“Government Ordinance 458: Guaranteed Profits”

By Travis Johnson, Stock Gumshoe, September 18, 2007

That’s the way this teaser begins: “Government Ordinance 458 Guarantees Your Profits on the New “General Electric” of China”

This is an ad not for a subscription, but for a special report from Michael Lombardi (who writes the free newsletter Profit Confidential) — the special report costs $95. I don’t see these very often, probably because most people would prefer to pay for an ongoing service that holds their hands through investment decisions, and because publishers are also quite keen on ongoing annual revenue and automatic credit card renewals.

But still — $95 is quite a price to pay for a single report … one hopes that there’s more to it than just the name of the company. After all, the Gumshoe is fixin’ to figger’ out the name of that company for you, gratis.

So …. what do we learn from the teaser?

We learn that “Ordinance 458” in China is going to benefit this particular company.

The ad compares this company with General Electric, which is clearly a bit of a stretch no matter what the company is, but it does make an interesting point: They claim that GE didn’t really become a huge success until the government mandated the use of electric streetlights as a replacement for gaslights.

I have no idea whether or not that’s true — my knowledge of GE history only goes back about to the time they built my toaster oven. But it’s an interesting point: It’s certainly true that rapid changes in demand for a particular product can be caused by government mandate.

Whether that’s good or bad, I’ll leave for the libertarians and liberals to argue over …. that’s not the Gumshoe’s turf (though I’ve probably got a few doses of both those L words in my bloodstream).

Anyway … we’ve got a teaser to solve here, let’s get moving. He also compares this to being in on the ground floor of several other industries, investing in Ford at the beginning of the auto industry, RCA at the beginning of radio, Zenith at the launch of the television, IBM for computers, etc. etc.

We get it, if we had a time machine we’d be really, really rich. He didn’t mention what it would have been like to invest in one of the other several hundred car companies of the first half of this century, or Digital Equipment instead of IBM … well, you get the idea. And that probably reinforces the point: You need to be in the right company sometimes to get the benefit of a huge new industry, we often look back with what they call “survivor bias” and forget about all of the failed, bankrupt and long gone companies that contributed to building a new industry.

But back to the point, Lombardi thinks he’s got just the company for you.

“It’s a once-in-a-lifetime opportunity to invest in a company that makes products that the Chinese government requires businesses to purchase!”

This is some kind of video surveillance company, because they note that this Ordinance 458 requires cafes and entertainment centers and discos, etc. etc., to install video surveillance equipment.

And specifically, the teaser indicates that those businesses that are in Shenzen (the big city just across the border from Hong Kong) will be required to buy from this particular company … and immediately.

“Just like Edison’s GE, the government has enacted a law that requires businesses to purchase a certain type of equipment. That’s important because they’re mandated to purchase it from this company.”

And just to interject here — I didn’t see any evidence in my brief sleuthing exercise that this is true, that the government is specifically directing people to buy from this particular company. It could be so, but I certainly can’t confirm that.

The teaser notes that there are “more than 2 million” entertainment halls that will need to purchase this video equipment.

And, another bit that seems to me to be a bit of extra hyperbole:

“This company’s success (and possibly your profits!) is guaranteed by the Chinese government.”

I always get nervous when people talk about anything being guaranteed. That’s a pretty strong word, no? I think my palms would have stayed drier had he said that the Chinese government’s policies make success more likely for this company … but that doesn’t make you want to throw children and dogs out of your way as you rush to the phone to call your broker, does it?

Anyway, there’s more:

“The Chinese government recently passed another ordinance that requires surveillance equipment to be installed in coal mines, justice departments, and cities throughout China.”

And there’s some more similar regulation that might help this firm — requirements that retailers in Xi’an need to install equipment, and so on. Essentially, we’re told that this is the first swell of a series of massive waves that will crash across China, all of them throwing massive wads of cash into the pockets of this company as the big brother surveillance state is built in earnest. The market should be $33 billion for this stuff in China, according to our author, and the Beijing Olympics and the Shanghai World’s Fair will be yet further spurs for demand.

Whether or not you think all that surveillance is a swell idea, I think we can stipulate that the Chinese market is potentially massive for this kind of product, as for so many others, and anyone who invests in China does so with a little bit of a blind eye to human rights and individual liberty — which certainly sits better with some investors than other.

We’re not here to judge, however, we’re here to find out the name of this company so you can check it out for yourself, no $95 required. If you do want to read more about the bigger picture, there was a good article in the NY Times about a week ago which also names this company and one or two of their competitors, and talks about the revolving door with these companies and government officials.

And then we get to the only really specific clues for our teaser:

“In the last year alone, this phenomenal company’s revenue exploded 106% — even before the Chinese government ordered its products as “must-buys.”

And they had a “recent financing” of some sort.

So, if you’re really interested in reading all about this I suppose you could order up the special report from Lombardi, “Guaranteed Profits from the New General Electric of China.”

