“Billion Dollar China SSE to Own RIGHT NOW” Bill Mann

This is part of an ad that we’ve looked at before in slightly different form — the other “Billion Dollar SSE” we looked at was General Steel Holdings back in July.

What the folks at the Motley Fool’s Global Gains newsletter mean when they call something a “SSE” is a “state sponsored entrepreneur” or “state sponsored enterprise” — that’s a term they use for something inbetween the tiny mom-and-pop firms in China, and the huge state-owned companies. These are midsize companies, though many are really small caps in the context of the US stock market, and they usually have good connections to the government but are privately owned and managed by entrepreneurial founders.

In general, I like the theory — these are the companies I am most comfortable with in China, too, though they are certainly not guaranteed successes. And I have some financial interest in a few of them (though not the main one covered here today). Small companies that are either consolidating industries or growing organically in a huge market are usually more compelling for me than are large companies that are owned by the government and may have other priorities beyond growing shareholder value (or a big overhang of shares if the government decides to sell). Not always true, of course, that’s just my general feeling.

So what is this latest teaser company from Bill Mann at the Motley Fool? Here’s a taste of what they’re selling …

“You may have heard that companies like General Electric and Honeywell are making a big splash in China. Well, here’s something unusual we picked up in our discussions with local entrepreneurs. These heavy hitters are, in fact, landing high-profile contracts in Beijing and Shanghai. But mainly because the State wants to play nice with deep-pocketed foreign companies and governments.

“… lucrative deals are going to China’s best and brightest sons — as part of Beijing’s plan to, as my colleague Bill Mann calls it, ‘microwave the process’ of jump-starting its ‘industrial revolution.’”

So this particular company is one that they say has “quickly emerged as China’s clear leader in security technology, system installation and monitoring, and total security solutions.”

Some details?

“In recent months, the company snagged coveted, lucrative contracts to install camera, alarm, and response systems in Jining (a $114 million win) and Yinchuan (a $27 million win) under Beijing’s “Safe City” mandate.

“Meanwhile, private sector customers, from hotels to banks and factories, are implementing its custom solutions. And thanks to State Ordinance 458 — which essentially mandates that they do so — even small restaurants, bars, and discos are getting on board….

“Don’t forget, China’s relentless growth demands a steady flow of new factories, city streets, government buildings, airports, and shopping malls to be fitted with state-of-the-art surveillance and security systems….

“In short, Beijing’s “Safe City” initiative puts millions of existing businesses on the block throughout China for retrofitting and security upgrades. And this remarkable company is uniquely positioned to cash in.”

Not bad, eh? State mandates are a nice way to make money in China, especially if governments are also making deals with the firm, so perhaps there’s some potential.

They make a guess as to the future gains from this company, too, and they are in the style of Goldilocks — not too crazy to be unbelievable, not so low that you’ll ignore them … “Bill Mann is convinced that the company could approach $1 billion in sales in five years. Given a reasonable multiple, that earns us anywhere from 17.5% to 27% annualized returns.”

There’s quite a bit more here in this teaser, too, but that’s the meat of it — if you read up on it yourself you’ll find that he talks about the possibility for foreign expansion (the CFO apparently recently visited Dubai), and the potential for increasing margins by outsourcing their manufacturing, among other possible futures.

But since you’re here with the friendly Gumshoe, who remains friendly even though he’s been torn away from his vacation to be back here with you today, you probably want the name of this company, no?

Indeed.

Well, I spun this around in the Thinkolator a few times, and I can tell you that this firm is certainly …

China Security and Surveillance Technology (CSR)

And it is all those things Bill Mann believes it to be — an entrepreneurial company, with impressive margins, in a growing industry that is a focus of the government. They design video surveillance, among other things, and help the Chinese keep the streets, malls, and such safe … as well, one assumes, as helping them keep an eye on their population. And perhaps any impetuous reporters. Or worse, protesters.

You can make your own judgment calls about surveillance, of course — I’m sure there’s a good argument to be made for and against a surveilled society, depending, in no small part, on who’s doing the surveilling.

And if you want to read some more opinion on CSR, you can always count on the Motley Fool covering the stocks that have been recommended by their newsletters — here’s one recent laudatory article, and there is also a fair amount of chatter at SeekingAlpha about this one. I also wrote about the company once before, back when it traded with the ticker symbol CSCT last Fall (just as it was in the middle of that run to $30).

I expect that if you like Chinese small caps, this one will sound pretty good — excellent growth and very good margins, even if they are in a very competitive business. If you don’t like China or Chinese small caps (and if so, you’ve sure been right so far this year), this one probably won’t sound that much better than the dozens of others in similar situations — like many others I’ve written about, this is much cheaper than the average US company, it’s small, it’s growing fast, and it’s down dramatically in the last year. Last year about this time, CSR was on its way to a high of about $30, but it fell back to earth not long after that and it has been bouncing around the $15-20 range since January.

If you think this is the real deal — or if you think you’ve found the blind spot in their camera layout — feel free to share.

