Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
1/13/09
CGYV daily
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Beverly Hills, CA 90210 Phone: (310) 402-5901 E-mail (IR): jim@prfmonline.com Website: www.chinaenergyrecovery.com MARKET DATA
Symbol CGYV Exchanges OTCBB Current Price $1.85 Price Target $4.00 Rating Speculative Buy Outstanding Shares 28.77 Million Market Cap. $53.23 Million Average Volume (3m): 62,295 Source: Yahoo Finance
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China Energy Recovery Inc. 9440 Little Santa Monica Blvd. Suite 400
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Company Introduction China Energy Recovery, Inc. (CGYV) designs, manufactures, markets, licenses, installs and services waste heat energy recovery systems that significantly reduce greenhouse gas emissions. The Company’s energy recovery systems capture and re-use over 90% of waste heat energy and enable many industrial facilities to satisfy 50% to 80% of their energy needs internally. In addition, the Company`s customers gain tradable Carbon Credits, known as Certified Emission Reduction (CERs). CGYV also owns a proven technology that makes generators 20% more efficient and reduces electricity consumption and costs. The Company focuses on the Chinese market, which is already the world’s second largest energy consumer and experiencing energy demand forecast to double over the next five years. CGYV built China’s first sulfuric acid energy recovery system and retrofitted that country’s largest sulfuric acid manufacturing facility - Two Lions Fine Chemical Company – with its largest-ever recovery system. The installed system has 54 megawatts (MW) of power generation capacity sourced from recovered heat energy. The Company has also built energy recovery systems in Egypt, Turkey, Korea, Pakistan, Vietnam and Malaysia. CGYV is currently involved in over 100 assorted energy recovery system projects in China and internationally. Total value of contracts and orders completed during 2007 and 2008 exceeds $40 million and CGYV has already secured new orders valued at approximately $19 million for 2009. In November 2008, the Company contracted to design and manufacture the world’s largest straw pulp alkali recovery system for Shandong Tralin Group, one of China’s top paper manufacturers.
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
The total project cost is estimated at RMB95 million (approximately $13.9 million), of which RMB79 million (approximately $11.6 million) represents the estimated cost of the alkali recovery system CGYV will design and manufacture. The system will process some 1,200 tons of toxic residual black liquid generated from pulp-making and purify this discharge. This system is expected to generate 145 tons of steam per hour, equivalent to nearly 12 MW of heat energy generation capacity.
Investment Highlights Business model leveraging waste heat recovery technology The Company designs, manufactures and installs highly-customized systems that recover up to 90% of waste energy from inefficient industrial facilities while also eliminating harmful emissions. CGYV targets industries in which customers achieve payback on invested capital within one to three years. While a majority of the waste heat recovery systems CGYV has installed to-date have been for chemical manufacturing plants, the Company has also installed systems for steel manufacturers, cement makers, paper mills, coke processors, refineries (including Ethanol refineries), and petro-chemical processors. CGYV has installed more than 100 energy recovery systems in China and internationally. Substantial market opportunity Booming economic growth and rapid industrialization has spurred electricity demand in China. At year-end 2007, China’s total installed generating capacity was 713 gigawatts (GW), up 14% from the prior year-end. According to the International Energy Agency, China must add 1,300 GW of new electricity generating capacity, more than the current total installed U.S. capacity, to meet its growing energy demands over the next few years. Due to the expansion of energy-intensive sectors such as steel, cement, and chemicals, China’s energy consumption is growing faster than its domestic GDP, resulting in shortages of electricity and coal in over 20 of the country’s 32 provinces. Energy recovery systems offer a cost-effective solution for rising energy demand. According to the U.S. Department of Energy and Environmental Protection Agency, energy recovery systems could generate nearly 200 GW of new power in the U.S. alone. The European Union is also committed to energy recovery systems, with 104 GW of installed capacity; Germany and Italy have the most installed capacity, at 16 GW and 13 GW, respectively. Significant cost savings attainable through energy recovery systems Energy recovery systems represent a large-scale, environmentally friendly and economically feasible form of power generation. Compared with other alternative energy sources such as solar, wind or biomass, energy recovery systems are much more affordable and already capable of delivering power on the scale necessary for industrial processes. Energy recovery systems are even cost-competitive with conventional large-scale power sources such as coal, fossil fuels and nucleChina Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
