Fructivore Investments

You may recall that cheap and Chinese is starting to become a theme on this blog, and today is not an exception. This one, however, has nothing to do with food: it is China Security & Surveillance (CSR), which trades at an exciting P/E ratio of 5.44, although they did pay an unusually low amount of taxes last year, and if China’s statutory rate of 25% were applied it would be around 8. Like our other Chinese companies, this also has a short but very impressive growth history (and presumably one that is hardly sustainable at its present rate).

China Security & Surveillance is in the business of manufacturing, installing, and servicing surveillance products. Unfortunately, much of their sales comes from installations so it is difficult for them to get repeat business. But on the plus side, they are expanding into software and their servicing and maintenance operations. Furthermore, China instituted in 2004 an initiative that required 660 cities in China to have street surveillance, and they are a recommended vendor. Being on a government-approved list is always something you want to hear, but on the other hand they are highly dependent on their local government customers. For what it’s worth they have nearly a $200 million backlog as of the end of the last fiscal year.

Installation represented 3/4 of their total revenue last year. 15% of their income was from manufactured products that were not bundled in with installation.  The firm has a distribution network that covers all of the inhabited regions of China.

Turning to the balance sheet, the company is almost in a net-net situation; their current assets as of their last 10-Q came to $605 million, and their total liabilities were $345 million, producing a current asset value of $265 million. or 74% of the market cap of $356 million. Total shareholders’ equity is $491 million, but $133 million of that is intangible assets and goodwill.

Sadly, they have an offering of 15 million shares that has recently been amended to allow for an oversubscription to a total of 17.25 million. Their historical return on capital has been a reasonable 11.8% last year, but the offering price may well off below their current price of $5.07, and as stated above they have a price/book ratio of less than 1 so the dilution is going to be significant.

On balance, I do think the upside of a cheap Chinese firm that has the government stamp of approval outweighs the risk of an unattractive share offering, and I do think this is another cheap stock with a built in bet on the strengthening of the yuan.

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Investing by grocca