Friday, January 22, 2010

RINO International (RINO) Lands 10 Year, $118M Contract

RINO International (RINO) is one of a host of companies I've had on my watch list for a few months but have yet to discuss on the website.  Today's 10 year, $118M contract provides a good incentive to introduce the name, at least in a cursory fashion.  Like many companies in China, there is little here that is "innovative" but the growth opportunities are akin to buying into US markets in the 1950s/1960s - hence just industrialization & modernization in a vast country should provide some exciting prospects.  Company website at

Rino International Corporation operates as an environmental protection and remediation company. It engages in designing, manufacturing, installing, and servicing wastewater treatment and flue gas desulphurization equipment principally for use in iron and steel industry in the People's Republic of China. The company also offers anti-oxidation products and equipment for use in the manufacture of hot rolled steel plate products.

Obviously there are environment concerns in China highlighted by the nearly complete shutdown of Beijing a few weeks ahead of 2008's Olympics - so that athletes could breathe.  Hence, a company such as RINO International provides American investors an avenue to benefit from necessary improvements, that a growing middle class (along with prideful leadership) will be demanding over time.

RINO has a (sub) $600M market capitalization, with just over $2.00 estimated for 2009 estimates on some $200M of revenue.  So the low to mid $20s stock price seems like a relatively good bargain considering recent growth rates.  However, like many Chinese companies - the recent selloff has clobbered the stock; we can see a gap in the chart from mid November, finally being filled 2 months later (Wednesday). 

Today's news of a substantial contract is pushing the stock up substantially in premarket, back over $24 - but the recent technical action has made for a tough situation other than very short term "dead cat bounce" type of trading.  Untilt he stock falters down to its 200 day moving average (currently mid $18s) or recovers back over the 50 day moving average (mid $27s) it is going to be more of a trader's stock...
  • ....announced that it signed Sinter Flue Gas Desulphurization BOT (Build-Operate-Transfer) contracts with Shougang Jingtang Iron & Steel Co., Ltd. The BOT contracts consist of a build contract and an operating contract, valued at a total of $118 million. Shougang Jingtang Iron & Steel Co., Ltd. is owned 51% by Shougang Iron & Steel and 49% by Tangshan Iron & Steel Co., Ltd.
What we have here is really 2 contracts in 1... the first for the build out ($34M) and the other for 10 year of operations.  This is actually quite a nice press release - with completion dates, margins on the operating contract (rarely offered in a press release), etc - quite impressive.  As the buildout portion will be completed in 2010 the current analyst median estimate of $243M should see a modest pop - unfortunately the revenue from this contract will be paid out over a long period (with interest) rather than upon completion.

  • The build contract, valued at $33.8 million, includes $25.8 million construction principal and $8 million in interest, covers the design, construction and installation of two Semi-Dry Flue Gas Desulphurization ("FGD") Units, each of which is approximately 500 square meters in size, which collectively produce approximately 11 million tons of sinter mine annually.
  • The project commenced at the Hebei Province Tangshan City Caofeidian Industry zone facility with initial engineering design work on January 1, 2010 and the installation will be completed by September 30, 2010.
  • (key point - it appears even the buildout portion of the contract will be paid out over the entire 10 years) The customer will make an initial payment of $4.0 million one year after the FGD Units have received product approval by the customer and environmental acceptance by the State Environmental Protection Department. The balance of the build contract amount will be paid in annual installments of approximately $3.0 million, which includes interest at a blended rate of 5.75%. 
  • Gross margins associated with the build contract are estimated at approximately 38%.
  • The operating contract, valued at approximately $84.3 million, has a 10- year term, will commence upon receipt of final State Environmental Protection Department approval. RINO will be responsible for daily operation of the two FGD Units installed under the build contract. This includes obtaining desulfurization supplies such as lime, and utilities, such as process water, power and compressed air, in addition to staff salaries, maintenance repair and FGD ash handling fees.
  • Under the operating contract, the customer shall make annual payments to RINO of approximately $8.24 million through monthly installments. RINO will bear the utility expenses estimated at $6.21 million annually, which are the largest component of the operating costs. RINO will also receive $1.9 million for maintenance upgrades of the FGD Units in the fifth year.
We can quickly do the math and if you take $6.21M in expenses away from $8.24M in revenue you are left with $2.03M in gross income on the annual operating portion of the contract - effectively a 25% gross margin, not accounting for the $1.9M kicker mentioned above in year 5. 

This is a name we are keeping our eye on but the technical picture which was fine just 2 weeks ago, is now much more difficult.

No position

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