Half Position: China Recycling Energy (CREG)

China Recycling Energy
Ticker: CREG (OTCBB)
Share Price: $2.78
Market Capitalization: $107.80 million
Cash: 5.27% of Market Capitalization
EPS: $0.31
P/E: 8.96

CREG provides environmentally friendly waste-to-energy technologies to recycle industrial byproducts for steel mills, cement factories and coke plants in China. Byproducts include heat, steam, pressure, and exhaust to generate large amounts of lower-cost electricity and reduce the need for outside electrical sources. The Chinese government has adopted policies to encourage the use of recycling technologies to optimize resource allocation and reduce pollution. Currently, recycled energy represents only an estimated 1% of total energy consumption and this renewable energy resource is viewed as a growth market due to intensified environmental concerns and rising energy costs as the Chinese economy continues to expand.

Recent Developments:

- CREG Reports Record 3rd Quarter Results and Reached Full-year 2009 Guidance

"We are very pleased to announce a record quarter for CREG, based on a combination of product sales, delivery of systems servicing a new customer and increasing recurring revenues from our portfolio of existing waste-energy recovery projects. This quarter we have both expanded the scope of our business industry sector as well as taken on larger projects. We are fully confident that we will continue to be a leader in build, operate and transfer (BOT) energy recovery projects in China and will deliver increasing value to our customers and shareholders."

- New 10-Year Contract With Shenmu (Coking Industry)

"CREG expects to recognize approximately $18.3 million in revenue at September 30, 2009 (the delivery date) with a related cost of goods sold of $14.1 million. After the inception of the lease, CREG anticipates that it will recognize a total amount of $38.4 million as interest income from this sale-type lease over the 10-year term, on a monthly accumulative basis as it receives the monthly installment payments from Shenmu."

"This is CREG's first project in the coking industry, one of the most energy intensive sectors in China. This project is expected to reduce annual coal consumption by 52,000 tons, equivalent of 130,000 tons of CO2 emissions. We are excited about the substantial growth in our Company as we take on ever larger projects with waste gas-to-energy solution."

Investment Thesis:

CREG is a renewable energy play. The idea is to convert waste from coking, steel, cement and other energy-heavy industries back to energy. This will subsequently create value for CREG's customers and greatly reduce emissions. CREG will directly benefit from China's subsidies in the space, its target to reduce emissions and support renewable energy companies.

What makes China Recycling especially interesting is the recurring revenue model. After the inital product sale to a new customer, the company will earn multi-year recurring revenues in the form of monthly lease and interest payments for these projects. I expect this segment to grow rapidly over the coming years and financing to be secured by favorable government policies.

I am adding a half position of CREG to the China Portfolio. As of today, CREG has a relatively small number of customers and - while looking very promising - the success of the recurring revenue model depends on adding many more customer from additional industries. I will likely increase the position with the next customer announcement. I also see CREG as a likely candidate for a 2010 uplisting to Nasdaq or NYSE Amex. My initial target for CREG is $4.50 based on expected 2010 EPS of 0.45.