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RINO (OTCBB:RINO) Serving Massive China Markets, No Operational Exposure to U.S., Looks Cheap

Dec 16, 2008
Author: SCP Editor

December 16, 2008 – RINO International Corp. (OTCBB:RINO) provides wastewater treatment equipment and energy management systems designed to reduce industrial pollution and enhance energy utilization – two huge areas for growth, we think for the foreseeable future.

The world’s most populated country, China continues to experience rapid industrial growth, massive migration to urban areas and the result is a surge in emissions of pollutants, and its industrial pollution is becoming a critical issue not only in the region but on a global scale. RINO’s focus it on the iron and steel industry, which is one of the largest contributors to water pollution and sulphur emissions. Consider the fact that a population of 300 million people are expected to be moving into China’s cities in the next 24 to 36 months, and how much this is going to tax steel production, amongst other things. This, in turn will create a massive opportunity for replacing legacy systems, to reduce SO2 emissions.

China’s SO2 emissions levels are already well-above its targets, and continue to be driven by increases in steel production, and the sintering process in coal production. China’s SEPA has mandated about $18.8 billion in investment into flue gas desulphurization (FGD) through 2010 and as much as 10% of this will be invested into the steel sector, and there are further mandates for iron and steel sinters to reduce S02 emissions.

RINO’s Products

Wastewater System

·         Closed-loop system lowers consumption of water and increases energy efficiency in the process;
·         Scalable, allowing for follow-on orders from existing customers
·         Lower installation and maintenance costs, less floor space required
·         Average customer size is $3 million with 40% gross margins 

Desulphurization Cleaning System

·         About 80% market share in China
·         Achieves 90 to 99% removal of SO2
·         Customizable, lower installation costs, less floor space required, and automated process control
·         Customer cost is about $8 million per unit with 45% gross margins 

Anti-oxidation System 

·         Reduces oxidation loss by more than 60% from current levels to about 1.2%
·         Customer cost is about $1.4 million In addition, RINO is introducing additional technology for cleaning sinter flue gases and sludge treatment (which consumer less energy, with zero emission and less cost) which will be commercialized next year.

Financial Highlights

·         Guidance of $32 to $33.5 million for Q4, representing 85% Y/Y growth
·         At September 30, backlog of $61.1 million (about $29.4 million will be booked in Q4)
·         Through nine months, revenues of $98.5 million an increase from $46.1 million reported last year, with net income of $20.2 million – net margins of 21%.
·         $60.7 million in working capital

Revenues this year are expected to be more than $130.5 million, and we think net income should come in around $28 million or so. Since 2005, RINO’s sales have ramped from $3.6 million. Given this impressive growth, and the remarkable potential for continued revenue and earnings expansion, we think the stock, which is currently trading by appointment at $3.75, representing a market cap of $93.75 million, has significant upside.

The stock is trading .71x FY2008 forecasted sales and about 3.34x forecasted income. At 2x FY08 sales and 7x income, both defensible metrics we think, the stock price would be $10.44 and $7.84 respectively. In either case, the stock looks cheap at $3.75.  

Important Disclosure: SCPEditor does not hold any position in RINO. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.


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