China Security & Surveillance Technology Q4 2006 Earnings Call Transcript

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China Security & Surveillance Technology Inc (CSCT.OB)
Q4 2006 Earnings Call
March 12, 2007 4:30 pm ET

Executives

Terence Yap - CFO
Matthew Hayden - Hayden Communications

Analysts

Judy Huang - Roth Capital
Albert Lee - Maxim Group
Robin Roberts - Jayhawk
Jeff Kessler - Lehman Brothers
Chris Lackin - UBS
Boyd Hinds - Private Investor
Ashley Lucia - Diestry Capital
Joanna Wu - Southpaw Asset Management
Bill Wells - Pope Asset Management

Presentation

Operator

Good afternoon. My name is Marie and I'll be your conference operator today. At this time, I would like to welcome everyone to the China Security & Surveillance Technology Incorporated 2006 Full Year Earnings Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. And it's now my pleasure to turn the floor over to your host, Matthew Hayden from Hayden Communications. Sir you may begin your conference.

Matthew Hayden

Thank you, Marie and thank you everyone who has joined us today for China Security & Surveillance Technologies 2006 earnings conference call. The earnings release should be crossing the wire any moment, and the company plans to have its 10-K filed also in the near-term.

Your call today will be hosted by Mr. Terence Yap, the company's CFO and Vice Chairman. Mr. Yap will provide investors joining the call, with financial operating highlights for the 2006 fourth quarter and full-year, along with a corporate update on recent activities, the industry outlook and corporate goals for 2007.

Before we could start, a review of the Safe Harbor statement regarding today's conference call. This conference call may contain forward-looking statements concerning China Security's business, which are intended to be covered by the Safer Harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995.

The actual results may differ materially depending on a number of risk factors including but not limited to, general and economic and business conditions, new product development, installations, market acceptance, additional competition from the existing and new competitors, changes in technology and various other factors beyond the company's control.

All forward-looking statements are expressly qualified in their entirety by the cautionary statement and Risk Factors detailed in the company's filings with the SEC. China Security & Surveillance undertakes no duty to revise or update any forward-looking statements through select events or circumstances after the date of this conference call.

With that out of way, I would like to turn the call over to Terence Yap. Terence the floor is yours.

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Terence Yap

Thank you very much, Matt. Well good afternoon ladies and gentlemen and welcome everyone to our 2006 yearend conference. Allow me to apologize once again for the late release of the earnings call.

2006 has been a very productive 12 months for our company, and the managed team has achieved several significant milestones, which maintains record revenues for '06.

We had record revenues of $107 million, a 227% increase from $32.7 million for the quarter in 2005. In addition, the company signed approximately $41.7 million in new contracts during the quarter, providing enhanced visibility into 2007.

Our organization has grown significantly during the past year. And on 31st December, we had 580 employees, including 33 people dedicated to R&D, 335 to engineering and sales.

During the last conference call, we discussed our company in quite a bit of detail, along with our products and services, target markets and the business and governmental drivers at place.

So I will save your time. I want to go through everything. I'll actually reiterate one very important point; our goal is to become the number one vertically integrated Security and Surveillance company in China. By that, we mean being a true one-stop-shop for our customers. This includes manufacturing, product and system and solutions, and integration, as well as ongoing maintenance.

We believe this key differentiator will help us grow significantly, and helped us grow significantly during the past few years, by winning businesses from new and existing customers throughout China, while, building a brand name, which has become known industry-wide.

To support this significant growth, we have also announced a $60 million convertible notes purchase agreement with Citadel, which carries a five-year term by an interest rate of 1% per annum, with an initial conversion price of $18 per share.

This will provide the necessary working capital to complete our pending acquisitions, while capitalizing on key organic growth opportunities throughout 2007. I will elaborate more on this, later during the call.

Now let's move on to the financial results for the quarter which ended December 31st, 2006. All comparisons noted here will be against the fourth quarter of 2005. Revenues of $440.9 million, an increase of 451.1%. Revenue for the fourth quarter also included contributions from Shanghai Cheng Feng. Gross profit increased 426.1% to $10.7 million. Gross margins were 26.2% compared to 27.4% last year.

