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China Recycling Energy (OTC
BB: CREG): The Annuity Model That Keeps on Giving |
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There's a lot to go over with earnings
season for the small companies getting into full swing over the next two
weeks. A few will file between now and the 15th, and then there will be
a barrage of reports to go over right around the 15th.
In my last edition we discussed strategy
for the long awaited market correction. If there was any doubt there's
a sentiment shift and a downside bias, it was erased on Friday. Last Wednesday,
the market sold off. Thursday, it rebounded on the 3% GDP news, then Friday
it tanked, making a lower low.
I believe this correction is welcome,
long overdue, and resets the bar to allow the trillions of dollars on the
sidelines get into the market with some reasonable upside.
Earnings season for large caps is
over. About 75% of companies that have reported beat expectations. As usual,
the analysts swung too far, and the market continued chugging higher as
we all learned corporate America is in pretty good shape. Earnings are
now fully priced in, and the market will have to hang its hat on economic
news for the foreseeable future- a bit of a murky picture.
I suggested getting some capital
ready to go bargain hunting for the right companies after we see their
numbers. Two OTC Journal followings have delivered outstanding developments
in the past two days- Tianyan Pharma (AMEX: TPI), and China Recycling
Energy (OTC BB: CREG).
Of the two, CREG is the one
I'll cover today- TPI will follow tomorrow. This is great stuff,
and CREG might not want to wait for the correction to run its course
to start climbing again.
The original publication back on
October
19th might be worth reviewing: Just Click
Here. These guys simply have it right. Their business model takes out
the ups and downs of project driven revenue, and creates recurring revenue
for long periods of time for the massive energy recycling business at large
industrial factories in China.
Today, CREG reported it has
completed a major installation at Shenmu County Jiujiang Trading Co., Ltd.
The installation will result in reduced annual coal consumption of 52,000
tons, equivalent of 130,000 tons of CO2 emissions. This is
a protype of the BOT (Build, Operate, and Transfer) model I covered
in the original presentation.
The completion of the project is
of interest to shareholders. However, the way they are going to collect
the money over the next 10 years is of far greater interest to shareholders,
and suggests this stock is absurdly undervalued.
Here's the facts as discussed in
today's release: CREG will recognize revenue of $18.3 million
in the upcoming Q3 report from this installation. In the June quarter,
CREG
reported $11.1 million in revenues of which $9.5 million was product sales.
Therefore, we are assured of about a double in product sales
over the last quarterly report.
CREG also disclosed COG was
$14.1 million, leaving $4.2 million in gross profits to be reported.
That's great, but it's one project. Now they have to do it again this quarter
or they become another short story - Or do they?
Read on. Here's why I believe this
is the stock to own in this sector, and why I believe this company will
be generating huge profits for years to come. As it turns out, CREG
still
owns the system, and will operate for the next ten years. Shenmu has the
obligation to provide its industrial coke production to the system, and
CREG
then uses it to generate recycled power. Shenmu then has to buy the recycled
power from CREG for the next 10 years for about $500,000 per month-
yes- that's $500,000 per month in revenues - $1.5 million per quarter-
$6 million per year in recurring revenues.
So, what's CREG's cost to
collect this $6 million in annual revenues? Glad you asked-
CREG
has
to pay rent for the space the system takes up of $7,300 per year, and about
$438,000 in annual management costs. Nice- in all, this adds up to $38.4
million in interest income over the next 10 years with about 10%
annual costs. They need to pay the staff to collect the money. At the end
of the 10 year lease, Shenmu takes ownership. Until that time, CREG
owns the asset.
Imagine a company with about 10 of
these installations? It would equate to $60 million per year in recurring
revenues that would be about 90% pure profit. What a business
model. CREG makes money on the design, manufacture, and installation
of the project, then collects big money for 10 years. I love it.
The coming quarterly report will
be interesting in light of today's news. We know they're going to report
a strong quarter, but I can't gauge what the rental/lease revenue side
of the quarter will look like. We now know the project side will be a double
over the June quarter, which should be enough to send this stock higher.
There's 38.8 million shares I&O-
about a $78 million market valuation. The annual revenue
run rate is likely in the $60 million range at this point in time, and
we know the company will now have earnings of about $.14 per share
just on the rental/lease recurring revenues from this installation
alone - and for the next ten years.
Nine more just like it would equate
to $1.40 in EPS annually in recurring revenues. It could
happen in the next 3 years. No wonder Carlyle Group owns 31% of the company-
they know a good investment.
