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

by Travis Johnson, Stock Gumshoe | August 25, 2008 1:14 pm

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[1]’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[2], 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[3] 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[4], and there is also a fair amount of chatter at SeekingAlpha[5] about this one. I also wrote about the company once before[6], 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[7] (mostly options) on several small high growth Chinese companies (Hanfeng Evergreen [8] American Oriental Bioengineering, China Nepstar).

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