Tri-Tech Holding: The Most Exciting Chinese IPO Ever Listed

China is facing a severe water crisis. If present trends are not reversed, the World Bank forecasts that by 2020 there will be 30 million environmental refugees in China due to water stress.

• With 20% of the world’s population but only 7% of global water resources, China meets with a severe challenge.
• More than half of China’s 660 cities suffer from water shortages, affecting 160 million people.
• The per capita water volume in China is one fourth of the world average.
• 90% of cities’ groundwater and 75% of rivers and lakes are polluted.
• As a result of widespread water pollution, 700 million people drink contaminated water every day.
• Waterborne diseases have created a rising number of premature deaths.
• Between November 2005 and January 2006, three large-scale incidents occurred, halting water supply for millions of people and raising awareness of the challenges ahead.
• The government plans to mitigate water pollution by investing in wastewater treatment facilities.

The Chinese government is addressing this problem with big dollars. From the Tri-Tech prospectus,

From 2005 through 2010, China’s environmental investment is expected to be approximately $184.2 billion. This growth represents a cumulative annual growth rate of approximately 14.5%. Of the estimated $184.2 billion to be spent on environmental protection, approximately $39.5 billion is expected to be used for water resource management, urban water management, wastewater treatment, sewage reuse and water treatment.

In November 2008, the Chinese government announced a stimulus package worth approximately $585 billion designed to respond to the current global economic crisis. The first two allocations of the stimulus package have allocated approximately 10% of the $33 billion to environmental projects in China. While it is unclear at this point how much of the stimulus package will be allocated to or ultimately spent in our industry, the stimulus package may cause our industry to grow significantly.

Enter TRIT

I think that last week's IPO, Tri-Tech Holding, Inc. (TRIT), is the most exciting Chinese IPO to ever get listed. This Company directly addresses China's biggest environmental challenge, water scarcity.

From the prospectus,

Our company works with local and regional government bodies in China to design and implement systems to monitor and manage China’s natural and municipal water resources. Since we began providing these services in 2002, we have implemented more than 200 projects in provinces, municipalities, autonomous regions and special administrative regions throughout China.

We design sewage treatment and odor control systems for municipal supplies. These systems, which coordinate technological solutions (software, management information systems, enterprise resource planning and local and wide area networking) with hardware (sensors, distributed control systems, programmable logic controllers, supervisory control and data acquisition systems and mechatronics), allow our clients to monitor and control numerous variables in the sewage treatment and odor control processes. Our goal in this regard is to be a total solution provider for our clients, allowing them to engage us to design processes and systems that work seamlessly to manage the process from the initial intake of raw sewage through the return of water to consumers for reuse.

We also assist the government in monitoring natural waterways. We provide systems that combine technological solutions (software, geological information systems, management information systems, enterprise resource planning and local, wireless and wide area networking) with hardware (sensors, supervisory control and data acquisition systems and mechatronics) to track water levels for drought and flood control, monitor groundwater quality and assist the government in planning its water resource use and management.

My Estimates on TRIT

TRIT has a tiny float of only 1.7m shares with approximately 5.2m shares outstanding after last week's IPO. So the share structure is very small for a Company in such an exciting growth sector. Last Quarter revenues increased by 54.5% and net income increased 93.3%.

My calculation for EPS Run Rate with the new IPO shares is $852k for the last Qtr X 4 = $3.4m / 5.2m O/s = .65 EPS. However, with the strong growth prospects and current growth rate I can see this having potential to quickly climb to $.75-$1.00 EPS. DGW, another IPO serving the Chinese water industry, has had a P/E of 20-30 at various times since its IPO.

Based on Growth Prospects and DGW P/E range I personally target a PPS range of $15-$30 if momentum volume occurs.