Long term this could be a $20
stock if they keep completing projects of this nature. The stock
has already started rebounding today.
Is it worth thinking a little more
long term with these smaller stocks? It's the only way you're going to
make any real money. One of my business associated can attest that thinking
a little longer term could pay off.
Last March he picked up a rather
sizable position in Ford (NYSE: F) at $1.75 when it looked like
the Auto Industry was about to shut down. He sold it at $2.75, and
thought he was a trading genius for the moment. Today, he doesn't feel
that smart watching it trade through $7.50 just six months
later.
CREG has the killer business
model, and this stock is destined for much higher levels in my view.
Here is the complete text of the
news for your review:
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China Recycling
Energy Corp. Announces New 10-Year Energy Efficiency Build Operate Transfer
('BOT') Contract with Shenmu County Jiujiang Trading Co., Ltd.
-- $18.3 million top-line
revenue to be recognized in Q3 2009
-- Additional $38.4
million in interest income to be recognized over the 10-year term on a
monthly basis
-- Project is expected
to decrease annual coal consumption by 52,000 tons, equivalent of 130,000
tons of CO2 emissions
XI'AN, China, Nov. 1
/PRNewswire-Asia-FirstCall/ -- China Recycling Energy Corp. (OTC Bulletin
Board: CREG - News; 'CREG' or 'the Company'), a fast-growing industrial
waste-to-energy solutions provider in China, today announced that it has
delivered to Shenmu County Jiujiang Trading Co., Ltd. ("Shenmu") a set
of 18-megawatt capacity power generating systems pursuant to a Cooperative
Contract on Coke-oven Gas Power Generation Project and a Gas Supply Contract
for Coke-oven Gas Power Generation Project. The 10-year Contracts provide
that the Company will recycle waste gas from Shenmu's 600,000 tons per
year coke production line to generate power, which will then be sold back
to Shenmu for use in production. Shenmu agrees to supply the coke-oven
gas free of charge. Power generation and delivery of power begin in October
2009.
Under the Contracts,
Shenmu will pay to the Company "energy-saving service fees" of approximately
$473,000 per month for the life of the Contracts, as well as such additional
amount as may result from the supply of power to Shenmu in excess of 10.80
million kilowatt hours per month at the rate of .30 yuan (approximately
$.04) per kilowatt hour. The Company will subcontract a third party operator
at a cost of approximately $438,000 per year.
The Company expects to
treat the Contracts as a sale-type lease. Based on the accounting model
CREG applies regarding sale-type leasing under US GAAP, the Company 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.
The Company maintains
the ownership of the project throughout the term of the Contracts, including
the already completed investment, design, equipment, construction and installation
as well as the operation and maintenance of the project. CREG agrees to
pay to Shenmu 50,000 yuan (about $7,300) a year to use the land for the
power station. At the end of the 10-year term, ownership of the systems
transfers to Shenmu at no additional charge.
"This is CREG's first
project in the coking industry, one of the most energy intensive sectors
in China." said Mr. Guohua Ku, CEO of CREG. "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."
About China Recycling
Energy Corp.
China Recycling Energy
Corp. ('CREG' or 'the Company') is based in Xi'an, China and 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. The management and engineering teams have
over 20 years of experience in industrial energy recovery in China.
For more information
about CREG, please visit http://www.creg-cn.com.
Safe Harbor Statement
This press release may
contain certain 'forward-looking statements' relating to the business of
China Recycling Energy Corp. and its subsidiary companies. All statements,
other than statements of historical fact included herein are 'forward-looking
statements.' These forward-looking statements are often identified by the
use of forward-looking terminology such as 'believes,' 'expects' or similar
expressions, involve known and unknown risks and uncertainties. Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, they do involve assumptions, risks and uncertainties,
and these expectations may prove to be incorrect. Investors should not
place undue reliance on these forward-looking statements, which speak only
as of the date of this press release. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of a variety of factors, including those discussed in the Company's
periodic reports that are filed with the Securities and Exchange Commission
and available on the SEC's website at http://www.sec.gov. All forward-looking
statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by these factors. Other than
as required under the securities laws, the Company does not assume a duty
to update these forward-looking statements.
In
China:
Mr.
Leo Wu
Investor
Relations
China
Recycling Energy Corp.
Email:
tch@creg-cn.com
In
USA:
Mr.
Howard Gostfrand
American
Capital Ventures, Inc.
Email:
hg@amcapventures.com
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