ar power, but with the added benefit of reduced greenhouse gas emissions. CGYV’s energy recovery technology could reduce the cost of electricity to $6 per megawatt hour (MWh), compared to costs for coal-produced electricity at $48 per MWh. Because CGYV’s technology generates power at a fraction of the cost of other technologies, customers realize a rapid return on invested capital. The Company’s energy recovery systems reduce fuel consumption and costs by potentially tripling the useable energy extracted from a given amount of fuel, allowing users to slash energy expenditures by as much as 2/3rds. Numerous advantages will support rapid deployment of the Company’s technology Additional benefits associated with CGYV’s energy recovery systems include: (1) reductions in the amount of toxic, combustible wastes such as carbon monoxide gas, sour gas, carbon black-off gases and oil sludge released into the atmosphere; (2) reduced equipment spending since waste heat recovery allows for smaller sized flue gashandling equipment (fans, stacks, ducts, burners, etc.); and (3) lower auxiliary energy consumption. Smaller-sized equipment reduces auxiliary energy consumption by fans, pumps and related items. Exponential revenue growth The Company reported revenue of approximately $16 million for the first nine months of 2008, which is 112% more than for the same period last year. CGYV’s revenue growth reflects increased contract volume and higher revenues per contract. During the first nine months of 2008, CGYV completed 60 contracts with revenues per contract averaging $255,377. This compares to 36 completed contracts and revenues per contract averaging $209,403 for the same period of 2007. Growing 2009 order backlog The Company reported strong growth in contract volume during 2008 and is optimistic regarding full-year 2008 and 2009 results. The total value of contracts and orders completed during 2007 and 2008 exceeded $40 million and CGYV has already secured orders valued at approximately $19 million for 2009. We believe CYGC’s sales will continue to grow, despite the sluggish global economic outlook, since the Company has already secured orders for future periods and is uniquely well-positioned with the engineering skills necessary to design, build and install large energy recovery systems. In addition, the Company is pursuing sales opportunities in new high-growth segments such as bio-mass. Improving profit margins The Company significantly improved gross margins in 2008 by expanding sales and gradually increasing contract prices to offset rising raw material costs. Operating and net margins gains were achieved by improving operating efficiency and increasing the number of higher-margin licensing and design service contracts. We anticipate net income will continue to climb in 2009 as a result of sales growth, efficiency gains and expanded sales of highermargin services. The Company has attracted the attention of well-known venture capitalists. Roger Ballentine, a Venture Partner with ArborView Capital and the former Chairman of the White House Climate Change Task Force under President Clinton, serves on CGYV’s Board of Directors. eBay senior executive Steve Westley through his Westley Group is an investor in the Company. China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
China Energy Recovery Business Model The Company designs, manufactures and installs highly-customized waste heat energy recovery systems that recover up to 90% of the energy wasted by inefficient industrial facilities and reduce harmful emissions. CYGC is targeting industries in which customers can achieve a payback on their invested capital within one to three years. While most of the waste heat recovery systems CGYV has installed to-date have been for chemical manufacturing in China, the Company has also deployed systems in steel manufacturing and cement plants, paper mills, coke processing facilities, refineries (including Ethanol refineries), and petro-chemical plants. CGYV has an installed base of over 100 energy recovery systems. The Company operates through its Chinese subsidiary, HAIE Hi-tech Engineering Company, Limited (Hi-tech), which is principally engaged in designing, manufacturing, marketing, licensing, implementing and servicing of industrial energy recovery systems. Hi-tech carries out its operations mainly through Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. with which Hi-tech has a contractual relationship. This