Specific Growth Opportunities

Lastly, here are some specific growth prospects from TRIT's (From 10-Q) :

New Opportunities in Water Resources and Wastewater Treatment

We are currently pursuing over 100 smaller river basin flood monitoring and forecasting systems with a market potential of approximately $72.5 million, and groundwater monitoring systems for over 100 counties across the country with a market potential of another $72.5 million. There can be no guaranty that we will be successful in all or any of these endeavors. Through local distributors and partnerships, we also promote our proprietary products targeting the water monitoring and dispatching systems of the Northward Rerouting of Southern River engineering construction, which has market potential of approximately $43.5 million.

South-North Water Transfer Project is a large, inter-basin, long-distance water transfer project that is charged with dozens of major urban water supply tasks for such cities as Beijing, Tianjin and Shijiazhuang. The current automated dispatch system monitors a total of 304 buildings. As a result of our ability to assist with (i) the use of information acquisition and processing technology, (ii) the modernization of the operations maintenance and management, (iii) the establishment of a sound system and (iv) the greatest degree of rational management of water to make full use of China’s valuable water resources, we expect an increase in sales of this project.

China frequently faces flash floods and similar national disasters, so strengthening the prevention and treatment of such disasters is essential. System monitoring of rainfall by the water system, early warning and early warning response system is comprised of three parts. Data and early warning information processing service as the core, through computer networks, databases, early warning command and control platform release constitutes a set of flash floods disaster early warning system, especially for Hubei and Qinghai provinces. We expect an increase in sales of this project.

Disclosure: I am long TRIT from $8.65.

Comments

[Joseph L. S...:]

An interesting choice and one that vies with Duoyuan Global Water Inc. (DGW) for the biggest of the “home-grown” company in China formed to address their initial scarcity and continuing death spiral in providing potable water. Still, the Chinese are no fools and I believe they will seek the best engineering and water pollution firms to take care of this tsunami <<wherever>> the expertise lies.

That means US and European firms like Tetra-Tech (TTEK), Pentair (PNR), ITT Industries (ITT), Suez SA (SZE), Veolia (VE), Flowserve (FLS), Watts Water Technologies (WTS), Layne Christensen (LAYN), and Calgon Carbon (CCC). If you’re interested, others can be found in this article: seekingalpha.com/artic....

While some investors chase hydrogen automobiles and roll the dice on the next biotech breakthrough, I believe that a boring old industry like ensuring potable water will be one of the great growth industries of our lifetime...

Sep 14 11:39 AM

[Bill Simpson:]

How exactly do you explain the balloning accounts receivables here? They were sitting around $4 million as of 6/30/09 for a company with a $5 million run rate on the year through 6/3/09. Cash flows are ugly...you are using this 800k number for earnings, fact is however the company LOST nearly $1 million dollars in the quarter cash flow wise. this looks like a scam stock to me.

please read page 9 of the 10-Q:

www.sec.gov/Archives/e...

Sep 15 10:07 AM

[75 Year Old...:]

Well with the Fever over Chinese Stocks and all Id say this is a easy double bagger by years end . But I wouldnt put more then 10% of my stock investment funds in it .

Sep 15 10:33 AM

[75 Year Old...:]

After Further research into this , I took a nice little 50 cent a share profit this morning and exited,, I'll leave this stock to the gamblers among us .

Sep 15 11:04 AM

[super-trade...:]

The Company's contracts are mostly with govt which are slow payers and A/R turnover in China in general is slower than the US......good questions though.......you can say every China stock is a scam and never trade them or you can trade them and catch some big gains.......all about your own risk management

Sep 15 03:01 PM

[Mark Situ:]

I had chance to talk to TRIT's president Phil Fan. I am impressed by him.

Usually, companies that do government sponsored projects will have large account receivable. However, governments in China seldom default payments. The process may take some time, but collection will not be a big issue.

I once talked to an American private equity investor in China. He told me Chinese governments use cash to finance projects. While here in US, governments issue IOU.

