China Fire & Security: Roth Capital Conference Presentation Transcript

TRANSCRIPT SPONSOR

China Fire & Security Group, Inc. (CFSG.OB)
Roth Capital Conference
February 21, 2007 7:30 pm ET

Executives

Judy Huang - International Research Analyst at Roth Capital Partners
Brian Lin - CEO

Presentation

Judy Huang

Our next presenting company is China Fire & Security Group. With us here today is Brian Lin, the CEO of China Fire & Security Group.

TRANSCRIPT SPONSOR

HC International is a focused and dedicated organization that acts as a premier informational resource for institutional investors, hedge funds, buy and sell-side analysts, small to large brokerage firms and accredited investors. We help our client companies package their corporate information in a clear, concise and consistent manner while facilitating introductions to the right investors at the most opportune time. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

Brian Lin

Good afternoon. I know it's getting late and most people are pretty tired having had a long day. We will keep it short and finish within the 20 minutes. Okay. Standard Safe Harbor statement. First off, let me give you an overview of the company.

We are the leading provider of total solutions for the industrial fire safety sector in China. And we are the market leader in this industry with very high barriers to entry and very fragmented market sales. We have received -- continuously receive recurring revenues from our first tier clients, like iron and steel companies, power plants and petrochemicals plants, which increased our very strong visibility and backlog, going forward.

We have attracted a very strong R&D team, which focus not only on our new products but also help the government picking up the new fire codes and product standards in China. Now, we are well recognized in China as the leader in China's fire protection industry.

And also, as most people know, China is going through tremendous economic growth and economic expansion, and we are well positioned to benefit from China's movement to higher industrial standards and economic expansion. And we have very strong financials, especially with the fund that we just raised last October.

We have a very strong balance sheet to help guarantee the growth of the Company over the years. And last but not least, we have a very strong management team with good track record in execution and as well as we have strong majority ownership of the company, which guarantees that we have our interests aligned with our investors.

Just a quick snapshot on the capital structure of the company. We've got 27.9 mill1ion shares fully diluted and with a float of about 3.6 million shares. And just as of last December 29th, all the registered shares became effective. So we are very lucky to get no review from SEC for our SB-2.

So the investment highlights. The company was founded in 1995 by our Chairman, Mr. Gang Jin Li. We have over 500 employees throughout China with 20 offices. We are currently the largest manufacturer and distributor and installer of industrial fire protection products and services in China.

Now, we're also the first company to leverage our high tech product to serve our premier clients like iron and steel companies and petrochemical plants, etcetera. Now, we have developed a proprietary product line for the industrial fire protection industry, which includes both the detectors as well as the extinguishers.

We have over the years received many industrial honors, including being ranked number one by China Fire Association as the "System Contracting Enterprise" in China. Now, we're also ranked very highly in the "Top 30 Companies in Fire Protection Industry" overall in China.

A quick look through the financials. We have reported, through nine months of 2006, revenue of about US$23.5 million, which represents a 54.3% growth in comparison to the same period last year and with the net income growing about 21.2% to $7.4 million.

Let me share with you the market opportunity in China. The fire protection business overall in China was about US$3.7 billion in 2005 and with the industrial sector, which is the addressable market that our company focuses on, is US$900 million. And this -- we expect according to the statistics of the China Fire Protection Association the growth rate is about 11% over the next five years.

The driving force behind the growth -- there are a few factors here, one in particular is, China is going through the industrialization process and this process has led to a lot of new plants being built and that’s one effect. Another effect is, China -- the government is tightening the regulation in trying to enforce the fire -- the safe production across the whole society including these industrial plants. So we got a Safety Production Law effective in June of 2002. So in that law, it stated clearly that the general manager or the owner of the premises will be responsible for any fire hazards if they occur.

In other words, if the general manager of the state-owned enterprise -- if the fire is caught in the plant, he will be removed on the spot. So he has -- so all these heads of all the state-owned enterprises have a vested interest in the liability for putting up proper fire protection systems.

And also, since the law was newly effective, there's a lot of current infrastructures that don't have adequate fire protection systems in place. So there's a lot of opportunities for retrofitting in the existing facilities as well. And looking from a company perspective, we are ranked number one. However, we only have about 3% of the market share in the industrial fire protection sector that we are in. So there's lot of opportunities for us to grow.

This industry has -- the industrial fire protection sector has significant barriers to entry. And first of all, I think the product solutions are different from the traditional commercial and residential fire protection systems. And so, the designers will have a different set of knowledge. He needs to understand the complete system. And also, our product -- industrial product requires a specialized design and specification in comparison to commercial residential buildings where the products are mostly stand-alone and kind of becoming commodity products now.

