Solid results from China Security & Surveillance (CSR)

An update. This company is still quite undervalued, despite the ongoing rally in Chinese Shares..

And today it got a haircut of a good 10% (at the moment, two hours before market close), on the back of the fall of the Shanghai index, and those who expected even better earnings yesterday.

Early May, we posed the following question (and fundamental analysis): Wouldn’t you want to invest in a company that displayed the following revenue growth?

  • 2004: $16.06M
  • 2005: $32.69M
  • 2006: $106.99M
  • 2007: $240.19M
  • 2008: $427.35M

After the second quarter results were out, we can now add the company’s guidance for 2009:

  • 2009: $600-630M

Since two quarters have already passed, we don’t think there is much reason for doubting that they will make it.

Thus, top line growth is still quite spectacular, partly through acquisitions. We noted in that earlier analysis that as a result of these acquisitions, bottom line growth isn’t as spectacular. But it’s still pretty good, and you don’t have to pay top dollar for it, in spite of the ongoing rally in Chinese shares. Here is the profit development:

  • 2004: $0.34 (per share, fully diluted)
  • 2005: $0.39
  • 2006: $0.85
  • 2007: $0.91
  • 2008: $0.72

These figures are GAAP figures (international accounting standards), but they contain a couple of items that clouds the profitability unduly, in our view (see our earlier report for an analysis of the reasons). Excluding these items, the guidance for net income from the company is:

  • The Company also reaffirms adjusted net income of $108-$113 million and adjusted diluted earnings per share of $2.16-$2.26. The company estimates that non-cash redemption accretion on convertible notes, non-cash employee compensation expense, and depreciation and amortization will be approximately $22.7 million, $18.2 million, and $13.2 million, respectively.

Deducting these three items still gives a GAAP net income of some $53.9-$58.9M, or $1+ per share (50M shares, fully diluted). With the share price at $8.50, even that seems cheap, let alone the $2.16-2.26 non-GAAP figure, with is actually reflecting the situation somewhat better.

And on the redemption of the outstanding notes (one of the three issues that cause a wedge between GAAP and non-GAAP accounting), this is the company’s position:

  • The Company raised $60.00 million and $50.00 million through two guaranteed senior unsecured convertible note financings with Citadel Equity Fund Ltd. in February 2007 and April 2007, respectively. These notes bear interest at a rate of 1% per annum and are due in 2012. Under the indentures, if the notes are not converted before their respective maturities, the notes are to be redeemed by the Company on the maturity date at a redemption price equal to 100% of the principal amount of the notes then outstanding plus an additional amount of 15% per annum, calculated on a quarterly compounded basis, plus any accrued and unpaid interest.
  • As of June 30, 2009, the Company accrued $44.30 million as a redemption amount payable under the notes, $5.58 million of which was included in interest expense in the second quarter of 2009. Unlike the annual interest rate of 1% that the Company is actually paying out to the note holders under the notes on a semi-annual basis, the Company would only pay the accrued redemption amount under the notes if the notes are not converted into the Company’s common stock before their respective maturity dates and are redeemed in accordance with their terms. Nevertheless, the Company believes that it must accrue the entire redemption amount under U.S. generally accepted accounting principles.