China Joins Copenhagen: “Best Ways to Profit” (Hsu)

By Travis Johnson, Stock Gumshoe, March 18, 2010

Several folks have sent along a teaser article that Robert Hsu published on his free site a couple days ago — in it, he tells us that China and India have joined on with the nonbinding Copenhagen Accord, and that as a result China has voluntarily agreed to reduce its “carbon intensity” significantly over the next ten years.

He thinks there’s money to be made from this, no surprise:

“And these goals are creating some interesting investment opportunities–especially as China continues to recognize the importance of a clean environment. When you consider that China’s environmental protection industry is expanding at a rapid 23% per year, and more than $190 billion will be spent on pollution cleanup, you can quickly see the incredible opportunity for investors in this sector.”

So which stocks does he think we should buy? Well, he won’t quite tell us, of course, for that we’re asked to sign up for an Asia Edge subscription for $1,497 … but of course, the Gumshoe is on the case! If you want to play along at home, the teasers are in this article form InvestorPlace Asia.

Not a lot of clues today, but let’s take our best shot. Here’s what we’re told about the first idea:

“PICK #1: China’s leading provider of environmental protection equipment for the booming iron and steel industry. The Chinese government is requiring that companies reduce their sulfur dioxide emissions and have wastewater treatment equipment in place within five years. And this company is the leader with a significant gross margin for each proprietary product.

“As a result, the company is snatching up contracts left and right. My Asia Edge readers are already up about 75%, and I’m expecting the company to rocket higher when it announces earnings soon.”

Hmm … leading provider to that industry, wastewater and sulfur dioxide treatment, chance that investors could be up 75% at some point in recent years, I think this probably has to be …

Rino International (RINO)

RINO is a fairly small company, roughly a half billion in market cap, and profitable — and yes, it does both sulfur dioxide amelioration and wastewater treatment, largely for the steel industry, along with some related products and services. Trader Mark had an interesting look at one of their contracts a couple months back, and the stock is certainly up huge from the lows of the financial crisis (which also cut into steel demand for a while, and made us all fear everything that looked even a little bit shaky).

It’s also one of the many Chinese stocks that is controlled by a single shareholder, in this case Dejun Zou, who is also the CEO of Rino and of several subsidiaries. The filings are a bit odd because there’s also a trust holding in the British Virgin Islands that I assume is probably also connected to Zou, but on my rather cursory look it appears that he owns about half of the company.

Rino has had some positive comments from other investing pundits recently, including a small profile in SmartMoney and fairly frequent mentions in throwaway Motley Fool articles. Other than that, I’m not terribly well-informed on these guys yet — still, they’re certainly growing, if the steel business continues to grow and Chinese regulators continue to enforce stricter emissions and wastewater rules for industrial firms, then the path to growth seems quite clear … and they are profitable, and arguably undervalued based on their growth rate. If you’ve got a feeling about RINO, feel free to share with a comment below.

Next?

“PICK #2: China’s premier water treatment management firm that is focused on providing clean, fresh water to its citizens. In fact, with China expected to spend around $40 billion in 2010 just on water resource management, this company is soaring!

In addition, the company is capitalizing on a stream of contracts with the Chinese government, which are opening doors and expanding the company’s reach throughout China. And what’s even better, this micro-cap has recently pulled back from its highs, providing an excellent entry point for new money. My Asia Edge readers are up a modest 30%, and we’re headed higher! Learn more.”

This doesn’t make much sense to me, because the stock that he’s referred to as the “premier water treatment management firm” before has been Duoyuan Global Water, but as you’ll see in the paragraphs below, that’s probably not his pick #2. So … given the limited clues I can’t really tell you for sure who this might be. But I can guess — and given the “micro cap” tease and the “management” focus, I’ll throw out Tri Tech Holdings as a possibility (ticker TRIT). This is a company that does have a number of contracts, but the focus is more on hardware and software for water management and monitoring, something I’d never thought of before. If my guess is right, then Ian Wyatt may also have been picking this stock for his SmallCapInvestor Pro service back in December.

On this, I could certainly be wrong — but TRIT is a tiny little fish and it’s certainly an interesting business, wouldn’t be surprised to see their ticker darken our door again. They are profitable and growing, but have no analyst coverage and are teensy, with a market cap of under $100 million, so if you’re interested please be extra careful.

And our final stock to sleuth out?

“PICK #3: China’s leading domestic water treatment equipment supplier that is benefiting from the country’s need for clean, drinkable water. This company just released solid earnings, and I’m expecting shares to head higher in the near future as China’s demand for water treatment products is estimated to increase at nearly 16% per year through 2012.

The company plans to launch a whopping 36 products through 2010 — adding to their already-formidable base, and I expect the company’s competitive strength and cash position will allow the company to nicely capitalize on the market in the coming months and years.”

This one must be Duoyuan Global Water (DGW), an IPO from last year — and they’re actually getting down to close to that IPO price again, after rising significantly higher over the Fall and Winter. Duoyuan was teased by Keith Fitz-Gerald back in September in the low-$30s and is now available for about $25, the forward estimates put the PE ratio at about 15 and growth at 18-20%, though that’s from only three analysts. Clearly water treatment is a growing business in China, but it’s also quite clear that the companies involved tend to be mighty volatile little dudes. I’ve been keeping this one in the back of my mind since the IPO, but the temptation hasn’t gotten strong enough yet for me — if you’re a shareholder (I know quite a few folks were interested last time around, in September, so hopefully you haven’t lost money on the stock recently), feel free to let us know what you think of DGW and its prospects.

