Chinese Terrorist Plot Proves Security A Global Concern: Here's How To Play

| About: Implant Sciences (IMSCQ)

News of an attempted hijacking on a Chinese plane remains poignant in the world of security and antiterrorism. On June 29, hijackers attempted to take over a Tianjin Airlines passenger flight in the remote western region of the Xinjiang Province. Within minutes of takeoff, six men leapt from their seats brandishing lengths of metal that had been dismantled from a crutch, apparently brought on board by one of the perpetrators. Witnesses said the men attempted to ignite explosives that had been smuggled aboard as well, although how remains unclear. The men, ethnic minorities of the Uighur region which has seen increased violence with recent government crackdown, stormed towards the cockpit using the makeshift metal rods as weapons and pry bars in an attempt to break into the cabin. Alert passengers, including six local policemen, subdued the hijackers with mostly minor injuries and prevented the explosive devices from being detonated.

The explosive objects are the most terrible part of the hijacking plots. We are still investigating whether they are standard detonators or self-made bombs," said a Xinjiang official, "The passengers, flight guards and police officers managed to stop them from being successfully ignited in time.

While this may seem like an outlier event, the Chinese government has heightened national security and launched an investigation into security at the airport. The New York Times reported the following week that, "The new security measures announced Thursday include requiring disabled passengers to present hospital-issued certificates if they want to bring crutches on a plane. Passengers flying from the city of Kashgar, which is near Hotan, must check crutches and wheelchairs as baggage." Although the Chinese government remains notoriously tight-lipped on details, security enforcement at national and international airports has become a priority in quashing terrorism in China.

Increased vigilance and manpower improve threat detection, but some elements require a more technological approach. The explosives used in the Chinese hijacking were smuggled on board with supposed ease; officials have yet to release information about how the explosives made it on the plane, leading me to wonder if they've figured it out at all. Regardless, explosive detection devices are widely available and may herald the end of guesswork in determining where a bomb might be hidden. Products from Morpho Detection (OTCPK:SAFRY), Implant Sciences (IMSC.PK), and Smiths Detection (OTCPK:SMGKF) quickly and accurately screen passengers for trace explosive particles. Handbags, clothing, and larger checked baggage can be screened with the same speed and efficiency as current X-Ray machines. Notably, Implant Sciences is the only domestic pure trace-detection technology play; Morpho and Smiths are both based outside of the United States.

Implant Sciences has already made forays into the Chinese security market. The company announced in June a $150,000 Chinese order of the company's handheld HS-150 detection device for police-use and bomb squad personnel. In 2007 the Chinese government used Implant's detection systems to provide security during the Beijing Olympic games, and again just this year the products were deployed internationally for the Summit of the Americas in Columbia. One Chinese customer alone (presumably government) represented 45% and 62% of IMSC's revenues in 2010 and 2011 respectively - demand is growing in a country that recently faced an avoidable terrorist mishap. With a proven track record in Chinese - and international - indications markets, IMSC may see increased sales to the People's Republic as the country's transportation security tightens.

Take a look at IMSC's recent headlines and it becomes clear that global sales have driven much of the company's progress. International sales accounted for 85% and 98% of Implant Sciences total revenue in fiscal 2010 and 2011, largely due to domestic regulation. The TSA requires extensive testing of all products used for airport screening in the U.S. through the Dept. of Homeland Security's Transportation Security Laboratory (TSL). Implant's products, the handheld QS-H150 and benchtop QS-B220, are currently in the testing and approval process with the TSA. IMSC management expects a positive ruling in August of this year which will open the domestic market to their proprietary systems. To return to an earlier point, if (and they are) Implant Sciences' products are comparable to those made by a competing firm outside the U.S., it's reasonable to assume the government will prefer granting a contract to a domestic manufacturer like Implant Sciences, for both political and economic reasons.

The company's balance sheet, however, may present their biggest hurdle. Implant Sciences has $5.5mm in current assets, up against $35mm in current liabilities of which $27mm belong to the DMRJ Group. This may actually bode well for the company as DMRJ has repeatedly positioned themselves as a long term benefactor of the company, extending the credit line and promissory notes' due date from March to September of this year and increasing the amount borrowable under the line of credit. If the August TSA approval holds water, DMRJ may in fact be the greatest beneficiary in IMSC's long and profitable future, alongside even the smallest of shareholders.

Disclosure: I am long IMSC.PK, OTCPK:SMGKF.