Tuesday, October 13, 2009

No Drought for TRIT

China's Spending on Water

As previously discussed in this blog's "Tap into Chinese Water", spending on water resource and wastewater management in China is expected to soar in the next few years.

According to the budget plan announced by Ministry of Water Resources, China expects to invest $11.7 billion in 2009 in water.resources sectors. China’s central government has allocated $3.8 billion in the first half of 2009. With the projects the central government has approved, this investment will increase to $45 billion in the aggregate over the next 3 years. The projects include mitigation of 6,240 unsafe small and middle-sized reservoirs due to lack of proper maintenance for several years.South-North Water Transfer Project is a large, inter-basin, long-distance water transfer project that is charged with dozens of major urban water supply tasks for such cities as Beijing, Tianjin and Shijiazhuang.

TRIT Can Ride the Wave

Tri-Tech Holdings, Inc (TRIT) is a small Chinese company that specializes in water resource, wastewater and tail gas management. In the first half of 2009, about half of the revenues came from water resource management and the other half from wastewater and tail gas management.

TRIT definitely falls into the categories of "high-growth" companies. Q2 '09 revenue was up 54% to $3.1M from $2.0 M in Q2 '08. Q2 '09 net income $865K or $0.24 per diluted share up 100% from $444K or $0.12 per diluted share. For the six months ended June 30, 2009, revenue stood at $6.0M, up 75% from $3.4M a year ago. Net income $1.5M or $0.41 per diluted share up 78% from $807K or $0.23 per diluted share.

Assuming a range of 2009 earnings per share (EPS) between $0.65 to $0.82, at yesterday's closing price of $18.25, the stock has a price-to-earnings ratio (PE) of about 22 to 28. This is comparable or slightly higher than its Chinese counterpart, DGW, another Chinese water management company that too has just made its initial public offerings.

The valuation is fair on the assumption that the company can succeed in its pursuit of government projects in the next few years. The company is currently pursuing 100 river basin flood monitoring and forecasting systems in more than 100 counties with a market potential of $72.5M. Additional projects are being pursued through distributors and partnerships with a potential value of $43.5M. The company is pursuing wastewater treatment business in several markets including Tianjin Binhai where the government plans to construct over 40 large pumping stations and 30 sewage treatment plants with a total market potential of $8.7B. Hebei Province plans to construct 50 sewage and grey water reuse treatment plants in the next two years. Sales are expected from early flash flood warning system projects in Hubei and Tsinghai provinces. Increased sales also are anticipated in a long distance water transfer project with dozens of urban water supply tasks for major cities including Beijing, Tianjin and Shijiazhuang where the company is already engaged.

Noteworthy is that the company may face political risks in China where regulatory and central and local budget allocation procedure can be very complex and tricky. Small companies like TRIT may not have enough political connections to be granted big projects. In fact, should there be delays in budget allocation or receivables collection  which is not unusual in emerging markets, the company can face problems in its working capital.

1. As both companies are recent IPOs, the number of shares outstanding reported in http://www.google.com/finance is different from the one used in calculations of their most recent SEC filings.

Disclaimer: Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author owns TRIT in her personal account as of October 13,2009

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Agile said...

Coke, I am not sure FA applies to the Chinese micro-cap TRIT here. This reminds me of another Chinese small cap RCON, whose CFO is just a new graduate in 2007. I have not looked into Duoyuan (DGW) but it might be a better bet long term.

Of course, in short term those small stocks can go up a lot, as you have already seen.

Good luck !!!

coke said...


It's true that TRIT does have very short history to follow just like any other IPOs. Therefore, I would recommend very cautious money management if one wants to buy into it.

You are right that there are a lot of risks. Among them , as I recognized in the post, is whether a small company like TRIT can develop enough political connections to get big contracts. This is crucial as its business is primarily dependent on government policies and budget