Operating expenses increased 136% to $2.4 million. Income from operations increased to 722% to $8.3 million. Operating margins were 20.2% compared to 13.6%. Net income was $6.6 million compared to $1.3 million.

Net margins were 16.2% compared to 17.3%. Unfortunately we do not have a break down on specific diluted share count from auditors here, and thus we cannot provide a final EPS number at this time for the fourth quarter.

From a balance sheet perspective, cash and equivalents on 31st December was $1 million compared to $2.3 million on 31st December, 2005. This was a result of capital raised during 2006, plus positive cash flow from operations.

Accounts receivables increased to $26.8 million. Day sales outstanding were 90 compared to 128 for 2005. Inventories stood at $19.7 million, which was utilized for project implementations underway. The significant increase in new business won and in-process is the direct cost of this increase.

Current assets were $86.1 million and the company had a current ratio of 3.8 to 1. Total current liabilities were $22.6 million. Working capital on 31st December was $63.5 million.

Now, turning to full-year results, we will just stay at a very high level and run through the key financial metrics for the full-year 2006. The comparables will be against 2005 calendar year results.

As I mentioned during the introduction, revenues increased 227% to $107 million. Approximately 88% of these revenues came from selling entire solutions, including supply and installation of Security Surveillance equipment, where only 12% was from product sales.

More specifically, 40% of revenues were from engineering. Planning, architecture, at engineering accounted for 30%. Software was about 20%, while maintenance accounted for 10%.

Cost of goods sold increased 223% to 76%. Gross profit increased 236% to $31 million. Gross margins were 29% compared to 28.2%. This resulted from a change in our business mix and leveraging our model as revenues increased.

Operating expenses increased 226.5% to $5.7 million. Depreciation and amortization for the full-year was $1.1 million compared $300,000. Net income increased 215% to $22.9 million, net margins were 21.4 compared to 22.2.

The company incurred a $3.9 million in tax for the full year, which carried an effective tax rate of about 14.5%. Diluted EPS were $0.87 versus $0.39. Diluted shares utilized in the calculation were approximately 26.3 million compared to 18.5 million.

Allow me to run through the highlights for '06, which will set the stage for continued growth during 2007. During the year we signed approximately 152 new contracts, the total value of approximately $116 million and during the fourth quarter we signed 57 new contracts totaling $41 million in revenues. Of which majority were realized during the quarter, which was about the end of March 31st.

In July, the company entered in a purchase agreement to acquire China Chong Qing. The government approval came in the middle of December. The proprietary software created at Chong Qing, includes a security source integration management platform and a security integration platform. These modules help integrate hardware and software onto a single operating system, which improves the overall management and functionality of the entire security system.

Next, we paid a total of $7.5 million and 1.33 million shares of restricted stocks. In addition, Chong Qing entered in a make-good provision with us and collateralized shares for 2006 and '07.

As part of the closing Mr. Yan Xu Fong, the founder of Chong Qing, was appointed Chief Operating Officer of China Security. He has really proven to be a valuable addition to our team. So while we purchase the company to help further augment our product offering and differentiate China Security, we also acquired significant distribution by combining their point of presence.

We now have more than 37 point of presence. In addition, we believe the return on investment of this acquisition considering Mr. Yan's contribution is probably understated. If you were to look at the economic impact.

We also announced in December that both Golden Group our main operating subsidiary and Shanghai Cheng Feng were awarded a position in the top 50 enterprise, in China security industry.

This is a group of government agencies that collects reports to recognize our achievements and accomplishments. While providing credibility and brand recognition, which facilitates our new business.

During '06, the company raised approximately $32.8 million in net proceeds to free equity financing to provide working capital and helping facilitate the acquisition of Cheng Feng.

On October 3rd, the company formalized a receivable bank financing agreement with the China Construction Bank to facilitate new business signings, contract work for approved Safe City 3111 initiative projects.

We believe this provides a significant competitive advantage, as the majority of our competitors do not possess these resources and working capital to effectively compete, win, and execute on projects of this size.

When coupled with our recent Citadel financing, we believe we have more durable working capital and accounts receivable financing than any of our competitors. And 2007 is the year to win as much new business as possible.

