Monday, November 30th, 2009
Secure Profits with China Security & Surveillance
Free Special Report: Top Value Stocks for Q2 2010
China Security & Surveillance Technologies Inc. (CSR) may not be the most well-known stock in the booming Shanghai marketplace, but its deep discount to intrinsic value could make it a compelling value play for savvy investors.
China Security & Surveillance builds, installs and services surveillance and safety products and related software in China. The company’s customers are primarily commercial entities, such as airports and hotels, as well as government entities, like courts and prisons. These customers are served through a network of 140 branch offices that cover the majority of China’s mainland.
Last quarter, China Security & Surveillance reported net income that jumped 140.4% to $22 million on revenues that jumped 34% to $159.82 million. The growth was primarily attributed to growth in the surveillance market in China and increased brand recognition from the acquisition of DIT and Coson in the fourth quarter of 2008 and the first quarter of 2009, respectively.
China Security & Surveillance also began generating cash from operations of about $15.9 million versus a loss during the comparable period in 2008. Combined with cash flows from other areas, this led to a $55.14 million increase in cash to $100.98 million for the period. These results support its income statement and show considerable strength.
Going forward, China Security & Surveillance continues to see strong demand due in part to several programs and regulatory drivers initiated by the Chinese government in 2006 and the 2008 economic stimulus package. In 2006, the government mandated that security systems be installed city-wide that are still being implemented and are now funded by China’s enormous $586 billion stimulus package that has been extended through 2010.
Currently, China Security & Surveillance trades at just about 7.3x its trailing 12-months of earnings of $0.83 per share. Considering that it earned some $0.46 during the last quarter alone, three analysts covering the company estimate full-year earnings of $1.67 per share. This level would imply a price-earnings multiple of just 3.65x with 50%+ annual sales growth (albeit, some due to acquisitions rather than organic growth).
Previously, the discount in CSR’s stock price could be explained by its debt and non-GAAP reporting. However, this debt has recently been restructured, the company now reports in GAAP-only, and its upcoming E-City project shows great promise and could provide a catalyst. One of the only downsides is about 1.2 million warrants exercisable at an average price of $9.81/share.
The Takeaway…
- China Security & Surveillance has seen its revenues and net income consistently grow, with cash flow increases confirming that the growth is real.
- CSR trades at a discounted valuation of 7.3x historical earnings, and less than 4x projected earnings, despite strong top and bottom line growth.
- The key reasons for the discount have been resolved, with the majority of its debt having been restructured and only warrants remaining.
Written by Rick Telfur
