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Since my last blog of China industrial waste (OTCPK:CIWT), I got numerous emails asking me why trading volume is so low and why the price experienced a pull back from a recent high of $3.45.

Well, Benjamin Graham said: "In the short term, market is a voting machine, but in the long term, it is a weighing machine." As a value investor, I look for undervalued stocks and believe that value will be recognized sooner or later. In the mean time, I also look at my target’s potential growth. I don’t try to forecast growth without solid foundations. I value a stock using earning power based on what I know.

I still believe that China Industrial Waste is a hidden gem and will bring tremendous profits to its shareholders. I recently had a call with CIWT's CEO through its Investor Relationship representative. The call turned out to be very positive and I think it is necessary to share with all my blog readers.

Recently, CIWT signed a new contract with a ship builer with estimated new annual sales of $2million. I treat this as a normal contract and would not spend too much time on it.

The most important and exciting of CIWT's business is its sludge treat business. The following is from its most recent SEC filing:

In accordance with the Company's franchise agreement with the local government, Dongtai Organic is entitled to process all of the sludge generated from the sewage treatment plants in the urban area of Dalian City. The Project generates revenues from two sources: (i) fees which are based on the volume of sludge processed and (ii) fees from the sale of biogas (natural gas) to the Dalian Gas Company. The Project has a designed capacity of 600 tons per day and is currently processing approximately 400 tons per day and supplying approximately 10,000 metric meters of natural gas per day. The Company anticipates the Project will reach 100% utilization within one-to-two years as more sewage treatment plants are constructed in the local area over.

Based on my call with Mr. Dong, CEO of CIWT, the sludge treatment business signed a 20 year BOT agreement with the Dalian local government. CIWT now can process 80% of daily generated sludge by the whole city.

Mr. Dong also told me that they charge about RMD 135/ton for the sludge. Although they expect the capacity may increase to 600 ton. I would judge 400 to be conservative.

  • the sludge treatment revenue=RMB 135/ton x 400ton/day x 30 days/month = 1.62 million RMB/month

The fermentation tanks built by CIWT can generate around 15000 cubic meters of bio gas/day. CIWT also sells bio-gas to local utility company. This part of business will generate 3.9 RMB/cubic meter x 15000 x 30 days/month = RMB 1.76 million.

So the total CONSERVATIVE revenue from the sludge business is RMB 3.38 million, which is approximately $500,000 per month and $ 6 million/year,

CIWT has a 52% stake of the Dalian Dongtai organic waste treatment project. So in the future, this part of revenue will be consolidated into its financial statements.

I am expecting to see a strong revenue growth in 2010. Due to the accounting treatment, net income growth will not be the same as revenue growth because a minority interest should be deducted. But I still believe we will see a nice bottom line growth because the new sludge treatment business net profit margin is expected to be 25%.

The more exciting news is that CIWT's business model has also attracted other city governments. In the coming years, they will go to other major cities to negotiate similar projects.

CIWT uses biotechnology to degrade sludge to generate bio gas. The remnants are harmless and could be used for fertilizer. This is an environmentally friendly method to process sludge as fast urbanization in China, waste water and sludge treatment causes serious environmental damage to large cities. CIWT obviously has the edge in being able to meet the strong demand and grow its business rapidly.

I am positive on this stock and believe it will shine sooner or later.

Disclosure: I have long position in CIWT

Source: China Industrial Waste: Strong Foundations for Growth