I would like to elaborate on this opportunity, which we view as our biggest opportunity. From a macular view, a secure and stable society is a priority for the central government of the PRC. And this initiative will be implemented through provinces and special subsidies.

More specifically, this Safe City initiative is part of 11th five year plan, which calls for surveillance systems of other areas, traffic junctions and government buildings etcetera.

Implementations include street cameras, traffic intersection, monitoring of [daily] public and government areas. All connected to local Public Security Bureau.

In fact, cities have their own budgets to determine the size and expense of the contracts. So, this is why we are winning business and who we interface with through the implementation.

Initial pilot projects have restarted, and I will run through this in a moment, while major installations will commence in 2007. To qualify this opportunity, we estimate that the average contract win for major cities is approximately $30 million.

There are approximately 660 cities requiring installations. Thus, the addressable market is approximately $25 billion.

In addition, we see other related opportunities which may emerge from this massive undertaking, which includes security, the service provision of security operations, which includes emergency reporting calls and of course the first level of the filtering and this is a recurring revenue model.

There is also the opportunity of the citywide fire alarm industry, which can be added on to the same network.

More specifically 3111 is part of the safe city and which is what actually pick things off. The 3 stands for province, city and municipal; 111 meaning each province will select one city, each city will select one county, and each county will select one district. Selection is based upon financial strength, and so far approximately more than 22 cities have been selected.

We have already secured several projects in Shandong, Guangxi, Xianyang, Baoan, altogether more than 13 areas. In addition, we have been approved by the 3111 government initiative for our camera systems and DVR.

And while I discuss how big the opportunity is going forward. We are pleased to report that we made significant progress during 2006. Securing specific city business and cementing our needs as a premier brand name player relative to this initiative.

We secured 13 Safe City projects and cyber-cafes covered under the State Ordinance 458. We expect many of these, in each contract, to become much larger in size and scope as we move through this year.

As many of you know and some of you have visited, we currently own a 60,000 square foot manufacturing facility. Sorry, we currently rent a 60,000 square foot manufacturing facility in Shenzhen and together with Beijing University we have adjoined R&D plant based in Shenzhen as well.

In order to facilitate our business expansion, we need to add additional manufacturing capacity with increased assembly operations and distribution capabilities. We recently signed an LOI to acquire an industrial park in Shenzhen. The park measures 80,000 square meters and total configuration is estimated to be about $15.5 million; half to be paid in cash and half in equity. The company expects to complete this purchase by end of 2007.

We are benefiting from a confluence of strong macro trends. Key government initiatives and regulatory drivers, which have collectively created one of the most dynamic growth opportunities in China and management believes it will continue for the foreseeable future.

For those who are new to this story, it's important to quantify these fundamentals.

According to the China Public Security Guide, which is published by the China Security and Protection Industry, the market is growing more than 45% over the past five years and is expected to reach $33.2 billion by the year 2009.

We believe the growth during 2007 will come mainly from first of all, Safe City projects. Secondly, through further adoption and compliance with 458 Ordinance, where last year Shenzhen city was an early adopter, and one of it's local cybercafé associations made plans to installing surveillance at all 1,000 locations throughout the city.

Current and new customers from private and public sectors, including installations for educational institutions, businesses, airports, government offices, public bus and railway transportation controls etcetera.

We operate in a large and very fragmented market, which is comprised of over 15,000 vendors. This provides us with opportunity to tactfully pursue acquisition targets, which possess technology, distribution and then also this expertise and will complement our vertically integrated model.

In December, we announced LOIs to purchase two companies. First, HighEasy Electronic Technology or HighEasy for short. Is based in Wuhan, and owns advanced compression technology, which will enhance our product offering and user functionality by facilitating video and audio transmissions over telecom infrastructure.

Additionally, the acquisition will provide increased efficiency related to the company's current DVR system, as data will be compressed more effectively and seamlessly across the company's entire product suite.

