Eye on Recon Technology: Small Cap Chinese Energy-Focused IPO

 |  Includes: CKKHY, RCON, SHI
by: The Honest Trader

Recon Technology (NASDAQ:RCON) is an interesting microcap company that had its IPO last week. I think that the company has huge potential for gains in the near and long term. First, the company is very small, so if you don’t like volatility you can stop reading right now as it has a current market cap of around $30 million.

What Does the Company Do?

Actually it looks pretty interesting. Recon Technology provides computer software and hardware solutions to companies in the petroleum mining and extraction industry in China. The company engages in the sale and installation of hardware systems related to heating, maintenance, and processes customized for petroleum extraction.

Basically, the company provides services designed to automate and enhance the extraction of petroleum and it focuses and is located in China. RCON is the first Chinese non-state-owned oil and gas service company to go public in the US.

What Do I Like About the Company?

Quite a bit.

Proprietary Technology

The company does have proprietary products with 3 copyrights, 8 patents and 4 pending patents. This technology is validated by the fact that this young company’s major customers are CNPC (OTC:CKKHY) and Sinopec (NYSE:SHI).

For those unfamiliar with those companies, CNPC is China's largest oil and gas producer and supplier and Sinopec is another major petroleum company in China. Recon has provided services to Sinopec since 1998 and CNPC since 2000. Recon has conducted automation projects for 80% of CNPC and Sinopec's oil and gas fields, covering three of China’s four highest producing oil fields in Daqing, Shengli and Xinjiang. These seem like pretty strong relationships with growing customers.

Small Float

The company will have 3.9 million shares outstanding after the offering.

However, the shares in the tradeable float is ONLY 1.7 million shares. With this small a float you will get a lot of volatility but also the possibility of huge gains as traders buy the stock up on limited supply. This is often when momentum traders come in and things can get crazy to the upside.

Lots of Cash, No Debt

After the IPO, the company has about $11 million in cash ($2.8 a share) and virtually no debt. That's a lot of cash relative to its current market cap of approximately $30 million (1/3 of the cap in cash).

Insider Ownership

Directors and executives will own over 50% after the IPO and are selling no shares in the offering. That shows a strong commitment to maximize shareholder value.

Earnings / High Margins

The company did $9.1 million in revenue in nine months ended March 31, 2009 and diluted EPS of $.83 with net income margins over 20%. Net Income grew over 57% for the nine months ended March 31, 2009 over the same nine months of 2008. The company should report year end (June) results in the near future and I’d expect approximately $1.10 in EPS for the year on strong top line growth. That would put the current PE at around 7.5.

If you assume earnings growth of 50% for 2010 EPS, which I think is reasonable based on the base size of the company and the potential usage of the proceeds of the offering for growth, you get 2010 earnings of $1.60. That would put the one year forward PE based on these estimates at approximately 5. That seems cheap to me and sounds like a stock with multi-bagger potential.


RCON is a growing microcap company ($30 million market cap) focused on a strong market segment and has quite a bit of sexiness to it. RCON is an IT company, it provides services to the energy industry, and it’s the only non-state owned Chinese oil and gas service company public in the US with great customers.

Additionally, earnings and growth could indicate that the stock is undervalued and I expect this stock to hit radars once it publishes June results and reports over $1 in EPS for the fiscal year.

With the company’s float being so small, the stock could get bid up significantly and have the fundamentals to back the price gains up, unlike many other small float momentum plays. I like it right here at $8 a share.

Disclosure: Long RCON