China Security and Surveillance Systems: Riding the M&A Wave

PWC just released an interesting report that shows a dramatic increase in domestic M&A in China. This is clearly a reflection of the fact that many industries in China are highly fragmented, a legacy of the centrally planned economy where each province jealously guarded it’s own turf and local industry players. As China heads more and more towards a free market, it his hard to imagine this trend subsiding. This has also created great opportunities for aggressive regional players who can make smart acquisitions allowing them to make the leap from regional player to industry leader.

One company who has clearly taken advantage of this situation is China Security and Surveillance Systems (CSCT.OB), which has made several acquisitions including three recent ones and seen revenue growth in excess of 100% in the last year. They have done an excellent job of piecing together many smaller firms who have strong positions in different growth segments to create a more formidable player in the security systems space. Allowing them to offer a wider range of services and products while increasing their distribution and marketing channels.

This type of growth strategy doesn’t come without its own set of risks. In particular the need to find attractive acquisitions targets at reasonable prices to maintain growth will likely become more and more difficult over time. Luckily for CSCT it looks like they are in the early innings of a big game. According to the Chinese Security and Protection Association the security and surveillance industry is growing upwards of 40% a year and by 2010 industry revenues should be in the neighborhood of 12 billion USD. Although we assume their estimates are on the generous side, considering CSCT revenues probably won't exceed 100 million USD for 2007 it looks like they will have no problem finding attractive targets and taking market share from their smaller and less nimble competitors.

CSCT 1-yr chart

Disclosure: none