Thursday, August 27, 2009

Robert Hsu and CSR

Another masterpiece from Mr. Robert Hsu is the CSR trade.
Mr. Hsu decided to buy CSR on August 21st 2008, at $14.60.
Buy China Security & Surveillance Technology
To take advantage of the growing demand for security and surveillance technology in China, I'm recommending a domestic leader in the Chinese security and surveillance industry -- China Security & Surveillance Technology (NYSE:
CSR). I haven't been this excited about a new China Strategy stock recommendation since I recommended Mindray (NYSE: MR) and New Oriental Education (NYSE: EDU) nearly two years ago. That's because CSR fits all of the parameters we like: It was started by private entrepreneurs, it is a leader in a fast-growing industry, it's earnings are growing at over 80% a year, it is trading at an attractive valuation of only 7 times this coming year's earnings, and the company's CEO is regularly buying stock with his own money at up to $30 a share (shares are trading below $15).
Based in Shenzhen, China Security manufactures, distributes, installs and maintains security and surveillance systems in China. And it provides many surveillance products including hardware, software, design, implementation and technical support to its customers, which include government, corporate and commercial clients.
With Chinese demand for security and surveillance products growing, China Security has several manufacturing facilities, a R&D facility in China and an extensive sales and service network throughout the country. And the company is able to compete internationally with a lower labor cost, established distribution channels and a local sales team.
China Security has truly become a leader in this industry over the years and has achieved earnings growth of 80% or higher, as a result. Just look at some of the recent financials:
China Security achieved strong top-line growth from 2002 to 2007 when revenue jumped to $240 million in 2007 from $16 million in 2004. Plus, net income soared to $46.6 million in 2007 from $5.9 million in 2004. And most recently in early August, the company posted strong second-quarter earnings.
Net income soared 81% year-over-year to $7.7 million, or 17 cents per share, from $4.3 million or 11 cents in the prior year's same quarter. Revenue increased 78% to $92.7 million from $52.1 million in the second quarter of 2007. Gross margin -- one of my favorite indicators of a company's operating performance -- improved to 32.8% from 28.6% in the same period last year and 30.5% in the first quarter.
Looking ahead, I'm looking for continued strength as is the company -- its third-quarter revenues are expected to be $110 to $115 million and the full-year 2008 revenue $400 to $410 million. And China Security raised its adjusted 2008 net income forecast to $73 to $80 million, or $1.60 to $1.77 per share.
What makes this company particularly intriguing right now is that China Security is trading at bargain levels. This largely undiscovered stock was unfairly beaten down in the recent Chinese stock sell-off since October, as speculators sold it with other stocks. And now it is trading at a price-to-earnings ratio of only seven times this coming year's earnings. Talk about an attractive combination of strong growth and attractive valuation!
I want you to buy CSR under $19. I'm targeting $27 by the end of this year, which would give us a nice 50% gain.
CSR was able to go down to $2.47 (more than 80% loss) in March 2009, then partially recovered.

Mr. Hsu tried to explain what happened and basically told his readers to hold CSR for one year until on August 20th 2009:

China Security and Surveillance Technology is China's leading security devices company. It recently was finally able to negotiate better terms with its largest creditor, Chicago-based hedge fund giant Citadel. Basically, instead of paying a big lump sum at high interest rate to Citadel in 2012, CSR is getting better terms and the option to pay back the debt in installments. Despite this being a positive development for the company long term, it weakens the company's cash-flow position in the short-term.
I have told you before that, given the company's weak cash position, I am not comfortable with the company's aggressive acquisition strategy. In the past month, the company announced two more corporate acquisitions. So, the long-awaited renegotiation of Citadel notes gives us a good opportunity to sell CSR and put the money into better opportunities. Sell CSR.

Price was $7.27 for a 50% loss.

We should learn at least two things from this lesson:

  1. Robert Hsu is a gambler (with other people's money)
  2. Always use stop loss orders (before going down 80%)


Anonymous said...

Congratulations on bring #4 and #5 on the front page of Google Search for "Robert Hsu".

Anonymous said...

Glad this blog is back.

Good Stuff.