China Energy Recovery - Explosive Growth Ahead
posted by The Traveller on Friday, March 04, 2011

It doesn't happen very often that a pink sheets quoted Chinese microcap catches our attention, but China Energy Recovery (CGYV) is quite special in many aspects. The company designs, manufactures and installs waste heat energy recovery systems for industrial customers, and is set to become a leader in its industry. When the recently initiated second phase of its expansion program is completed in 2012, CGYV's site will stand as the largest single facility for energy recovery systems in China. Phase One of this expansion has already been finished and CGYV's capacity for 2011 increased almost five-fold over 2010.

China Energy Recovery's auditor is Big Four firm PricewaterhouseCoopers (PwC). This alone is extremely unusual for a tiny microcap with a book value of under $8 million (March 2010). Common sense tells us that this is not our typical pink sheets company when they engage a very expensive top tier auditor and especially also when PwC accepts them as a client. Since the engagement, PwC has carried out a complete review of CGYV's financials which resulted in restatements for 2008 and 2009 financials, and a long delay for the 2010 reports. This is how the formerly OTC-quoted stock ended on the pink sheets.

The company is now moving to bring their SEC filings up to date by submitting the remaining quarterly reports for 2010. The first quarter 10-Q has been filed this week and we can expect the others to follow soon. With the 2010 annual report the company would be back in compliance with the reporting requirements and could get rid of its pink sheets status.

The news flow over the past six months has been very positive:
  • September 16, 2010: New Production facility announced. Increases manufacturing capacity by 377% from 356,000 square feet to 1.7 million square feet. Another 100% expansion scheduled for 2012.
  • November 3, 2010: PricewaterhouseCoopers completes restatements of 2008 and 2009 numbers. Annual report (10-K) for 2009 filed. $22.2 million in total revenue and net loss of $886,480 or $0.03 per share.
  • November 5, 2010: $22.7 million contract for two waste heat recovery systems announced. Scheduled for December 2011 and January 2012.
  • November 11, 2010: $10.9 million contract for a heat energy recovery system announced. Scheduled for August 2011.
  • December 10, 2010: Company initiated phase two of its expansion plan which will triple capacity when completed in 2012. Management notes that when complete CGYV's "site will stand as the largest single facility dedicated to the design and manufacture of energy recovery systems in China."
  • December 21, 2010: CGYV secures $4.5 million loan facility with Bank of China.
  • January 10, 2011: $74.7 million contract for two major waste heat recovery systems announced. Scheduled for October and December 2011.
  • January 19, 2011: $4.2 million contract for a waste heat recovery system announced. Scheduled for November 2011 delivery.
  • February 24, 2011: $7.5 million contract for two waste heat recovery units announced. Scheduled for delivery in the third quarter and December 2011. 2011 contract total now exceeds $115 million.
  • March 3, 2011: First Quarter 2010 10-Q filed with the SEC. Reported revenue of $4.1 million (+212% YoY) and operating loss of $538,513 (-35% YoY).
The additional capacity from the Phase One expansion came online in December 2010, so we can not expect much growth for the past year. As the company's CEO stated in a recent press release, "production constraints limited growth, a condition that persisted through fiscal 2010 while our new manufacturing facility was under construction." We should see 2010 total revenue come in between $20 million and $25 million, pretty much in line with 2009 results. But from now on the future looks very bright and the company should see explosive revenue growth.

Trading China reached out to the company to clarify some open questions, and Simon Dong, financial controller of China Energy Recovery, was kind enough to respond:
1. Can we expect the remaining 2010 quarterly reports in the near future?

We do expect the remaining 2010 quarterly reports to be filed soon. The delay of Q1 is also due to restatement of 2009 figures took more than expected time.

2. Does the company plan to file their annual report within the deadline and regain fully reporting status this month?

Yes, the Company strongly wish to file annual report within the deadline, we closely cooperate with our auditor, PwC to issue the report on time.

3. In the last update the company announced: "CER's 2011 contract total now exceeds $115 million." Can you give an estimate for how much of this revenue will be recognized in FY 2011?

Most of the 115 million, we estimate about USD 100 million above will be completed in 2011.
Reported revenue of $100 million for 2011 would quadruple the results for 2010 and 2009, explosive growth that won't be ignored by the market as the financial results are backed by a best-in-class auditor. And it won't end there. The Phase Two expansion, scheduled for 2012 completion, "will more than triple the size of the current facility," and with both stages complete, CGYV's "manufacturing capacity will exceed its original Shanghai-based capacity by a factor of 10."

Those numbers suggest that CGYV can grow from $22.2 million in revenue for 2009 to $100 million in 2011 and $200-250 million in 2013. Long-term growth prospects for the energy recovery industry are excellent, as this technology serves two of China's main goals: lowering industrial pollution and reducing carbon emissions. We are adding CGYV to our China Model Portfolio today after the close.

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3 Comments:

At March 04, 2011 9:14 pm , Anonymous jrallen81 said...

Hello TC,

This does sound like an exciting potential opportunity. On reading the 10-Q it seems clear they will need further capital to complete their expansion plans, which probably means more warrants/share issuance. Do you have a take on the potential dilution involved?

 
At March 06, 2011 12:13 am , Anonymous Anonymous said...

They all are here to suck dollars. Their paper is worthless and thats how it should be treated.

 
At March 16, 2011 1:55 am , Blogger Chickenpookie said...

I know you've been compiling info on auditor companies, and I happened to run across an article that might help (Not that you haven't probably already seen and read it, but as least I can say I'm trying to contribute):

http://www.accountingtoday.com/news/Friedman-LLP-Opens-Beijing-Office-57597-1.html

 

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