China Security (CSR): An 'eye' on Beijing

"Some 3.5 million visitors will descend on Beijing for the Summer Olympic Games," notes growth stock expert Ian Wyatt, whose latest buy is a play on this upcoming event.

The editor of Rising Star Stocks says, "China's government has mandated all entertainment locations to install surveillance systems, leading us to China Security & Surveillance Technology (NYSE: CSR)."

"China Security manufactures, distributes, installs and maintains security and surveillance systems throughout southern China. China Security sells its watchdog wares to governmental entities as well as schools, museums, sports arenas and libraries and to commercial entities including airports, hotels, railways, and entertainment venues).

"Demand is also being driven by the expected spending of an estimated $6 billion to $12 billion for security infrastructure in preparation for the 2008 Beijing Olympics, along with the planned security and surveillance investment by the city of Shanghai for the 2010 World’s Fair.

"Not to mention the other Chinese government initiatives requiring security surveillance systems to be installed in 660 cities throughout China as part of the Safe City Project, an initiative to 'enhance general security' in China’s cities.

"Similar mandates apply to justice departments, courts and China’s 24,000 coal mines. China Security’s own pace matches the pace of Chinese government surveillance edicts, and then some.

"The company’s revenue has surged to $240.2 million in 2007 from $107.0 million in 2006. Net income increased to $35.32 million from $22.93 million, with EPS increased to $0.91 from $0.85 — impressive, considering that shares outstanding increased to 42.5 million from 31.8 million, mostly to help finance timely acquisitions.

"But China Security isn’t simply buying growth, it’s generating it internally as well. In late March, the company announced it had won a $114 million contract from Jining City, China, as part of the Safe City Project, to install security cameras and related equipment.

"China Security expects to realize revenue from the contract in 2008, with the majority being realized in 2009. Additional revenue will accrue from rights secured to place advertising banners on the surveillance camera poles throughout the city.

"We project that China Security’s EPS will post at $1.65 on revenue of $360 million this year. Next year, we see EPS of $2.10 on revenue of $470 million. Based on these variables and a discount factor of 11% (roughly the long-term rate of return on small-cap stocks), we arrive at intrinsic value of $29 a share.

"The U.S. economy also remains a negative mitigator. Many Chinese stocks, including China Security, tanked after Wall Street’s latest credit crunch that sank Bear Stearns in March. Another major crunch would likely have the same effect.

"But on balance, we think China Security’s positives outweigh its negatives, which is why we stick by our intrinsic-value calculation of $29 a share and rate the company a long-term investment-grade buy."