AGORACOM Small-cap Investor Relations Blog

China’s unprecedented economic growth over the past 30 years has come at a huge cost to the environment and this is no surprise for most of you who live in urbanized areas.  In fact , 20 of the 30 most polluted cities in the world are in China. 400,000 people die of pollution related diseases each year. One third of Chinese territory is affected by acid rain and approximately 70% of its water supply is polluted.

The damage has not only been to the air the Chinese breath or the water in their rivers, but also to its reputation across the world. But there are signs that China is serious about tackling pollution to prove to the world that it can develop while causing less damage to the environment, plus giving a better quality of life to its citizens. $184 billion is being devoted to China’s renewable energy markets – set to become the largest in the world. And yet if that wasn’t enough, the chief economist from Deutche Bank predicts that China will invest an astounding $754 billion over the next 36 months to reduce the magnitude of this growing, enormous problem.

POTENTIAL LARGE SECULAR GROWTH OPPORTUNITY

If that plays out correct, it will create one of the largest secular growth opportunities the country has seen aside from massive infrastructure and real estate development which have moved the country to Third in the World according to GDP. China is currently the world’s biggest consumer of coal, the cheapest yet most polluting source of energy. The country uses a quarter of the world’s coal reserves and depends on it to provide more than two thirds of its energy needs, while 2 new coal-fired power plants come on line each week.

The rapid growth has also altered old Chinese habits that used to be environmentally friendly. As soon as you walk out from your hotel onto the street of Beijing you realize that the typical image of Chinese city streets being packed with bicycle-riding commuters is becoming a thing of the past. During the first quarter, China surpassed the US with the number of vehicles sold and for the first time surpassed 1 million vehicles in March.

Pollution problems in China are estimated to cost the country more than $200 billion annually, and it should be no surprise that pollution is widely considered to be the #1 challenge to China’s sustained economic growth. World governments are fast adopting carbon standards which will penalize businesses for producing greenhouse gases. China’s Eleventh Five Year Plan calls for more than $190 billion in investment by industrial companies for cleanup. As a result of this focus, China’s environmental protection industry is growing at an annual rate of at least 23%, substantially faster than China’s normalized GDP growth (forecast for 2009 at 7%).

COMPANIES THAT MAY BENEFIT FROM CHINA’S MASSIVE INVESTMENT IN GREEN ENERGY

• China Bio-Energy Holding Group (CBEH: OTCBB)

• RINO International Corp. (RINO: OTCBB)

• China Industrial Waste Management (CIWT: OTCBB)

China Bio-Energy Holding Group (CBEH: OTCBB)

Biodiesel output in China is expected to be 1.6 million tons, and it would have to increase to 13 million tons, growing at a CAGR of 184% to reach 5% consumption in 5 years. That being said, China’s most recent 5-year plan is for a target of 15% utilization rate for alternative fuel. So the growth prospects for biofuel growth in China driven by legislative support and massive demand from its growing auto industry are firmly in place.

One of the companies that we think will benefit from this environment is China Bio Energy Holdings (OTCBB:CBEH), which is a producer and distributor of biodiesel in China, as well as finished oil products. Since 1999 it has been processing and distributing finished oil, and last year, it formally launched its 100,000 ton biodiesel production facility, which accounted for about 30% of sales in 2008 and 40% of sales in 2009.

Financial Performance:

* Revenue CAGR from 2005 to 2008 of 95%
* Y/Y revenue growth (2007 to 2008) of 149%
* Net income CAGR from 2005 to 2008 of 91%
* Y/Y net income growth (2007 to 2008) of 229%

At $4.30, the stock is trading at 4.7x 2008 earnings, with a PEG ratio of 0.27. Based on management guidance for revenues and net income this year of $240.7 million and 33.7 million, respectively, we think that an initial price target of $8 to $10 is reasonable based on an 8-10x earnings multiple.

RINO International Corp. (RINO: OTCBB)

RINO International Corp. (OTCBB:RINO) provides wastewater treatment equipment and large scale automated air filtration systems designed to reduce industrial pollution and enhance energy utilization – two significant areas for growth. RINO has installed over 30 desulphurization systems to date and is the dominant industry leader through superior technology and cost advantages vs. the competitors.

China continues to experience rapid industrial growth, massive migration to urban areas and the result is a surge in emissions of pollutants, and its industrial pollution is becoming a critical issue not only in the region but on a global scale. RINO’s focus it on the iron and steel industry, which is one of the largest contributors to water pollution and sulphur emissions. This, in turn will create a massive opportunity for replacing legacy systems, to reduce SO2 emissions.

China’s SO2 emissions levels are already well-above its targets, and continue to be driven by increases in steel production (specifically the sinter) and power generation. China’s SEPA has mandated about $18.8 billion in investment into flue gas desulphurization (FGD) through 2010 and as much as 10% of this will be invested into the steel sector, and there are further mandates for iron and steel sinters to reduce S02 emissions.

Financial Performance:

* Revenue CAGR from 2005 to 2008 of 238%
* Y/Y revenue growth (2007 to 2008) of 120%
* Net income CAGR from 2005 to 2008 of 407%
* Y/Y net income growth (2007 to 2008) of 120%

At $4.00, the stock is trading 2.5x TTM adjusted earnings (discounting the non-cash equity compensation charges), with a PEG ratio of 0.15. Based on management guidance for revenues this year of approximately $47 million, respectively, we think that a price target of $12 to $14 is reasonable based on a 7-8x earnings multiple.

China Industrial Waste Management (CIWT: OTCBB)

China Industrial Waste Management, Inc., through its 90%-owned subsidiary Dalian Dongtai Industrial Waste Treatment Co., Ltd., is engaged in the collection, treatment, disposal and recycling of industrial wastes principally in Dalian, China and surrounding areas in Liaoning Province. The Company provides waste disposal solutions to its more than 650 customers from facilities located in the Economic and Technology Development Zone, Dalian, PRC. Dalian Dongtai treats, disposes of and/or recycles a variety of industrial wastes through incineration, burial and/or water treatment, and recycles, processes and/or resells waste products for use as raw materials in the production of chemical and metallurgy products. In addition, Dalian Dongtai provides environmental protection services, technology consultation, pollution treatment services, and waste management design processing services.

Financial Performance:

* Revenue CAGR from 2005 to 2008 of 40%
* Y/Y revenue growth (2007 to 2008) of 40.5%
* Net income CAGR from 2005 to 2008 of 62%
* Y/Y net income growth (2007 to 2008) of 28.9%

At $1.65, the stock is trading 4.7 earnings. We think that a price target of $2.5 to $2.8 is reasonable based on a 7-8 earnings multiple.

Source – Hayden Communications International