Oh, and yes, they are planning to launch 36 products this year — that’s from their fourth quarter earnings release which came out last week. Earnings came in a penny short on that release, for whatever that’s worth (they had also pre-announced the results back in January, which is probably the main reason that the shares declined over the last couple months). They also did a secondary offering back in late January at just under $30, after the shares had fallen from highs of just over $40 late last year.

So there you have it — three possible plays on cleaning up China’s air and water, a worthwhile goal that probably will see some big “stimulus” funding for many years. As you can tell, I don’t have in depth knowledge of any of these companies, but they all look interesting on the surface — if you’ve looked into them, feel free to comment below and let us know what you thought.

Oh, and don’t be worried about the new-looking comment box, I’m installing a new system that will hopefully make it easier for us to share and track comments and “vote” on good or less-good comments so commenters can more easily build a “reputation” here at Stock Gumshoe (many of us know who the “best” commenters are if we’ve been around a while, but this will help out newcomers who’ve been asking for some kind of ranking system). It should be working in fits and starts this afternoon, and older comments will take a little while to migrate into the new system — take a crack at it and see what you think.

Related Gumshoe Articles

“Facebook of China to Deliver Your Next Double” (Robert Hsu)

Uncovering an Asia Edge tech teaser

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13 Comments on "China Joins Copenhagen: “Best Ways to Profit” (Hsu)"

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ilan
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ilan
March 18, 2010 7:35 pm

I think DGW was justly punished by investors for coming out with a SPO that was offered at 25% lower than its share price. Who knows when they'll try to raise more cash and do it to you, me , and other future investors???

MikeM
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MikeM
March 18, 2010 9:20 pm

These seem to be less risk and more potential than many of the other recent teasers. Caution is the better part of valor…worth perhaps a small introduction.

Jillybeans
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Jillybeans
March 19, 2010 5:33 am

I bought Rino on Feb. 1st at $20.76 and sold for profits on Mar. 15th at $25.65.

martin huber
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martin huber
March 19, 2010 2:00 pm

Hi John,the second pick might also be Hyflux,a company i am invested in.Feel free doing your DD on this company.
In case it does not fit,it may be attractive to look at;))
Good weekend,looking for the Friday file for the Irregulars;)
Martin:))

Diane Rienstra
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Diane Rienstra
March 20, 2010 4:05 pm

If China raises the value of the Yuan will this affect their infrasturcture type stocks?

Jamie
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March 21, 2010 7:11 pm

John,

Greetings from Hampton Roads, VA! I wanted to say thanks for all you do for us each week. Your writings are witty, educational, and inspiring. In fact, I started a new blog of my own and plugged this site — hope you don't mind. Figured any of my friends who read what I write would like this site. Cheers!

Jamie

Gravity Switch
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March 18, 2010 7:46 pm
I wasn't paying close attention to that secondary at the time, but from the filings it looks like they filed to do the follow-on offering on January 15, when the price was around $34-35, and priced it at $29.50 a couple weeks later. Not sure if the share drop was from blah numbers in the "pre-release" that came after the initial filing but before the pricing, or if it was just a selloff due to the secondary. Does make you think they'd have been better off raising the money back in November when it was over $40 and the sequential… Read more »
TV Guy
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TV Guy
March 19, 2010 1:09 am

Gummy….not sure about some of the fundamentals discussed. And these comments would apply to ANY stock…China related. As you indicated, the "Chinese filings seem a bit odd"…yeah….welcome to their SEC….non-existant.

Secondly, the interface of China complying and playing into the Copenhagen Accord principles….cleaning up the environment….and "stricter rules"….ahh…..not the China that I know !!! ?????

So for any potential play (and as you can guess I won't be making one )…..judge things solely on the STOCK and it's attributes and not the imposition of North American standards to it.

ilan
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ilan
March 19, 2010 9:48 pm

I believe that if the blah numbers were responsible for the drop the share price wouldn't have climbed north of 40 with the pre release out… The pricing was just done with a complete disregard to the current holders and although I have no proof of market sentiment I know that I wouldn't have reacted favorably to a company pricing their SPO in this manner…

MonV
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MonV
March 19, 2010 2:12 pm

Compliance to the Copenhagen Accord is voluntary; I guess that's why they signed on. Everybody could sign on, nobody has to comply!

Gravity Switch
Admin
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March 19, 2010 3:13 pm

Thanks Martin — the Friday content for the Irregulars this week will be the "Idea of the Month," should be coming out after the market close today (working on it right now). And I actually own Hyflux's water trust still, though that's not as sexy as the parent company.

ilan
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ilan
March 22, 2010 4:55 pm

Who's John? Or is that just a reference to what our dear gumshoe does in his spare time?

Jamie
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March 22, 2010 5:30 pm

Geez….Ya know, that is what happens when I have too much going on at one time on the computer. My sincerest apologies to our esteemed gumshoe, regardless of his spare time activities! 🙂

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