Motley Fool likes CFSG too.
This is from their visit there a week or so ago.
The 10-Foot Tall Fireball
Are the stock markets really that insane in China?
That was one of the questions we hoped to answer on this trip around the world. The short answer: Yes. Folks are pulling money from every conceivable place, borrowing when they can, to flat out plow everything into equities.
And why not? The Chinese market is up some 150% over the trailing 12-month period.
Bear in the China shop!
While fundamental investors remain wary, such is not the case with many of these first-time Chinese investors. They aren't buying based on cash flows, earnings, or anything of the sort.
They're buying in droves because Uncle Hu says to. Or because the company's registration number, as The Wall Street Journal reported recently, contains lots of lucky number eights.
Woe betide the company whose shares close at RMB4.44, since 4 (su) is similar to the word for death.
Strategies these are not
In other words, the average Chinese punter is buying on anything. Or nothing. Same difference.
But this "buy on the 8, sell on the 4" mentality is not so much different from that of U.S. investors who bought dot-com companies en masse on the basis of things like "eyeballs." And something else is happening that bears an eerie similarity to the U.S. markets in the late 1990s: Steadily growing companies that generate free cash flow are being left in the dust.
In an overheated market, these are precisely the companies we want to discover.
Enter a 10-foot tall fireball
When we landed in Beijing, a young, smart entrepreneur named Brian Lin picked us up from the airport and whisked us away to his company's facilities a mere five minutes away (with a detour for an unbelievable meal, which may or may not have included duck tongue).
Neither Mr. Lin nor his company is flashy. Rather, he heads up a small firm with a wide market opportunity that's poised to dominate its niche. It expects to grow earnings per share over 50% in the forthcoming year and boasts a rock solid balance sheet.
Even better, when it comes time to write the rules that govern the industry, the Chinese government turns to Mr. Lin and his team of experts, including Research Director Liu Min, Ph.D.
All that said, what truly sets China Fire & Security Group (OTC BB: CFSG.OB) apart from its Chinese peers is that it trades for 15 times earnings. If you wanted to buy the rest of the Chinese market, you'd have to pay approximately 40 times.
Of course, China Fire still comes with some clear risks. It's small; it trades over-the-counter in low volumes; and with just 3% of market share, it can hardly be called a dominant player.
True to its name, China Fire detects and destroys industrial fires. Even better, its system can do so with finely misted water. That's a huge advantage over chemical solutions -- equipment that's been misted can resume operations in a day; equipment that's been contaminated can need a month or more to cool off.
And that time on the bench can cost industrial companies (the type China Fire targets)
serious money.
You don't need us to tell you that Chinese industry is growing rapidly. But that's not the only opportunity for China Fire. It's also scoring business retrofitting industrial plants that heretofore ignored the need for fire detectors and sprinklers in their facilities. The government has ruled that they can't do so forever -- and any plant manager that fails to bring his plant up to code will be held personally accountable.
With a Nasdaq listing on the horizon and a new focus in China on doing things the right way, China Fire sits in a very interesting sweet spot. Also, because it's small and trades solely in the United States, it has been largely ignored by the recent Chinese insanity. We'd be lying if we said that combination didn't
intrigue us.
Bill Mann
Advisor, Global Gains
Tim Hanson,
Writer/Analyst