arrangement is due to China’s restrictions on foreign investments and ownership in Chinese businesses. In December 2008, CGYV established a new operating subsidiary and R&D center, CER Energy Recovery Co., Ltd. (CER Shanghai), strategically located in Shanghai’s Zhangjiang Hi-tech Park, one of China’s key national technology zones. CER Shanghai is one of several CGYV strategic initiatives for expanding its operations to meet market demand in China and abroad. Generally, the Company provides engineering, procurement and construction services and is involved in the end-to-end process, from design and development through engineering, manufacturing and installation. CGYV transports the manufactured system in parts by truck, rail or water to the customer’s facility where the system is assembled and installed. CGYV uses equipment manufactured in Germany and high quality raw materials to manufacture its energy recovery systems. Customers may also unbundle CGYV’s services to purchase specific services such as design and engineering blueprints. The Company invests heavily in R&D and owns a portfolio of core Chinese patents on various components of its energy recovery system. Over 150 experienced, specialized engineers employed by CGYV spend between 30% and 40% of their time on research and development. The Company invested about 4% of sales in R&D during 2006 and 2007 and remains committed to ongoing investments in enhancing its technology and products. Another important benefit of the Company’s energy recovery systems is their ability to create monetary value for customers in the form of tradable carbon credits. A central feature of the Kyoto Protocol, adopted in 1997 and entered into force in 2005, is its requirement that countries limit or reduce their greenhouse gas emissions. To encourage greening in the private sector, carbon credits are issued for every ton of greenhouse gas emissions reduced. These credits, known as a Certified Emission Reduction (CER), are issued in accordance with the Kyoto Clean Development Mechanisms. Companies can sell their CERs on one of the world’s Carbon Credit exchanges. The CER trading mechanism provides a rapid payoff for companies that implement greenhouse gas emissions reduction programs and enables them to avoid €100 per ton penalties which began in 2008 and extend through 2012. China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Corporate strategy CGYV’s goal is to become an international leader in the multi-billion worldwide market for energy recovery systems. This will be achieved by: • Capitalizing on changing environmental regulations and increasing demand for clean energy alternatives around the world; • Investing the resources necessary to develop leading-edge technologies that reduce harmful emissions and enable customers to realize increased margins and a reduced energy footprint; • Maintaining a focus on customer satisfaction, innovation, and corporate entrepreneurship; • Expanding its international presence to meet the demand for clean, low cost alternative sources of energy; • Developing a network of international partners with geographic expertise; • Generating stable, predictable, growing cash flows to the shareholders. The Company has defined several near-term objectives to be achieved in three sequential stages:
Phase I • Continue to fulfill current orders; and • Establish long-term strategic purchasing agreements with key suppliers. Phase II • Start construction of manufacturing facility to increase capacity, margins and efficiency; • Purchase specialized equipment to drive efficiencies; • Grow R&D efforts to expand into new industrial sectors such as coke refining and cement; and • Add international sales and marketing team focused on design and licensing. Phase III • Construct second manufacturing facility to meet future demand; • Add engineering and design team to further expand its EPC business; and • Increase marketing efforts in Europe and United States. Source: Company presentation
Technology Leveraging waste heat gas recovery system technology to re-capture and use energy wasted in flue gas emissions increases energy efficiency and reduces costs. Energy recovery also captures the majority of carbon emissions and other harmful pollutants that would otherwise be released into the environment. The figure below highlights opportunities in the cycle for energy savings. China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Source: Company’s presentations
Understanding how energy recovery systems work is explained in example below which looks at the sulfuric acid production process: Traditional Sulfuric Acid Production Process: The production of sulfuric acid involves highly exothermic chemical reactions; most of the heat is released into the atmosphere through cooling towers. Without the use of an energy recovery system, one ton of sulfuric acid will produce one ton of steam.