Sep 16 02:38 PM

[Bill Simpson:]

you cannot say every China stock is a scam. I am long DGW and LIWA at the moment actually. these Anderson ipos do well initially due to the small float...over time though they generally prove to be lower quality companies. EFUT I have issues with as well, another former Anderseron ipo as was PSOF and SINO I believe. I analyze company financials for a living and there are real/tangible issues here with TRIT cash flows that do not exist in every Chinese company...you cannot simply slap on a multiple that is equal to other companies when real issues exist. the fact is, these Anderson ipos are simply lower quality usually than other china ipos...and yeah they can be moved early due to small float(I owned RCON even though it looks very scammish also). careful standing when the music stops though.

Sep 16 04:01 PM

[super-trade...:]

TRIT $12.62 RTQ after hours from my $8.65 call........debate is futile at this point.............

Sep 16 07:34 PM

[Bill Simpson:]

debate it never futile. your hype is quite silly actually. trust me, I've been making a living trading ipos for a decade and have never resorted to the kind of overblown hype like 'most exciting ipo ever'. You do a disservice to our profession.

Sep 16 09:42 PM

[Bill Simpson:]

hey i am than willing to make money off crap stocks too in a bull phase,,,,just no reason to call a low quality micro-cap the most exciting stock etc...you know very well it isn't and when this come tumbling down a la SINO at some point you will be long gone from the trade. call it a low float spec play that should work because these have been working, don't start calling something like this one with terms we both know it does not deserve. congrats on the trade, these things definitely been working...liwa and rcon running recently as well.

Sep 16 09:48 PM

[John Rayhall:]

I bought Trit on your recommendation 500 shares at 10.35(are you allowed to write that in here?) and so far it's doing great! Have to say thanks I like the whole software for water companies story. The water shortage in China is real and I think it's going to be a big story in the next 10 years. I think the small float is going to help propel the stock. I like your $15-30 target I’ll settle for 20. Yes the stock is still spec and its def not for the feint of heart but I def like the story thanks again.

Sep 16 11:19 PM

[super-trade...:]

Bill Simpson

#1 I didnt pick the title......Seeking Alpha did...my instablog was titled
"Tri-Tech Holding - Low Float IPO Addressing China's Water Crisis "
seekingalpha.com/insta...

but for some reason when Seeking Alph aedits it they changed the title

#2 you can call me a hyper, or pumper or whatever...but the fact is My readers and I are up 50% while you try to explain why this will be down in a year........i never said I was putting it in my IRA.......i said $15-$35 target and my low range of target is almost hit......

so you keep lecturing me and calling me a hypster....my readers and i will think about it as we count our money

good luck to you

again wasnt my title......

Sep 16 11:29 PM

[Wisdom vs. ...:]

i have followed your picks and made some money, i respect you; i think you should be pissed about the title, it is ridiculous, frankly i expected this article to be absurd and could not understand the title after i read it. keep up the good work (SA slapped a sensationalistic title on one of my articles, painful)

Sep 17 12:38 AM

[John Rayhall:]

Trit at $14.20 sometimes you have to throw the balance sheet analysis out of the window and just trade! How many people said to get out of FSLR from 54-320 or Goog from 90-700 sometimes you just have to ride the train!

Sep 17 09:53 AM

[super-trade...:]

TRIT $14's from $8.65 call !!!

Sep 17 11:31 AM

[75 Year Old...:]

150% up in 3 days , somebodys Scaming somebody ! Ive seen this movie before it ends Badly !

Sep 17 03:50 PM

[super-trade...:]

$15.60 close from $8.65 super!

Sep 17 04:28 PM

[KDG:]

I made it in and out and wish all those the best of luck who can time this baby. The Chinese govt seems like a legit customer if indeed TRIT has services 'to be' rendered for the republic.

Anyone who questions the growth potential of water management need only watch "Blue Gold" for a sobering look at the future of the most essential 'commodity' of all.

Sep 17 04:50 PM

[thorbash:]

Hey super trades, how long do you plan on staying in? Any idea what this stock might make it to?

Sep 18 04:50 AM

[super-trade...:]

TRIT $8.65 to $20

Oct 08 08:06 PM