And the clients are asking for a lot more than the traditional commercial and residential customers where the clients are asking for a total solution. For example, in iron and steel mill, they are very knowledgeable in producing iron and steel. However, they have really no knowledge in understanding what is the adequate fire solution for a plant.

And I guess, this morning, I talked to a few people. And they are surprised that we are able to provide automated fire protection systems for our industrial clients, which is really a must now with the new fire code in place. For example, in the fire, the system has to be able to respond to a fire automatically, and the fire extinguishment system has to be working to put out the fire.

And last, we have -- over the years, we have worked with our clients, mostly top tier, large state-owned enterprises. These clients actually present another barrier to the competitors in the sense our system has worked for our clients over the years. There is no reason for them to go to switch over to other competitors.

Here is the overview of our sales and implementation process. Basically, we are -- our business model is providing total solutions for our clients. So we work with our clients in the initial construction stage.

We are working with the design institutes in China to actually design a proper fire protection system. And then we certainly will go into the bidding process. And after we get the projects, we would do a manufacturing of our own proprietary product, including detectors, sensors and fire extinguishing nodules, et cetera.

And then, certainly, we will include other products from third parties as the total solution to our clients. And we oversee the installation of all the equipment included in the project. And after the project is completed, we will also get in the maintenance services from our client, which is kind of recurring revenue from our clients.

The revenue composition of our company -- there are three parts. One is we get the Total Solutions from the clients, which includes the design and the equipment and also the installation and engineering services which takes about 50% of our revenues.

And for the Product Sales, which in some cases we design for the client, we actually provide an integrated product. However, we leave the installation and engineering services to third parties, which is required by our clients. So that takes about 44% of our revenues. And we are getting about 3% of revenue from Maintenance Services.

The product portfolio, as I mentioned earlier, the full fire protection system includes three parts, the detection and the controller and also the extinguishing system. The detectors -- well, we have just a lot of detectors in the residential/commercial buildings as smoke detectors or fire detectors.

However, in the industrial plants that as many of you may not know what's going on inside underneath a power plant or an iron-steel mill, there are a lot of power -- high voltage power cables, like hydraulic oil tanks there. And so there we -- actually what's needed for the detecting is really detecting the temperature change. There may not be a fire. If it is a fire, it's always too late. So we are detecting a temperature change.

So we have the linear heat detector, and that's very special for the industrial application. It's not available. It's not used in commercial buildings. This is the product that we have lot of patents around it. We are the world's leading product vendor in the world. And also we get flame detector and gas detectors, which are used in petrochemical plants, etcetera.

And the controller is really the brain of our system. It takes the signal from the detectors and analyzes and sees whether it's only -- it may be just be a faulty part and it would send out the amber signals to the personnel who is going to look up -- take a look at that particular area.

If a fire -- if already a fire started, the system -- the controller is going to activate the fire extinguishing system whether it's water-based or a powder-based extinguishing system. And the picture here, as it shows you the system's overall status. So if anything goes wrong or faulty, there will be a red light or amber light showing on the screen.

The extinguishers -- we are mostly focusing on the water-based fire extinguishing systems. So we have designed special nodules to create a water mist and very fine tiny droplets inside the water mist systems to put off fire. And we also design the controllable valves so that we direct the water flow to certain directions, where there is a fire.

So we have maintained a very strong R&D team. This team has really focused on developing new products and actually doing not only the product development, but also the system testing. I guess there are -- in China, there are product certifications for fire extinguishing products.

But however, from the system perspective, whether how effective your fire extinguishing systems were is really a different matter. So we have installed actually -- have a life-sized testing facility to test the effectiveness of the fire extinguishing systems, which will be used later on as the certification for fire protection -- fire extinguishing solutions.

Our R&D team also helps the company as well as the government to set up industry tenders for product certification, for product standards, and also set up fire codes or fire certification for different industrial sectors.

So we have successfully -- we are sitting on the board of -- we are editorial member of the "Linear Heat Detectors" in China. So we have helped the government operate the linear heat detector standards in China, which is higher than the current standard -- the UL standard, which is widely used worldwide, especially in the US.

We are also helping the government setting up fire codes for industrial sectors. The latest one was declared effective in last December for the -- for iron and steel mills. And we’re still working with the government to help them develop the fire code for other industrial sectors.