Full disclosure: I do not own any of the companies mentioned above, but have written positively about GSI on the Irregulars site and do own shares or options (mostly options) on several small high growth Chinese companies (Hanfeng Evergreen, American Oriental Bioengineering, China Nepstar).
             ——————–
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1. What a co-incidnence. This is also being touted in Hsu’s China Strategy Newsletter for September. I don’t know about anyone else, but this type of stock conjurs up images of fictional stock tout in the late 1930′S pushing the company that manufactured something that was needed for the efficient operation of concentration camps. to which I say, no thanks Hsu & Fool. Ya have to draw the line somewhere if you want to retain your humanity.

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   Cool Soupy Reply:
   August 26th, 2008 at 8:37 am

   I totally agree! Look at the new Stalin in Russia. We need to learn that the almighty dollar is not Alpha & Omega. Sending our wealth to people that don’t like our system is pure folly.

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   Posted by A.Nony Mouse | August 25, 2008, 8:20 pm

2. Considering that the Chinese just made an offer and have probably bought a major American element in the American Steel Industyr, in their drive to establish a completly vertical Steel Company within America, which will extract American resources and money faster than ever… it behoves us all to wonder if there will be an America left for our children… or will there be only the super rich, who have no allegiance to any thing BUT money, and private consortiums taking profitable businesses private and out of the reach of individual investors. The middle class is evaporating. ARAB, ASIAN, EUROPEAN AND RUSSIAN GOVERNMENT FUNDS ARE BUYING AMERICA DIRT CHEAP. Our kids and grandkids will be slaving for the rest of the world. We have let the crooked politicians and the corporate gangsters ruin our country… People who’s private motto is “Greed is Good”.

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   Ken Fritz Reply:
   August 27th, 2008 at 7:29 pm

   Bonnie’s articale pretty much expresses my feelings as well. Crooked politicians, judges and lawyers are selling out the working individual in this country. They have filled their pockets at the expense of the working middle class and crooked politicians (get their cut too)have assisted them with laws that makes stealing legal for them.

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   Posted by Bonnie | August 26, 2008, 1:43 pm

3. Interesting debate started by the Gumshoe during an election year. What I find is interesting here is that the emphasis is on human rights, rather than the need for public safety and security. Fast forward to another terrorist attack (There was at least one on the world news today), and we will start hearing cries for more security technology and survelliance. Given that there was so much negative press prior to the Olympics in China and fear of a terrorism, it was amazing to learn that there were very few incidents in Bejing and beyond. Credit the tight security and systems like the one from CSR? Probably. Did the athletes give up their rights? From their expressions at the closing celebration, it seems they enjoyed being in a secure environment. If CSR was responsible in part for that, I am a net buyer.

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   A.Nony Mouse Reply:
   August 27th, 2008 at 1:08 am

   Did the dissidents give up their rights? Did human rights protestors give up their rights? Did Christian athletes with Bibles give up their rights? Actually if you read the Chinese press, the admission by the Chinese is well, uh yes they did because of increased scrutiny. As to the terror threats, in a VERY closed society it’s more likely those “threats” were a pretext to crack down on any thing the govt didn’t want exposed.

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   Posted by advantedge | August 26, 2008, 4:13 pm

4. HI Travis -
   thanks – I just received the Mann and Hsu letters and you are ‘johnny on the spot’ with the important information they leave out.

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   Posted by John Sloan | August 26, 2008, 4:15 pm

5. I doubt that a $114M and $27M contract to install camera systems is “coveted and lucrative”. Usually, the bigger they are, the thinner they’re bid, since the competition on contracts this size would be huge. Personally, I’d like to see the bid results from all of the bidders, to see what kind of money these guys left on the table. The second problem is manpower. Nobody has an installation force that big, just sitting around waiting for the phone to ring. Which means you have to hire warm bodies to put the systems in. Warm bodies take longer to install things than experienced techs do, so those thin profit margins can start to evaporate very quickly. Doesn’t sound lucrative to me.

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   Posted by Big Mo | August 26, 2008, 9:25 pm

6. Travis I first got a teaser from Bill Mann about this one in late June when it was trading around $20. I liked the sound of it and put it on my watchlist. I was really glad I didn’t buy but I think now it is much more attractive after the Chinese market has plummeted. I am sorely tempted.

   I missed the other Bill Mann one in July about the Steel Stock but yesterday received what I think is a repeat of that very same teaser. So he is promoting it again. However he does say that this company is “China’s oldest private steel producer” and that means they will have a huge overhead of ex-employees, current and future who’s pensions they have to pay until their deaths. In the short term it might be good but in the long term I don’t find it a good investment.

   Den

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   StockGumshoe Reply:
   August 27th, 2008 at 6:40 am

   Remember that “oldest private” doesn’t mean all that old in China — or necessarily, all that large. That oldest steelmaker is now one of four major subsidiaries of GSI (DQ Steel if memory serves).

   GSI, the company teased, is still under a billion dollars. And for the most part, I don’t think many private Chinese companies have taken on huge liabilities for pensions, though I could be wrong. This is worth investigating, since China is an aging society not unlike our own in some ways, but my general sense is that the “iron rice bowl” (their version of “safety net”) is moving from the responsibility of government to the responsibility of individuals, not necessarily of businesses. That sense could be totally wrong, and, being China, this picture could change at any moment. That’s part of the reason why these companies are cheap, the landscape can move under their feet.

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   Posted by Denby45 | August 27, 2008, 1:39 am