The second the Shenzhen Hongtianzhi Electronics Company Limited or Hongtianzhi. It's currently one of China's top security camera manufacturers. The acquisition is expected to bolster China's Security presence in the domestic market, by making it one of the only vertically integrated providers. While also facilitating the company's planned expansion into new markets. The purchase is approximately $40 million for both companies', with half consideration in cash and half with stock.

Both companies will also enter into make-good provisions with China Security. The company acquisition is subject to final due diligence and government approvals. And we expect to close it within the first half of this year.

In addition, both companies have been awarded the top 50 enterprise in the security industry by China Security and Protection Industry Association. A designation, that China Security also enjoys.

The company successfully surpassed its 2006 make-good of $17.5 million in net income. And Mr. Tu, the company's founder and CEO, placed his personal stock as collateral for 2007, agreed to make-good, which is $34 million in net income.

In addition, I am pleased to announce that a report recently, passed a resolution effectuating a lockup agreement for shares held by senior management and shares issued for both recently completed Cheng Feng acquisition and for future contemplated acquisitions.

The lockup covers shares held by the CEO, CFO and COO and other key senior managers. And as (inaudible) said these parties may not pledge, mortgage or sell these shares till 31st December, 2008. Shares issued for future acquisitions are expected to be subject to a two-year lockup provision.

In addition, I am also pleased to announce that we will be attending the B. Riley Conference on March 14th at 9.15 am. For which I will be catching a flight in a couple of hours, and also the ISC conference at the end of the month.

So, in summary, we are operating one of the largest in absolute dollars in the fastest growing markets in China. We are well capitalized and have improved working capital significantly during the past six months through equity financing.

Our convertible notes with Citadel plus our agreement with the China Construction Bank. We have a large installed customer base to leverage and a broad geographical distribution footprint, which has expanded significantly through the acquisition of Cheng Feng.

This concludes our prepared comments. I would like to take this opportunity to thank you for joining us today and more than helping and happy to open to calls for any questions.

Marie, we are ready for any questions.

Question-and-Answer Session

Operator

Certainly sir. (Operator Instructions). Our first question comes from Judy Huang from Roth Capital. Please go ahead.

Judy Huang - Roth Capital

Hi, Terence. Great quarter, congratulations.

Terence Yap

Thank you very much.

Judy Huang - Roth Capital

I just had a question on the acquisitions for HighEasy and Hongtianzhi.

Terence Yap

Yes, please.

Judy Huang - Roth Capital

Are those expected to close, second quarter of '06? Is that progressing on schedule?

Terence Yap

Yes, it is.

Judy Huang - Roth Capital

Okay.

Terence Yap

Yes, it is still on track.

Judy Huang - Roth Capital

Still on track, okay. Is that expected to close towards the end of the quarter I think?

Terence Yap

You mean end of Q2?

Judy Huang - Roth Capital

Yeah, end of Q2.

Terence Yap

No. We expect them to be at the beginning of Q2, hopefully. We are still finishing off all the final documentation and due diligence right now?

Judy Huang - Roth Capital

Okay, great. And then I noticed that you said your product mix, 12% is coming from product sales now. With these future acquisitions, product sales comprise a greater part of revenues. That said, do you expect the gross margins to come down a little bit as well because of product sales?

Terence Yap

Yes and no, because, yes, it's true that the product mix would change in '07 due to the acquisitions of these companies. We still reiterate that the gross margins will maintain about 27%, mainly because of some of the higher gross margins business in the solution.

As you know that some of the business that will be going forward in terms of the governments, will have higher gross margins due to the fact that we are providing a financing facility with the CCB, China Construction Bank financing package. So we are still confident that the gross margins will maintain about 27%. 27%, 20% or around that.

Judy Huang - Roth Capital

Okay and then last question. You have a great industry macro overview picture. Do you think 50% organic growth rate for Golden Group for '07 is attainable?

Terence Yap

Well, if you look at the growth from last year. Even without government 3111 projects and regrouped by more than 20% already. So we are assuming still the growth in the range of 40 odd to 50 is still possible.

Judy Huang - Roth Capital

Okay thank you very much.

Terence Yap

Thank you.

Operator

Our next question comes from Albert Lee from Maxim Group. Please go ahead.

Albert Lee - Maxim Group

Hey there. Can you hear me?

