RINO International Corporation (RINO:NASDAQ) provides environmental protection and remediation technologies for waste water treatment, desulphurization, and anti-oxidation solutions for the iron and steel industries in China. Economic development has created significant environmental concerns in China. Additionally, China is water deficient, having ¼ of the rest of the world’s per capita capacity. Environmental improvement is a major concern for China. The PRC’s new 5-year environmental plan includes $195 billion of spending in water waste management and $1 billion in desulphurization. These government expenditures combined with state environmental regulations for industry are the growth engine for RINO’s proprietary technologies.
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RINO is incredibly well run. Its 29% net margin has allowed the accumulation of $135 million cash with only $5 million in debt. This profitability is available to investors at only 7.6 times earnings and cash flow. In its short history on the NASDAQ, earnings have increased 161% despite revenues slowing from 119% growth to 38% (still no laggard!). Management has plenty of “skin in the game”, with ownership of 65% of the outstanding shares, so management’s interest is tied closely to the success of the company. With only a 10 million share float and an average daily trading volume of 1 million, any significant demand could make this a very valuable stock in a short period of time. RINO plans to expand its industry exposure by adapting its desulphurization technology to metallurgy, electrical generation, and rubb! ish trea tment, while adapting its water waste technology to chemical and oil industry sludge and municipal waste.
RINO’s downsides are limited but unfortunately significant. Revenues are linked to the iron and steel industries. Its high temperature, anti-oxidation technology is further limited to only the rolled plate steel industry. These industries are extremely fragmented in China and are dominated by small companies. In addition to environmental initiatives mentioned above, the PRC is also controlling pollution by forcing small producers to cease their operations or facilitate their merger to larger entities. This limits customers for RINO’s products. Although larger customers are perfect for cost effect implementation of RINO’s solutions, it has only identified 34 companies that meet these requirements. RINO only spends .1% of revenues for R&D and relies heavily on joint patents with the Chines Academy of Science. This seems inadequate for a 3 pony show in a very competitive environment. The 10 million float and short position shares available may limit maximum upside activity by limiting institutional investing.
This is a great investment. This value play in a boring, but growing industry would please both Warren Buffet and Peter Lynch. With the present float, I doubt this stock will retrace to its $56/share IPO position. If management continues its business model, follows through on its expansion plans, and the PRC follows through on its 5 year pollution plan, this stock is an easy double. If management halves its position, it’s a four bagger. I’m buying at $15/share.
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