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Home > Option Play > China Security & Surveillance – A Speculative Growth Company - CSR

China Security & Surveillance – A Speculative Growth Company - CSR

September 29th, 2009

 

CSR[NYSE]  Sep. 29, 2009 $7.07

52-week range: $2.47 (Mar. 12, 2009) - $14.20 (Sep. 29, 2008)csr-logo
 
China Security & Surveillance Technology, Inc. (CSST) manufactures, distributes, installs, and services surveillance and safety products and systems in mainland China. The Company’s customers include governmental entities [customs agencies, courts, public security bureaus, prisons, schools, museums, sports arenas, libraries, airports, hotels, real estate, banks, mines, railways, supermarkets, and entertainment venues. CSST operates primarily in five segments: Installation, Manufacturing, Distribution, Software, and Services.
 
CSR completed a secondary offering of 4.1 million shares in late August at $6.25 /share generating $25.35 million net to the company. That added to the $89.5 million in cash held as of June 30, 2009.
 
Only two American analysts currently have estimates on this company. They are extremely bullish with 2009 – 2010 expectation s of $1.62 and $1.88 respectively. This assumes huge growth in second half earnings this year which would reverse a drop in year-over-year earnings from the first half when they posted $0.17 versus $0.29.
 
Here are their actual historical per share numbers since their 2006 IPO as reported by Value Line:
 
Year
Sales
C/F
EPS
B/V
Avg. P/E
2006
3.36
0.76
0.85
2.82
7.6x
2007
5.65
0.74
0.68
4.70
26.4x
2008
8.70
0.86
0.72
6.19
19.7x
 
The lack of per share growth in cash flow and earnings while the sales grew dramatically was the result of the share count expanding from 31.83 million in 2006 to 42.51 million in 2007 and 49.14 million by year-end 2008. The secondary offerings were anti-dilutive to book value as they took place above existing B/V levels.
 
If the analysts are correct in looking for $1.62 in 2009 earnings then the P/E is now < 4.4x this year’s expectation. That is extraordinarily cheap, especially for a Chinese company.
 
If you believe the estimates the shares are screamingly cheap. CSR actually traded as high as $12.25, $33.60 and $22.45 at the peaks in 2006-2007 and 2008 and they’ve changed hands at $10.24 already this year.
 
Value Line’s rating system has their expected performance rated #1 (on a 1 – 5 scale with 1 being highest). They also have CSR’s safety rated as 5 (worst) despite their decent balance sheet. Standard and Poors sees CSR’s ‘Investability Quotient Percentile’ as 5th (with 100th being best) and notes their high share price volatility [Beta = 1.6].
 
China Security and Surveillance offers generous option premiums for those who want
 to play. You could probably receive $1.10 /share for the March 2010 $7.50 calls and
$1.45 /share for the March 2010 $7.50 puts right now with the shares at $7.07.
 
Short interest in CSR represents about 10% of the floating shares.
 
This is a classic high-risk/high-reward situation for those who don’t mind volatility.
 
 
Disclosure: No position.
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