Terence Yap

Hi Albert.

Albert Lee - Maxim Group

You can hear me. Okay, good. I have got out of the way here, what was the net income figure for Q4 again and what was the tax rate associated with that, again?

Terence Yap

The net income for Q4 was about 6.6.

Albert Lee - Maxim Group

And the tax rate associated with that?

Terence Yap

The tax, we paid about 24.7%. But that's because in the last year, we actually had a lot of deferred payments in the quarter. For the full year it's about 14.5%.

Albert Lee - Maxim Group

14.5% okay. And did you talk about the latest backlog at all?

Terence Yap

We have signed $41 million contract. A majority of 50% or more will be recognized in Q1 of this quarter.

Albert Lee - Maxim Group

Okay. So that's the way it is. And with respect to the few acquisitions. What was the potential revenue contribution again on that? And I guess, was it roughly $40 million on a full-year run-rate basis?

Terence Yap

You mean for the current acquisitions.

Albert Lee - Maxim Group

Yeah the Hongtianzhi and the HighEasy.

Terence Yap

Well just under 40 million, about 35 million. That's what we have announced previously.

Albert Lee - Maxim Group

Okay. Got it. And the press release isn't out yet, right. Is that going to be out anytime sooner or is it --?

Terence Yap

Yes I do apologize once again due to finalization of figures with the auditors' etcetera.

Albert Lee - Maxim Group

Okay, got it. Thanks.

Terence Yap

Thank you.

Operator

Our next question comes from Robin Roberts from Jayhawk. Please go ahead.

Robin Roberts - Jayhawk

Hi Terence, great quarter congratulations.

Terence Yap

Hi Robin.

Robin Roberts - Jayhawk

When you look at the fourth quarter numbers and look through all the contracts you signed. Did you sign some contracts, that's earlier than you expected?

Terence Yap

What do you mean, signed some contracts earlier than expected?

Robin Roberts - Jayhawk

Well, before each quarter, you have contracts that's been signed. Everybody have those pipelines, sales pipelines, you've got the stages etcetera, before the deal closing. So I am just wondering, in terms of timing of those deal closings, were they on target as you expected or are some of them were earlier?

Terence Yap

Yes, we are on target for the contracts and also some of the closing. We expected that the contracts signed after the 15th of November, is mostly likely to be pushed over to the first quarter of '07.

Robin Roberts - Jayhawk

Alright. But so far in terms of fourth quarter, the number contracts being signed before November 15th, was basically on target as you expected.

Terence Yap

As we expected, yes.

Robin Roberts - Jayhawk

Okay. And if I heard you correctly, you said that your '07 make-good provision is $34 million in net income. Right?

Terence Yap

That's right.

Robin Roberts - Jayhawk

And you expected a gross margin of '07 at about 27%?

Terence Yap

Gross margins, yes. Fluctuate between, roughly about 27%. Yes.

Robin Roberts - Jayhawk

Okay. So if net income is $34 million and gross margin is 27%. At what level of revenue can you get through the net income of $34 million?

Terence Yap

Well, we have not given a full-year guidance, yet. But the analysts have given us between $180 million to $200 million in full-year revenues. We think that we are pretty comfortable with that at this point of time.

Robin Roberts - Jayhawk

Okay. And so basically, let's say worst case scenario is 180. You still can get to the $34 million net income basically?

Terence Yap

Yes assuming its 180.

Robin Roberts - Jayhawk

Okay, alright. That's helpful. Thank you very much.

Terence Yap

Thank you Robin.

Operator

Our next question is from Jeff Kessler from Lehman Brothers. Please go ahead.

Jeff Kessler - Lehman Brothers

Thank you. Hi, Terence, how are you doing?

Terence Yap

Hi Jeff. Staying awake.

Jeff Kessler - Lehman Brothers

A couple of questions here. Clearly the acquisitions that you have just made, the two acquisitions. At least one of them is dedicated towards vertical integration of products and one is essentially vertical integration of software. What I am getting to is to what extent can you drive down the cost of first compression and then storage on the video side, as a way of keeping that gross margin going up. The product mix is changing this year and some of that product mix may be going against you.

