rino BOT

http://seekingalpha.com/article/197101-rino-international-morphing-into-a-financier

On April Fool's Day, RINO International (RINO), a Chinese company specializing in environmental protection equipments, announced record 2009 earnings and net income and saw its stock tank 10.75%. This strange move caught my attention and made me look into the root cause.

This company is another one of the Chinese crazy stocks. It went from $3 per share one year ago to as high as $34 per share 4 months ago, and currently stays at $21.

In general, I keep away from those high-flying Chinese stocks as they are often manipulated. Plus, the environment protection business, however sexy it may sound, does not arouse my interest. It is an industrial production business in its core, and any competitor could copy its design in a country where intellectual property protection is still at an infant stage.

In any case, what is interesting in the conference call is a new business model the company is going to adopt.

This new business model is called BOT, shorthand for Build-Operate-Transfer. According to the CEO:

BOT is a construction model in which contractors (Author's Note: RINO itself is a contractor) will construct the whole project. And the contractor will pay for the construction project in advance including construction and operation, and in the final stage will hand over to the company (Author's Note: the company = RINO's customer).

Quite a few red flags are flying here. I don't care about what name is used - be it BOT, CDO, or CDS - this is seller's financing. We see seller's financing all the time with GE, Ford, Mitsubishi, and lots of names I can recall, but they all share the same characteristics: those companies have a financing arm and their cost of capital is low, while the financed customers are often with a much weaker financial position and would not be able to buy the products without seller's financing.

In RINO's case, its first BOT customer is Shougang, or Beijing Steel Corp., a much larger state-owned corporation that has a very low cost of capital as it can tap into the state-owned banks. This does not make common sense. Why should a company with a higher cost of capital finance a company with a much lower cost of capital?

What's more, BOT is worse than financing, because the project RINO builds is inside Beijing Steel Corp. If the deal breaks during the operation, unlike other seller's financing where products get returned to the seller, dissembling of RINO's project could be a total write-off. Imagine that you and your neighbor have a deal where you build a house on your neighbor's land and rent the house to her. What are the consequences if your neighbor refuses to pay the rent?

RINO suggested that it had bank loan agreements lined up to fund the BOT projects, but this does not change the fact that it is bearing all the risk and its cost of capital is higher than its customer's.

Its first project with Shougang has build contracts of $33.8 million and operating contracts of $84.3 million. This is not a small amount compared to the $204 million equity value of RINO as of the ending of 2009.

According to RINO's 10-K, it is the government that is encouraging the BOT business model.

To support adoption, the government will encourage the build-out through BOT (build-operate-transfer) ownership structures which would allow the financier to operate the system for up to 20 years and then transfer ownership to the steel producer.

Even if we take this at face value, it is worth pointing out that it is perfectly fine to use BOT so that environment protection equipment will be constructed sooner rather than later. But, RINO is not in a position to take up the financier role.

Nevertheless, the management claimed in its conference call the following bullish statements.

This project (Shougang Project) is a significant milestone for the company as we enter into new service agreements and we look to do so with as many customers as possible to provide high margin recurring revenue.

Quite contrary to the management's bullishness, these statements made me worry. It reminds me of AIG (AIG) and CDS, if you know what I mean.

One last note, short interest of RINO has steadily risen during the past half a year. it stood at 4.5 million shares on March 15, while Yahoo! Finance indicates that the floating shares count is 7.9 million.

It smells.

