaporean power producer Tuas was followed by an acquisition of another Singaporean power firm, SinoSing. And the company has also invested RMB1.4 billion (US$204 million) in a Chongqing coal mine, with total recoverable reserves 125.13 million tons, to ensure a reliable supply of coal for its plants.

While we’re not quite ready to jump in yet, we think that Huaneng is one to watch.