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NF Energy (OTC BB: NFES)- A Hot China Penny Stock- Has Wind At Its Back

China wants to achieve a certain level of energy independence by 2030. They have a goal- by 2030 they intend to generate 50% of their power needs from renewable energy resources.

In a report published in February of this year, world class consulting firm McKinsey and Co. estimates a result of this magnitude would require an investment of approximately 150 to 200 billion Euros ($210 to $280 billion) annually to achieve this ambitious target.

With all other global economies down to flat, China managed to eak out 6% GDP growth in Q1. The Chinese Government is pushing Green Tech very hard. Aside from Government mandates and initiatives, Chinese power companies have massive reserves of cash on their balance sheet. The banks, owned primarily by the Government, are anxious to loan money as well. 

China has doubled wind power generation capacity for each of the past 4 years, and this year will surpass the US as the largest market for wind turbines. The Chinese originally set a goal to have 30,000 megawatts of wind energy by 2020- on their current torrid pace, they will reach that goal by 2010.

NF Energy (NFES), currently the most undervalued of the 5 China ideas I  follow, is diving into the Wind Turbine business in a hurry. Fresh off a fantastic year in 2009 (up 50% from the previous year) where NFES delivered $4.38 million in profits ($.10 EPS) on $15.8 million in revenues, NFES is deploying some of its roughly $11 million in cash and receivables on moving rapidly into wind turbine manufacturing.

The company has expertise at making energy producers more efficient. Anytime there is any energy related material moving from place to place, NFES is moving it more efficiently and therefore saving energy. 

Pictured here is one example of the valves they design and manufacture for giant hydro projects. These valves make hydro power projects up to 40% more efficient, and are in high demand as they need to be custom designed for each individual hydro electric installation. These valves are being deployed in the most ambitious water conversion project ever under taken. The project will bring water from China's largest river- the Yangtze, to three rivers in the north; the Yellow, Huai and Hai, whose basins are running dry. 

The project will eventually bring 44.8 billion cubic feet of water from South to North each year. It won't be completed until 2050, and is expected to cost $62 billion. 

Today, just prior to the open, NFES disclosed it was experiencing significant demand for wind turbine equipment. They had an installation earlier this year at a wind farm in Inner Mongolia, and the equipment has been functioning flawlessly for 3,000 hours. The project, which required a total investment of $351 million, is now generating 300 megawatts of power.

NFES has been quiet of late, but has actually had a great year in terms of price appreciation so far. When I first looked at the stock, it was $.20 and nobody knew anything about the company. It had fallen into a state of total obscurity despite stellar corporate performance.

After moving up nearly five fold, the stock has been trending sideways on lighter volume since mid May, with a couple of surges venturing up to about the $1 level.

The numbers suggest this stock is absurdly undervalued. I believe the company will earn about $.15 EPS this year. The closest comp they have is a company trading on NASDAQ - symbol HEAT- it trades at 23x trailing earnings.

The company has formally announced it expects to deliver about $20 million in revenues this year, with a full $10 million of it coming for project oriented orders that will be completed in Q4- this would insure about 40% growth over the '07 to '08 growth rate.

If the company can earn $.15, and trade at a multiple of 23x earnings, you have a $3.50 stock. My price target is in the more modest range of $2.00 to $2.50.

At about $.70, you only paying 7x last year's earnings for a company with a 50% annual growth rate. That's just absurdly cheap, and the stock won't stay here long. Technically, it's digesting the big gains for a couple of months ago, but this low volume sideways trading sets us up to make the next move higher.

In this one, you own real value in a China "Green Theme" company that will be intimately involved in the infrastructure build out for years to come.

Here's today's news:
 

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