Disclosure: No position of mentioned as the time of writing
About the author: Chimin Sang Chimin, aka Stanley, collected a Ph.D in Engineering from SUNY Buffalo and an MBA from Chicago Booth Business School. After working in the computer field for more than 8 years, he has now quit to run his own portfolios. His current interest is on the China and technology sectors, but he is keen... More 158
Followers20
FollowingFollowSend Message Share this page
0
Share 0 Print this article Email this article
Related Articles
• The Big Short: Inside the Doomsday Machine • Fuqi International's Numbers Were Saying It All Along • Giant Interactive: Fairly Valued, Room to Grow Related stocks: RINO
Related themes: China Energy, China Funds, China Healthcare, China Internet, China Materials
16Comments on this article Register or Login to rate comments » anupamk2005 Comments (2) anupamk2005 0
Followers2
FollowingFollowStudent trying to learn trading. Please do the appropriate research before commenting on BOT model. Your comparison of using AIG and CDO business is like comparing ant to an elephant. Four analyst companies will not upgrade this stock if this business model was not worthy of a praise and investors will not buy secondary offering at 35.00 per share. It would be nice if you check your facts before commenting. Apr 05 04:30 PM Reply +2-4 stocknerd Comments (137) stocknerd 9
Followers1
FollowingFollowI've been following the American stock market since 1960 when I was 13. When other boys kept score cards for baseball players I kept stock quotes. In the days of fractions no less. The stock market is changing and what one needs now to make money is information and understanding of human... More For some reason Chinese companies seem to come under suspicion all the time for no reason. If you look at companies that are shady, well in China they shoot corrupt officials and crooked deals. In the US they hire an attorney and get club fed. Also Taiwan/Hong Kong Chinese are always bashing it seems any mainland Commmunist companies. Apr 05 04:47 PM Reply +2-3 Joenatural Comments (4) Joenatural 1
Followers0
FollowingFollowJoenatural has yet to provide a bio. The reason RINO's PPS is dropping is because their EPS model is dropping from the $2.25 area for 2009 to $1.70 or so in 2010 and that's because they now have to pay taxes and their capacity won't be expanded until later in the year. It doesn't take a genius to figure this out, yet absolutely no one has discussed the tax issue. Amazing how people try to over analyze these things when the answers are so simple. Apr 05 07:30 PM Reply +30 Chimin Sang Comments (109) Chimin Sang 155
Followers19
FollowingFollowChimin, aka Stanley, collected a Ph.D in Engineering from SUNY Buffalo and an MBA from Chicago Booth Business School. After working in the computer field for more than 8 years, he has now quit to run his own portfolios. His current interest is on the China and technology sectors, but he is keen... More A followup note:

Below is the interest rate from my broker. If you are shorting this stock, prepare to pay 72% per year in interest rate!

And gosh, how I hate those companies using those acronyms in their reporting, ODM for FUQI and now BOT for RINO. Of course we have the great CDS from AIG.

And I have one acronym for all these: BS.

05-APR-10 Yes -72.88 -72.88 -72.88
04-APR-10 Yes -72.88 -72.88 -72.88
03-APR-10 Yes -72.88 -72.88 -72.88
02-APR-10 Yes -74.75 -76.62 -72.88
01-APR-10 Yes -78.50 -80.38 -76.62
31-MAR-10 Yes -80.50 -80.62 -80.38
30-MAR-10 Yes -80.44 -80.62 -80.25
29-MAR-10 Yes -80.25 -80.25 -80.25
28-MAR-10 Yes -80.25 -80.25 -80.25
27-MAR-10 Yes -80.25 -80.25 -80.25 Apr 05 07:58 PM Reply +10 Lou Siegs Comments (10) Lou Siegs 1
Followers1
FollowingFollowLou Siegs has yet to provide a bio. What do acronyms or the interest cost of shorts have to RINO fundamentals. Answer the replies you were given or STFU! Apr 05 09:45 PM Reply +2-1 squareopening Comments (2) squareopening 0
Followers7
FollowingFollowsquareopening has yet to provide a bio. Lou, this author understands nothing of how things are running in China. Even thoughs he sees that the BOT model is supported (or shall we say driven) by the Chinese government, he just coundn't collect the dots.

I agree that if you don't understand what you are talking about, you should just STFU. Apr 07 02:19 PM Reply 00 Lou Siegs Comments (10) Lou Siegs 1
Followers1
FollowingFollowLou Siegs has yet to provide a bio. I for one am told in China the BOT is a preferred funding vehicle that does not rely on conventional finance or LOCs. In fact it allows large concerns to expand their capital base and pays premiums to companies like RINO to deliver a "factored" package. I agree with mgt. in the conference call that BOTs will greatly expand market share. The writer is also clearly ignorant of the implied ptshp between RINO and the State University on the patent royalty split. The Intellectual Property is a valuable barrier to entry. Who can argue with a 10 PE and $5.share in cash in the China market. There is no comp. Apr 05 09:21 PM Reply +2-1 stocki711 Comments (27) stocki711 0
Followers2
FollowingFollowJust a student at UB and of investing. Value investor. Read the language used in the "Controls and Procedures" section as well as the answers on the conference call. They released a supplement to the Annual Report in which they had to correct the supplement within hours. Everything is chaotic in the company and they are overburdened and have too much risk. It is not as simple as throw a 10x on P/E for eps modeling and move on. This is an incredible company with terrible management and terrible chain of command. Apr 06 12:40 PM Reply +10 Lou Siegs Comments (10) Lou Siegs 1
Followers1
FollowingFollowLou Siegs has yet to provide a bio. You make a good point regarding 9A. Internal Controls. RINO is obviously growing far faster than mgt's current capacity to report in accordance with established standards. I would think this behavior is evident among many Chinese public companies. The good rews is they have recognized these deficiencies and have implemented remediation. Whether this disclosure has any actual negative impacts on growth and value is certainly a wild card that will exist until the independent auditor gives its blessing. But, isn't it just another risk one takes in emerging market equities? Therefore, it is exactly for these reasons why a 10PE, 5$ cash/share, 20% growth company is trading at a 50% discount to developed market peers. It is also why I own the stock. Apr 06 10:19 PM Reply +10 stocki711 Comments (27) stocki711 0
Followers2
FollowingFollowJust a student at UB and of investing. Value investor. I'm mentioned it because it's not common. I know a lot of ADR's that do not contain this language in this section. This is the type of jargon used by FUQI and AOB among others that had problems. CEU, CPBY, GFRE, HOGS all have great looking reports and great accountants.