What can you do in the vertical integration area to offset that in the area of both compression and storage and anything else that you can do to help you?

Terence Yap

All right. Mainly for us, in the terms of applying the compression, it's more of a completion of our product suite, offering a much more complete suite of services and products to our customers.

In terms of driving the costs [in all], by relocating some of the manufacturing specialties together, we will enjoy economies of scales, because obviously someone, like for example when we bought (inaudible) top three models, top three Sony chip buyer in Asia-Pacific. So obviously they get a better pricing from chipsets than us. So we will enjoy in terms of economies of scales and better purchasing price etcetera from that side.

But in terms of hard disk, that's just depending on the customer's requirement, because like I said the compression will enhance the ability of us to actually transmit the data or the video feeds over wired or wireless communication. That adds an attractive proposition to the customers and therefore that will probably translate to a much more better complete suite of services and hopefully a better pricing, which will probably stabilize our gross margins.

Jeff Kessler - Lehman Brothers

Right. To what extent, do your current customers have analog legacy systems and how easy will it be for you to convert these systems over to digital?

Terence Yap

While the benefit for us, like in any -- I guess I will not say its both at the investor lines and generalizing economies. Whereby we are almost starting from a clean plate. We are not like an US legacy of analog cameras in China. I guess we are leapfrogging a lot of technology.

We did not start off with a lot of analog cameras [forward in place]. There are some, but real not a lot. So we are really starting from a clean plate. A lot of them are really new installations. So therefore, we don't see much issues in terms of converting, analog to digital.

Jeff Kessler - Lehman Brothers

Another question that we have gone over before. One thing I have to ask is, on your recurring revenue. What do you believe in 2007 and perhaps even if you want to talk about 2008, can you drive your recurring revenue up to as a percentage of your sales and where are you going to get it from?

Terence Yap

Right, well, as I mentioned to some of you before as well. That right now we do not have the recurring model, except for inventions, which is really not that significant at this point.

But the key for us is this, when we build the network capacity for the safety projects, up to a certain level. We strongly believe would better the opportunities to actually provide security surveillance monitoring service within the local areas and local provinces.

We think that this will probably happen in '08, '09 when the installation is of a critical mass. There will be a recurring model, whereby we can possibly collect a security tax fee jointly with the local Public Security Bureau and even more often monitoring service to corporate sectors as well.

Once again, this will only be probably kicking in '08, '09. At this point of time, I cannot provide any percentage in terms of how much it will be for revenues, because everything is growing enormously. But our feel is that from the US industry, more than 50%, especially the fees from the monitoring service and surveillance services. So we think that it will be a moving part of the significant portion of our business.

Jeff Kessler - Lehman Brothers

Thanks, one final question. You don't currently, because again in China the market is kind of starting from scratch. You don’t have the classic channel conflict that we see here in the US security market, between the product manufacturers and the security services companies.

Is there any problem that you see in generating a business model that can accomplish both at the same time? Or that will there be some internal tensions that you may run-up against as far as trying to create a total turnkey solution?

Terence Yap

Right. Over the past few years, we have looked at this and from my experience we not had any problems. In fact this has been an advantage for us, because whenever we go for different projects, whenever we talk to the government officials. We constantly pride ourselves at a one-stop-shop service provider.

This adds a lot of credibility and a lot of benefit for us in terms of accountability to the government point of view. You have got to remember that China is a huge, huge geographical country and each province, each country has their own language and culture. So bee-hiving our own vertically integrated and factoring all the different provinces has helped us in terms of understanding the local environment, and building relationships with government officials, which has certainly helped us in terms of building the business.

Jeff Kessler - Lehman Brothers

All right. One final question, that is, are you going to be building the systems and are you do you doing it now to international or compression standards? Amtec, Forge, things like that?

Terence Yap

I am sorry can you repeat that last line.

Jeff Kessler - Lehman Brothers

Basically international compression standards, so that you can have other people selling your systems, actually making it more of an open system?

Terence Yap

Oh absolutely. We think it's important to also putting out some open platform. In case we need to integrate any other third party accessories and products into our systems.