at
he
Combustion Sulfur is burned to produce sulfur dioxide while releasing heat (exothermic) S(s) + O2(g)
SO2(g)
at
he
Oxidation Sulfur dioxide is oxidize to form sulfur trioxide while releasing large amount of heat (higly exothermic) SO2(g) + O2(g) 2SO3(g)
Absorption Sulfur trioxide is treated with water to produce sulfuric acid; 1 ton of H2SO4 produce 1 ton / of steam SO3(g) + H2O(l) H2SO(l)
Source: Company’s presentations
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Sulfuric Acid Production Process with CGYV’s Technologies: The addition of an energy recovery system increases efficiency so that one ton of sulfuric acid can produce as much as 1.65 tons of steam; the recovery system captures 94% of the heat that would otherwise be released into the atmosphere.
Energy Recovery System at
he
Combustion Sulfur is burned to produce sulfur dioxide; the released heat is harnessed by the energy recovery system.
at
he
Oxidation Sulfur dioxide is oxidized to form sulfur trioxide. An economizer is used to harness the large quantities of released heat.
Absorption Sulfur trioxide is treated with water to produce sulfuric acid; the previosly harnessed heat increases the steam output by 65% to 1.65 tons.
Source: Company’s presentations
CGYV’s technology generates power at a fraction of the cost of other clean energy technologies, produces a faster payback on invested capital, and substantially boosts internal rate of return (IRR).. The Company’s energy recovery systems save fuel and energy costs by potentially tripling useable energy extracted from a given amount of fuel, allowing users to slash energy expenditures by as much as 2/3rds. Additional benefits associated with energy recovery systems include: • Reduced pollution. Toxic combustible wastes such as carbon monoxide gas, sour gas, carbon black-off gases and oil sludge that would be released into the atmosphere through incinerators can be re-captured to recover heat and reduce environmental pollution. • Reduced equipment sizes. Waste heat recovery reduces fuel consumption and the volume of flue gases produced. This enables operators to reduce the size of flue gas handling equipment such as fans, stacks, ducts and burners. • Lower auxiliary energy consumption. Since the equipment is smaller, auxiliary energy consumption for fans and pumps is also reduced.
Industry Outlook The pace of energy consumption growth is determined by economic and population growth in the world’s developing countries. With the United Nations predicting the world’s population will grow from 6.4 billion in 2004 to 8.1 billion by 2030, energy demand is also likely to increase substantially over that period. Both population growth and increasing standards of living in developing countries will contribute to strong growth in energy demand, expected to average 1.6% per year, or 53% between 2004 and 2030. China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Demand for electrical power is projected to nearly double between 2004 and 2030, growing on average 2.6% per year from 17,408 to 33,750 terawatt-hours. Increased demand is most evident in developing countries where some two billion people have limited or no access to electricity and addressing their need is a high priority. Demand for electricity
Source: www.epa.gov/owm/mtb/cwns/2004rtc/toc.htm
At the same time energy demand is growing, modern industrial nations and emerging markets are faced with the growing challenge of reducing toxic emissions that present serious health risks to national populations, cross international borders, and damage the environment. Environmental concerns are encouraging governments and industries to invest in alternative forms of power generation and energy conservation. We believe increasing emphasis on power generation efficiency and mitigating the environmental impact of its processes will bring energy recovery systems to the forefront as an eco-friendly solution for improving energy output from current fossil fuel supplies. Energy recovery systems represent a large-scale, environmentally friendly and economically feasible form of power generation. Compared with other alternative power sources such as solar, wind or biomass, energy recovery systems are more affordable and already capable of delivering power on the scale necessary for industrial processes. Energy recovery systems are even cost-competitive with large-scale, conventional power sources such as coal, fossil fuels and nuclear power, with the added benefit of reduced greenhouse gas emissions. Energy Cost Comparison Method China energy Recovery Gas Wind Coal Hydroelectric Geothermal Nuclear Solar
