NFEC - Did some DD, contacted IR
I have to say that after doing some DD and speaking with their IR firm, I'm a buyer.
First, their earnings. Here is a summary of the adjusted EPS by quarter:
1Q08 - .06 / 2Q08 - .09 / 3Q08 - .08 / 4Q08 - .07 / T09 - .30
1Q09 - .03 / 2Q09 - .06 / 3Q09 - .16 / 4Q09E - .15 / T10E - .40
Bear in mind that in May, they lowballed their 3Q quarter estimate by 33% (.12). So 4Q will probably surprise.
Note also that google, yahoo, and so on all quote the wrong ttm P/E because the stock did a 3 for 1 split in August which screws up the EPS used in the calculations.
Second, their contracts. As of December, they have 62 secured contracts totaling $70M in revenue, with $22M of that revenue set to be completed by 2009. 8 more contracts are in negotiation. Since May, they've secured 15 contracts worth $34.1M in revenues.
Their recently announced contract with GE on the BOT plant is estimated to generate $10M in revenue annually. If you put a 25% margin on those revenues (their 3Q margin was 28%), you get $2.5M in annual income, which is about .18/share a year, or 45% of their estimated earnings for this year. So it's a big deal.
Third, their balance sheet. As of 3Q, they have $13M in cash and accounts receivable, and $3.7M in accounts payable. Current assets are $15M and current liabilities are $5M for a current ratio of 3. Their total assets are $25M and their projected return on assets for 2009 is about 25%. That's an awesome return!
Fourth, their story. They work in the engineering areas of energy conservation and cogeneration, emissions reduction, and fluid system design and instrumentation. Industrially, they are exposed to China's nuclear, coal, and wind buildouts, China's global warming initiatives, and China's water supply infrastructure project (South-North Water Transfer).
The most intriguing part of the story to me is the water part. China has huge problems in the area of water supply--it's a more significant obstacle to their growth than even energy supply.
Fifth, uplisting. They meet all the requirements and have submitted the application. They hope to receive word by end of year, although the IR guy said they probably won't hear back until early next year.
Sixth, the silly lawsuit (over chump change, really). My question was, why didn't they just settle up front. I talked to their IR rep and he said it was a cultural thing. Fair enough.
Seventh, everyone china small capper's greatest fear: dilution. The IR rep said that the only thing limiting them right now is the ability to meet the overwhelming demand for what they do. They don't *need* equity financing--that is, they have strong operational cash flow--but they would be willing to take up a private placement on favorable terms in order to accelerate their growth.
At this point, I'd like to point out that PRIVATE PLACEMENTS ARE NOT ALWAYS BAD. Nor does the market always react to them with a selloff. The devil is in the details.
Based on the dreadful stock performance of many chinese small caps, we've all been trained to sell at the slightest word of an equity raise. But that's just because the deals have been so terrible.
Recently, they've been getting better. Look at CGA and NEP. They each raised capital in the last few days on very good terms. And their share price hasn't suffered that much. CGA diluted at a 10% discount to close price and they only dropped 2% today, even making up a significant portion of the drop after hours. Consider also that CPQQ announced a capital raise on Dec. 7th and the stock was up by the day's close! Now, it's way up. So I think the common fears of a capital raise are overdone. If it's for an insolvent f-ed up company like Citigroup, then yeah, run like hell. But if it's for a strong, positive cash flow company that just wants to meet available growth potential, it doesn't necessarily have to be a bad thing, even for share price. A stock can go up on word of a placement.
The IR guy said that Rodman and Renshaw and Brean Murray have expressed significant interest in investing in the company, and so if the company does choose to accept a private placement, they won't have to settle. It will be a good deal.
In conclusion, here's my take.
I think the upside potential is tremendous. If you annualize the non-recessionary 3rd and 4th quarters of this year and you take today's closing price of 4.09, you have a P/E of 6.5 with a 100% YOY growth rate. If over the next two years they double their earnings, and the market gives them a more reasonable P/E of say 15, you're looking at a quadruple bagger, 200% per year.
The downside risk is an unfavorable equity offering, or an equity offering met with a panic selloff. Given that (1) the CEO owns 60% of the company, (2) the company has strong operational cash flow, and (3) the investment community has already shown significant interest, I doubt that we'll see a questionable deal. Moreover, I think that if we do see a deal, it will probably be at higher prices from where we are now, probably next year after the 4Q earnings report, which I suspect will significantly surprise to the upside.
So I'm in. If there is eventually a private placement that leads to a stock price drop, I'll just add to the position.
Thanks to CSP and Lostmyballs for the pump.
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