We are not a manufacturing company per se, but we do have our -- we do manufacture our own products including the linear heat detectors and a special nodule. We are not really aborting manufacture, but the capacity we have -- as we are running about 50% of our capacity right now with the newly acquired facility in Shenzhen.

We have a nationwide sales network, which covers almost all over China. And over the years we have also established a good relationship with our partners and distributors in China.

Here is a sample list of our clients. The key point here is that these are all like large state-owned enterprises like Ma An Shan Iron and Steel -- Anshan -- Ma An Shan Steel and -- Anshan Iron and Steel and Wuhan Iron and Steel. Most of these companies like iron and steel companies are listed either on the New York Stock Exchange or Hong Kong Stock Exchange. And the contract we have received from these clients are -- like some of them are over $50 million over the last few years which shows that we are receiving recurring revenue from our clients.

Here is a case study that showcased that our system really worked. In April of 1995, our system was deployed and two years later was really -- a fire unfortunately started because of the molten mixed steel leak. Our system successfully had proved that -- it's actually the first case that in China has reported that the automated fire protection system actually put out the fire. And as a result of this, we have continuously receiving revenues -- projects from our clients.

Certainly, over the years we have received numerous awards and recognitions, including the number one in the category of System Contracting Enterprises. And we also received certification. In China, we got the Top Level Design Certification and also the Top Level Engineering Certification. And one thing I want to point out is we also received the UL Certification, which allows us to sell our products overseas.

Looking at the financial performance, we have achieved about 30% growth over the past two years from '04 to '05. And our nine month financials, we received as of -- in September, our revenue has achieved -- has exceeded the revenue in 2005 and also our net income exceeded the net income of 2005.

The key operating metrics here. We are growing. Over the last nine months, our revenue growth has been tremendous. We have achieved 54.3% revenue growth and also nice gross profit increase. And -- but the operating income increase is significantly less due to our -- kind of onetime non-cash expenses related to stock options. This will be just onetime expenses over US$500,000. That's why the -- it hits our operating income. But management has committed a "make good" provision in our last fundraise guarantee of net EPS of $0.46 for 2007.

The balance sheet. We got about $4 million as of September 2006, including the fundraise that we did in October and December, which was $8 million. There's about $12 million in cash and equivalents. We are getting positive cash flows from our business, but we really were not burning cash going forward. But the cash -- we have raised the money so that it helps us grow the business. And if opportunity occurs, we would do a joint venture or engage in M&A activity.

Here is -- if you got visibility going forward from '04 and '05 and also the three quarters through '06, we have increased our backlog, which is really the unrecognized revenue carried over for next year, has been increasing, to $26 million as of Q3 of 2006.

Management team. Our Founder and Chairman of the Company, who could not make it today because of the Chinese New Year in China. So he has been in the business for over 15 years in China's fire protection business. Over the years, he has built strong relationships with clients and also in the government.

He is on a lot of committees in China's fire protection industry. He also received recognition for his entrepreneurship in the city of Beijing. Mr. Li graduated from Beijing University with a Management Degree in 1991 -- a Master of Management Degree in 1991.

And myself, I have been involved with the Company since its inception. I was an early stage investor. And before joining the Company full time in January of last year, I was the CEO of a subsidiary of a NASDAQ-listed company called PacificNet.

And also, I had public company experiences with UTStarcom and Nortel Networks. All the experiences were in North America. And I graduated from University of Toronto with a Masters Degree in Electrical Engineering in 1989.

Most recently, since last June, Ms. Guo joined the Company as the President of the Company. She brought with her over 20 years of experience in China's fire protection business, mostly in government capacities.

Prior to joining our company, she was the Executive Vice President of another Hong Kong-listed company, which is in the commercial/residential fire protection business. And she helped with a lot of M&A activities over the last -- over the two years’ period that she was with the Company.

So she is going to help us a lot in identifying good companies in China. She also brought with her strong relationship connections with the government.

Okay. Last one. So the future growth, I think we are going to focus on organic growth. That's the focus of our company. Certainly, we will be looking at -- since with the fragmented marketplace there, we are looking at growth outside the Company, to setup joint ventures or if opportunity occurs then we will do M&A.

But I think we've got very good business potential here. And we're also looking at international penetration of our product. So that will be working through our OEM partners.

Judy Huang

Great. Thank you, Brian.

TRANSCRIPT SPONSOR HC International is a focused and dedicated organization that acts as a premier informational resource for institutional investors, hedge funds, buy and sell-side analysts, small to large brokerage firms and accredited investors. We help our client companies package their corporate information in a clear, concise and consistent manner while facilitating introductions to the right investors at the most opportune time. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.