China Security & Surveillance: A Speculative Growth Company

China Security & Surveillance Technology, Inc. (NYSE:CSR)

Sep. 29, 2009 $7.07

52-week range: $2.47 (Mar. 12, 2009) - $14.20 (Sep. 29, 2008)

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 5^th (with 100^th 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.

Comments

[Randel:]

Paul,

Thanks for the response. I understand CSR better now. I bought the stock and sold some covered calls this morning. No puts, calls only.

Sep 29 12:40 PM

[Shareholder...:]

Sorry to say, but you could have done a little bit more homework before you write about a company..
Hint: A main issue is the (rather significant) difference between GAAP and non-GAAP earnings, which has to do with two outstanding notes, but these have recently been replaced by two new ones (from the same company though)..

Sep 29 10:39 PM

[kotika98:]

This company has been trying to cover up the lack of growth in its core business with acquisitions. They havent been able to acquire very profitably either, while buying up a bunch of companies with margins lower than their own.

And, "if you believe the analysts" is too much to ask. The guys who have ratings on this stock are the same guys who brought them public, so make your own conclusions.

Oct 10 10:08 PM

[locksmiths:]

Security industry round the globe is gaining momentum briskly and so is the technology

Oct 24 10:38 AM