Jeff Kessler - Lehman Brothers

Okay, very good and congratulations on a good year.

Terence Yap

Thank you very much. Jeff.

Operator

Our next question comes from [Chris Lackin] from UBS. Please go ahead.

Chris Lackin - UBS

Thank you. First of all great quarter.

Terence Yap

Thank you.

Chris Lackin - UBS

I just have a question. May be I missed this initially; I had to get on a little late. There is maybe something wrong with my computer, but we actually will see a full-year report or a quarterly coming out online sometime. I just misunderstand.

Terence Yap

Yeah the earnings call will be coming out shortly with the press release. I do apologize for it once again.

Chris Lackin - UBS

Okay. In the next like week or so, or a couple of days?

Terence Yap

The 10-K will actually be issued within next week.

Chris Lackin - UBS

Okay. Thank you very much.

Terence Yap

Thank you.

Operator

(Operator's Instructions). Our next question comes from [Ashley Lucia from Diestry Capital]. Please go ahead.

Ashley Lucia - Diestry Capital

Yes hi, Congratulations again on your quarter.

Terence Yap

Thank you.

Ashley Lucia - Diestry Capital

I wanted to ask you about an update on getting listed in the US at all?

Terence Yap

Okay. We actually were in New York about two weeks ago and we have spoken with the New York Stock Exchange and we basically complied with all the requirements in terms of the distribution and also the financial.

Right now we just need to put in place the independent Board of Directors, and also internally we want to ensure that the SOX is in place before we move over to the [main bar].

We are right now considering a New York Stock Exchange as a possible move through the main bar. So at this point in time, I cannot commit on a timeframe. But certainly, we are looking at a possibility of within this year.

Ashley Lucia - Diestry Capital

Thank you. And also when will this 3111 project again impacting revenue growth?

Terence Yap

This year, '07.

Ashley Lucia - Diestry Capital

Okay, do you know when in '07?

Terence Yap

It looks like it will be within Q2.

Ashley Lucia - Diestry Capital

Okay. Thank you very much.

Terence Yap

Q2, Q3. Thank you.

Ashley Lucia - Diestry Capital

Great Thanks.

Operator

Our next question comes from Boyd Hinds, private investor. Please go ahead.

Boyd Hinds - Private Investor

Hi, Terence. What is the current capacity utilization for the company?

Terence Yap

Right now, we are about 50%, 60%?

Boyd Hinds - Private Investor

Okay. And do you anticipate having to add any new property plants or equipments during 2007 to meet --?

Terence Yap

Yes. I actually mentioned that we are looking at expanding to an industrial park, whereby we will merge all the manufacturing facilities in to a single location.

Boyd Hinds - Private Investor

Okay. Have you ever published what kind of win ratio you guys have on a project that you have bid on successfully?

Terence Yap

Unfortunately I don't think so. I don't think that we have any official figures out of that.

Boyd Hinds - Private Investor

Okay. Could you give us some idea of how many bids that you have out there currently that have yet to be determined?

Terence Yap

Well bids are not released yet. But we are going through a lot of bids right now, but I don't have an official number that I can release to you unfortunately at this point in time.

Boyd Hinds - Private Investor

Okay. In 2006 you acquired Cheng Feng. Did they satisfy their make-good provisions for the year?

Terence Yap

Yes they did.

Boyd Hinds - Private Investor

So do you have any breakdown of how much they contributed to the net income in the quarter?

Terence Yap

About 12% or less than 12% in the second year. For the full year it's approximately $4.1 million for the full year. But remember we only included their financials in Q3 of this year.

Boyd Hinds - Private Investor

Okay. And do you have a breakdown for Q4?

Terence Yap

No. Not at this point in time unfortunately.

Boyd Hinds - Private Investor

Okay. Is it safe to assume that the bulk of that came in Q4?

Terence Yap

Absolutely yes.

Boyd Hinds - Private Investor

Okay. Thank you.

Operator

And our final question comes from [Joanna Wu from Southpaw Asset Management]. Please go ahead.

Joanna Wu - Southpaw Asset Management

Hey Terence.

Terence Yap

Hi Joanna.

