RINO International - Highest Short Interest in the Street

Remember the Copenhagen climate conference last December? China has committed to the "binding goal", written into China's social and economic development plans, to lower its carbon dioxide emissions per unit of GDP by 40 to 45% by 2020 compared to the 2005 level. Rob Bradley, Director of the International Climate Policy Initiative at the World Resources Institute, testified last Friday before the US-China Economic and Security Review Commission that "China has shown no signs of walking away from these commitments. Rather, it has taken substantive action to reaffirm and move forward on them."

And there is more to China's environmental problems than emissions and the need for clean energy:

Wastewater treatment has always been one of the main environmental and infrastructural problems China is facing. Parallel with the population increase wastewater related problems shows increasing tendency. Statistics shows China generated 55.7 billion tons of wastewater in 2007, of which municipal wastewater and industrial wastewater account for 55% and 45% respectively. It is expected that total wastewater will continue growing due to rapid urbanization and industrialization, to reach 64 billion tons in 2010.

The 11th five-year plan seeks to control water pollution by raising sewage treatment and water reclamation rates, especially in the arid cities of the north, resulting in a large demand for related technology and equipment. During the 11th five-year plan period (2006 to 2010), the Chinese government is estimated to have made a total of RMB 1.4 trillion investments in the environmental protection industry. Of this, some RMB300 billion went to investments in sewage and water reclamation projects, and RMB100 billion for rehabilitation of the water supply network and infrastructure.

(Source: China Water Congress 2010)

As I wrote in a recent article about Tri-Tech (TRIT), the Chinese government has dedicated an estimated 1.35% of its gross domestic product, or approximately $205 billion, to environmental protection.

According to the 2009 Chinese Government Annual Report announced by Primer Wen Jiabao, the Chinese government will continue to focus its efforts on environmental protection in 2010. To improve its environmental management, and municipal sewage and solid waste treatment in key areas, China will increase its daily sewage treatment capacity by 15 million cubic meters and its daily solid waste treatment capacity by 0.06 million tons in 2010. Based on an average construction unit cost of RMB 1300 per cubic meter of treatment capacity, we believe that total spending on sewage treatment will reach RMB 19.5 billion.

(Source: TRIT 10-K)

If we look at the sector performance within the China Small Caps group we find a quite astonishing development. Coal Stocks are by far the biggest gainers this year with an average gain of a whopping 124.76% YTD, while Clean Energy Stocks are amongst the biggest losers with an average loss of 9%. There are plenty of opportunities for long-term investors in the Clean Energy sector at the moment, the whole range of industries from energy recovery to solar and wind power and alternative fuel is available for patient investors at attractive prices right now.

But I want to focus on the biggest losers in the China Small Caps space so far this year: Waste and Water Treatment Stocks. The group is down more than 11% year-to-date and the three biggest players, Duoyuan Global Water (DGW), RINO International (RINO) and Tri-Tech Holding (TRIT) are down 24%, 28% and 27% respectively. And this is where I believe you should keep your eyes on now.

I've made the case already for Tri-Tech, so let's look at RINO today which seems to have fallen completely out of fashion. The stock is sitting on the $20 mark, down 43% from its December high at $35.15 and back to the level where it traded most of February. It's fairly easy to find a reason for the drop: the company reported fully diluted 2009 EPS of $2.22, which translates into a trailing P/E of 9, but expectations for 2010 are low with no income growth and only EPS of $1.90 due to the higher share count.

That sounds bad, but as I pointed out before there should be plenty of business out there for RINO and peers, for 2010 and many years ahead. Given the huge environmental problems the country is facing with water supplies and especially wastewater treatment it is unthinkable that public spending in the area will be cut, quite the opposite. As Rodman & Renshaw pointed out in their latest note, RINO failed to communicate their prospects properly:

Today’s earnings call left a lot to be desired. We believe management needs to revisit the manner in which it communicates with investors. Much useful information that could have provided comfort to investors over the company’s prospects in 2010 and beyond, in our opinion, could not be effectively discussed.

(Source: Rodman & Renshaw, April 1, 2010, Outperform, Target: $40)

I would expect the company to announce new contracts throughout the year which should lift the stock back to its highs at some point. There might be further short term weakness due to the lack of immediate catalysts, though. But here's why I am adding a full position to the China Portfolio today. RINO has the highest short interest of all Nasdaq stocks, a staggering 60% of the float is short. This is the setup for a massive short squeeze with the next positive company development, and as I pointed out: the future for this industry is bright!

Adding 500 RINO at Friday's close of $20.00 with a 6-12 month target of $35.00.