Or, thanks to the quick thinking of one of the Gumshoe’s readers, Louis Sodones (and some research to confirm by the Gumshoe, of course), we can tell you that this company is …

China Security and Surveillance Technology (CSCT, trades over the counter)

This company has also been approved for a NYSE listing, I think, it looks like all they need to go is get a good independent-ish board in place first.

And it’s tough to be absolutely certain about this one, since the 106% “explosion” in revenue was actually from 2005 to 2006, if I read this correctly … so this report might not be quite as fresh as you would like. Recent year over year sales have been significantly higher than that, well over a 500% increase.

This is an acquisitive company that has indeed built a pretty big firm in surveillance equipment, and their claims to future success rest on a few things: Close relationships with the government, which is of course important for virtually every Chinese company; the expansion of required surveillance installations, of which I agree it seems likely they’d get a good share; and vertical integration (they manufacture and sell and install whole systems), which apparently is not the norm in this sector in China, so they feel that gives them a competitive advantage.

But everything I’ve seen says that although these systems are being pilot-tested throughout China in various cities and towns through what they call the “Plan 3111” system.

What’s that you say? Don’t know about Plan 3111? The Gumshoe provides:

This is a quote from the company’s presentation at a Roth conference last Winter:

“What is the 3111 initiative? First of all, it is actually a testing phase for monitoring and reporting. 3 meaning province, city, county or municipals, and 111 meaning each province will select a city, each city will select a county, and each county will select a small district for testing of pilot projects. Last year about 22 cities were selected. We actually got about 13 of them and once successful the government will actually conduct a nation-wide roll-out plan.”

So … they got a bit over half of the pilot projects, which is good but doesn’t necessarily mean that the government is mandating that this particular company’s products be used.

So that’s my biggest concern about these guys: I don’t know that there’s anything so unique about this company’s products that they will be the only ones to benefit — you can bet that since this is China there’s going to be massive competition pouring into this relatively new space now that demand is being stoked, and I assume that individual Chinese shopowners, just like most Chinese consumers, are going to be extremely price-sensitive and savvy customers (though the government might be an easier sell).

It could be that CSCT is big enough, and has acquired a strong enough foothold, that they’ll be able to build on their big market share … it might even be likely. But I’d really hesitate to use that “guaranteed” word. And from what I’ve seen of this ordinance, this is all still pilot programs and testing, with certainly a lot of test sites but no national decree that everyone has to install surveillance just yet (though I wouldn’t be surprised if this does become a national policy at some point — and it’s possible that it has and I’ve missed it).

As usual, the Gumshoe is not going to tell you what to do: I don’t get paid enough to take responsibility for your mistakes, and you’re too wise to give me credit for your successes. I’d just say that from my limited research, it looks like an interesting company but the price seems fairly steep to me if, as I’m guessing, there is likely to be significant competition that might bring margins down. I don’t know whether the NYSE listing when it comes will result in another pop to the price when more investors will hear about them and institutions become able to buy in, or if that is already baked into the shares — they’ve had a really nice run to close out this summer. You could have had shares for as low as $13 or so in June, and they’ve now run up to about $22.

The company is trying quite hard to court US investors ahead of their big board listing — you can see some interesting Q&A sessions and transcripts, as well as the opinions of a few bloggers about the company (mostly pretty enthusiastic), over at Seeking Alpha. If you like what you see in CSCT, let us know. I am a believer in China investing in general, and hold several china stocks and funds (including the A shares CEF that I just re-bought today), but I don’t own shares of this particular company and I’m unlikely to buy them in the near future.

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5 Comments on "“Government Ordinance 458: Guaranteed Profits”"

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Anonymous
September 19, 2007 2:32 pm

Your comment about GE is quite sad, because it highlights how much industrial America has changed. The history of GE is one of the most fascinating and largely unknown stories of engineering and marketing excellence in the Twentieth Century. Together with the now defunct Westinghouse, GE was THE major cause of the electrification of this country and the world.

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Anonymous
September 19, 2007 4:07 pm

I remember a friend who had his entire stock account in GE. He sang its praises when its price was over $50 per share. That was 7 years ago. I was skeptical due to his lack of diversification. He doesnt speak to me anymore.

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Anonymous
September 19, 2007 6:39 pm
As someone who provides information to women investors, I always include the ethical considerations involved in companies. I think Enron, etc. showed that it is wise financially to do so. So there are some serious ethical considerations in this Chinese security company, which were covered in an article in the New York Times today: China’s Hot Stock: Orwell Inc.By Harold MeyersonWednesday, September 19, 2007; Page A23 The American economy may be teetering on the brink of a recession, but there’s an industry our hedge fund gurus believe has an almost limitless future: the Chinese police state. In a stunning report… Read more »
wolfi
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September 15, 2008 7:03 am

Have you checked this one out? Keep up the good work!!

Stacy Morse
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January 8, 2009 3:46 pm

hi
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good luck

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