Joanna Wu - Southpaw Asset Management

Congratulations on all that hard work, it paid off.

Terence Yap

Thank you very much

Joanna Wu - Southpaw Asset Management

Few quick questions. I think I missed out on some of those financials earlier. If you don't mind just kind of giving me the download on the revenue and operating income line?

Terence Yap

Yeah for the full-year we have $107 million, gross margins were 29%. Our gross profit was about $31 million. The operating expenses increased to about $5.7 million. Net income $22.9 million.

Joanna Wu - Southpaw Asset Management

Got you. And how much did you say depreciation and amortization was?

Terence Yap

$1.1 million.

Joanna Wu - Southpaw Asset Management

And that’s for the full year.

Terence Yap

That’s right. For the full year. The tax rate was about 14.5.

Joanna Wu - Southpaw Asset Management

Okay. Do you see your tax rate potentially having an increase as the new taxation laws that have recently been released in China?

Terence Yap

No, we don’t think so because right now most of the companies that you are looking to acquire have got special status in terms of being a technology company or being a R&D company. So they do enjoy certain tax benefits. So, we don’t think that will have an impact on us.

Joanna Wu - Southpaw Asset Management

Okay, good. And then just a follow-up on your remark earlier about adding capacity with I guess you are expanding into the industrial park at Shenzhen. How does this change your cost structure? Since you are effectively merging all your NASDAQ trading facilities into one platform, is that what it is?

Terence Yap

Yeah. We are hoping to merger every single acquired entities manufacturing facility into a single location thereby hopefully we will have a better economy for scale.

Joanna Wu - Southpaw Asset Management

Right. And how would that impact your cost structure?

Terence Yap

Well, we definitely hope that they will decrease our cost of goods in terms of purchasing and also our manufacturing costs as well.

Joanna Wu - Southpaw Asset Management

Any colors as to how you can quantify that?

Terence Yap

At this point, not possible because we are still growing through the figures numbering and everything, because of the acquiring target, et cetera. So we are still looking through that.

Joanna Wu - Southpaw Asset Management

Got you. And then lastly just regarding competition, are you seeing any other players kind of coming out of the woodwork here, and trying to get a piece of this market in China?

Terence Yap

Right now we are still seeing that we are the leader in terms of being the most capitalized company. And being the first secured company to be listed in the US, we have gained tremendous milestones and hit starting in terms of our credibility and profile with the Chinese government. So, at this point of time we are still seeing, not a lot of competition coming up in terms of the city-wide, et cetera. But once again though, it’s a huge project. There may be localized smaller players partnering with state-owned companies that are bidding for projects. But we are still the only largest vertically integrated multifunctional service provider in China.

Joanna Wu - Southpaw Asset Management

Got it. Okay, thank you very much. And good luck to all of you.

Terence Yap

Thank you, Joanna.

Operator

Excuse me sir, we say we have one final question from Bill Wells of Pope Asset Management. Please go ahead sir.

Bill Wells - Pope Asset Management

Hey, we were just going to ask you are you starting to see anymore competitive threats from in the large Chinese telecom companies?

Terence Yap

Not really. We see them joining bids with other manufactures mainly because some of the last mile from the local public security bureau. We need to rely on the local telecoms. In fact, we actually partnered with them in some of the projects for the last mile installation. You have to remember the telecoms operators do not really focus on manufacturing of surveillance systems or even the monitoring or installation. They do what they do best is really providing the telecoms infrastructure. So, rather then viewing them as a competitive we view them as a partner in a lot of these projects.

Bill Wells - Pope Asset Management

Thank you, Terence.

Terence Yap

Thank you.

Operator

This concludes our Q&A session; I will now turn the floor over to Mr. Terence Yap for any closing comments.

Terence Yap

Well, thank you very much ladies and gentlemen. It has been a great 2006 for us and we certainly know that '07 would be another exciting year for everyone. So, we look forward to you continuous support in the future months. Thank you very much.

Operator

Thank you everyone. This concludes today's conference call. You may now disconnect your lines at this time and please have a wonderful day.

Terence Yap

Thank you, Marie.

Operator

Have a good day, Mr. Yap.

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