China XD Plastics Company (CXDC – Snapshot Report) is up sharply after a record-setting quarter. Shares are priced at a deep discount though, thanks to several controversies surrounding reverse mergers.

But, if you are looking to take a risk, this stock offers an excellent potential reward.

China XD Plastics Company makes plastic parts primarily for the auto market. The products are used in more than 70 brands including Audi, BMW, Buick and Toyota.

Great Quarter

On August 15 the company said that it second quarter revenue was up more than 42% to $88.2 million. The record-high top line drove gross profit 49% higher to $22 million.

A year ago it had a $3.1 million loss, so this period’s $14.4 million profit was quite a turn around. Earnings per share came in at $0.26, which was a penny better than expected. China XD has topped estimates in each of the past 4 quarters.

Reverse Merger

One important factor to keep in mind is that China XD did go through a reverse merger, which is enough to get most people to stay away. But, with that added risk there should be an added reward if this company pays off.

Good Enough for Morgan Stanley

Also on August 15, CXDC announced a $100 million deal with Morgan Stanley Private Equity Asia. The minority stake in the company will involve redeemable convertible preferred shares.

Estimates Moving Up