China Fire and Security Group, Inc.
We’re giving you a look today at a small, speculative company that deals overseas. China Fire & Security Group (CFSG) manufactures and installs industrial fire safety products (think fire extinguishers and smoke detectors) and systems to organizational customers in China. With a small market capitalization of $228.96 million, buying this company’s stock may be risky, but it sure has a lot of potential.
The driving factor behind China Fire is the location in which it works: China. The communist nation is expanding and industrializing at a rapid rate. Every factory that opens is a potential customer for China Fire. China is seeing its GDP grow at a rate of 7.5% per year currently. When you consider that the United States’ GDP grew only 2.5% in 2008, it is easy to see that China is moving at a fast clip.
But a GDP growth rate of 7.5% per year does not satisfy the needs of China’s economy. Analysts estimate that roughly 24 million Chinese people enter the work force every year. China’s GDP growth needs to be around 9%-10% to provide enough jobs for these new workers. So its current growth rate of 7.5% (roughly three times as fast as ours) is too slow! The Chinese government is smart, so they are attempting to bump the GDP up by 2 to 3% by implementing a $586 billion stimulus package that was announced at the end of last year.
Now, with the Chinese economy lesson aside, it is important to note that China Fire is poised to capitalize on all of China’s growth and the stimulus package. The company’s main customers are members of iron, steel, power, and petrochemical industries. These industries are at the heart of China’s stimulus package. All of the smelting, electrical power, and increases in labor will definitely require new fire protection systems and equipment. In fact, China Fire just secured a contract with Dongbei Special Steel Group this March valued at $4.4 million.
We take a lot for granted in the United States, including legalities that require fire safety systems in all buildings. Many buildings in China do not have the fire safety systems or equipment that every U.S. building does. China’s middle class is growing, and it is also growing discontent with the lack of safety. As the market leader in China’s fire safety industry, China Fire will be at the source of improvements in safety.
The potential for growth is backed by factual data that shows the company has been actually growing. CEO Brian Lin, in China Fire’s earnings announcement on March 12th, reported record revenues of $61 million, a 47.8% increase year over year. Additionally, net income of $24.7 million was an increase of 47%. In a time when most American companies were seeing large declines in income, and even significant losses, China Fire is surging.
CFSG was trading around its 52-week low of $5.62 in early March when this earnings report was released. After the announcement, it jumped to the $8 range, and has been trading there since. I don’t think that its current price reflects the company’s true value and potential for growth. China Fire has a ridiculously juicy PEG ratio of .31, meaning that investors have yet to factor the company’s growth rate into its current stock price.
Now is the time to buy China Fire. The country in which it operates is rapidly expanding and making big moves, and the company reported record financial numbers in 2008 and appears to be able to continue its growth. Finally, China Fire is largely unknown by investors and is an opportunity for you to buy before everyone else gets in. While waiting for a pull back after the recent extended rally may be wise, buying China Fire now would still be a great move for your portfolio.
-Matt Schwartz
College Trillionaire
Posts