I think 10 P/E is the sector average more so then it being undervalued. There are chinese ADR's with P/E's of 5 and 6 that are very small and carry risks similar to RINO which warrant such valuations.You mention a deep discount to DEVELOPED peers and that's exactly the point; there should be a discount to developed market peers. There is more inherent risk involved which requires a discount. You have the logic and refuse to implement it.

Finally, I believe the cash per share value is meaningless without context and the future growth is purely subjective. The amount of companies that have growth at 20% annualized for 10-20 years which your discount model calls for are limited to Berkshire to my knowledge (though I'm sure more exist). 20% for any country anywhere is a task and a half because if it lasts just 1 year or even 5 years and decreases then you must use a lower number for accurate discount models. Apr 06 10:41 PM Reply 00 Lou Siegs Comments (10) Lou Siegs 1
Followers1
FollowingFollowLou Siegs has yet to provide a bio. My point is the lower PE already discounts the uncertainty of future growth. Still, I would not make too much of the Internal Control section as the problems have been properly disclosed, a secondary has been fully bought and no deleterious impacts have been recognized. Many provate companies face similar "house cleaning". The RINO biz mosel is relatively straight forward and a good revenue generator. As such, absent any truly devious misconduct, I would expect continued transparency in their evolution. Look at the bright side: any new announcement about better GAAP practices, higher Yuan (no export income), upgraded mgt or accelerated BOT contracts send this baby significantly higher. Apr 07 08:58 AM Reply 00 Chimin Sang Comments (109) Chimin Sang 155
Followers19
FollowingFollowChimin, aka Stanley, collected a Ph.D in Engineering from SUNY Buffalo and an MBA from Chicago Booth Business School. After working in the computer field for more than 8 years, he has now quit to run his own portfolios. His current interest is on the China and technology sectors, but he is keen... More Lou, this article is meant for you to see the risk from miles ahead, to question the true meaning of any business model, to put every business action under the microscope of economics.

It is okay you exchanged the 'low' p/e with the high risk if that fits your style. Apr 07 09:08 AM Reply 00 Lou Siegs Comments (10) Lou Siegs 1
Followers1
FollowingFollowLou Siegs has yet to provide a bio. Fortunately, risk assessment is based on quantitative analysis, not mile high macro opinions. Your B-School education does not qaulifiy you to be excused from the necessary and strenuous company specific research that must be conducted to support your conclusions. Apr 07 03:50 PM Reply 00 Chimin Sang Comments (109) Chimin Sang 155
Followers19
FollowingFollowChimin, aka Stanley, collected a Ph.D in Engineering from SUNY Buffalo and an MBA from Chicago Booth Business School. After working in the computer field for more than 8 years, he has now quit to run his own portfolios. His current interest is on the China and technology sectors, but he is keen... More Even if I don't have any education, that lack of education does not disqualify me from commenting on a business practice that fails to make sense.

And you fail to understand that you don't need to be convinced by my article, which makes lots of sense to people other than you. Apr 07 06:09 PM Reply 00 stocki711 Comments (27) stocki711 0
Followers2
FollowingFollowJust a student at UB and of investing. Value investor. Why dont you share your results of the risk assesment? Also, you provide no support nor can I find any for the "implemented remediation". This "implemented remediation" has been a reoccurring problem for 15 months now and probably longer since the investigation occurred 15 months ago. If you are still going to purchase I don't mind and I don't intend to make this discussion hostile. I just think you are overly excited about the prospects of the company and ignoring a huge negative.

I would suggest CEU as a much safer buy with similar upside and better valuations. I do not own CEU but I would. Apr 07 05:49 PM Reply 00 swiftsoul Comments (7) swiftsoul 0
Followers6
FollowingFollowswiftsoul has yet to provide a bio. Using discounted cash flow model, the key factor is the RADR to be used for RINO. Due to the extremely high beta, its RADA tends to be much higher than market return rate.
In short the market believes RINO is risky which might be overblown since market is overly sensitive these days. It's a buy if RINO goes down another 4-5 points to around $15. Apr 08 12:33 AM Reply 00Add Your Comment