Capital Cost ($/KW) 57-22 400 1,700-1,800 1,250 1,200-3,600 2,770 2,000-3,000 6,000-9,000
General Cost 100% Utilization ($/MWh) 6 39 40 48 51 55 111 200
General Cost 25% Utilization ($/MWh) 26 44 60 55 113 75 145 320
Source: Company presentation
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
According to recent studies by the U.S. Department of Energy and the U.S. Environmental Protection Agency, energy recovery systems could generate nearly 200 GW of new power, equivalent to approximately 20% of current U.S. power generation capacity. The European Union is a significant user of energy recovery systems, with 104 GW of installed power generating capacity. Germany and Italy have the greatest installed capacity, at 16 GW and 13 GW, respectively. Global market overview The world currently faces fundamental problems with its energy supply due primarily to reliance on fossil fuels. The economic prosperity of the wealthiest nations in the 2oth century was built on a ready supply of inexpensive fossil fuel, and developing nations are consuming fossil fuel reserves at an accelerating rate. This will lead to depletion of the world’s fossil fuel reserves; available supplies of both oil and gas are likely to be effectively exhausted before the end of the 21st century. Only coal reserves are expected to last into the next century. Fossil fuel combustion hurts the environment by producing carbon dioxide that contributes to global warming. Efforts to combat global warming through CO2 mitigation are projected to create a $400 billion market opportunity by 2030. Coal-fired plants represent a huge opportunity for CO2 mitigation since about one-third of CO2 released into the atmosphere is associated with coal combustion from these facilities. Coal consumption is forecast to increase 50% by 2030 because power plants are substituting coal as a fuel to replace more expensive oil and gas. Given international concerns regarding global warming and the need for more efficiently utilization of our remaining fossil fuels, demand is emerging for technologies that can increase the amount of energy extracted from a given amount of fuel and also eliminate harmful emissions that would otherwise be released into the atmosphere. These technologies, which include CGYV’s energy recovery systems, benefit customers by reducing energy consumption and costs and eliminating harmful emissions. China market overview Booming economic growth and rapid industrialization has spurred demand for electric power in China. The country’s installed generating capacity increased 20% in 2006 to 622 GW and was estimated at 713 GW in 2007. China’s installed generating capacity, GW
Source: images.adsale.com.hk/images/upload/Total_Installed_Generating_Capacity_in_China.ppt
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
China’s energy consumption has been growing faster than national GDP and shortages of electricity and coal have occurred in 20 of the country’s 32 provinces, autonomous regions and municipalities. With the rapid modernization and industrialization of its economy, China now accounts for over 15% of the world’s energy consumption. In 2007, China’s energy demand surged in support of 11.4% GDP growth. Total energy consumption increased 7.8%, equivalent to 2.65 billion additional tons of standard coal, while electricity demand rose 14.1% to 326.32 million kWh. Thermal power still accounts for the bulk of the energy China’s generates at 83%, followed by 14% from hydro, 2% from nuclear and less than 0.1% from wind power. China’s energy sources, 2007 Nuclear power 2%
Other sources 1%
Hydro power 14%
Thermal power 83%
Source: China Electric Power Research Institute
China’s power demand was up 13% year-over-year in 2008. With the shutdown of small thermal power generating units and the slowdown of investment in power generation, growth in new installed capacity slowed in 2008 to an 11.8% rate. Over the long-term, China’s power demand is projected to grow 6.6% to 7.0% annually over the next ten years. Significant new investments in installed capacity will be required to meet demand. By 2020, total installed generating capacity is forecast to reach 1,230 GW, which will include 290 GW from hydropower and 70 GW from nuclear and wind power. While China’s investments in hydropower, wind power and nuclear power are increasing, at present, investments in coal-fired power generation continue to rank first. According to the International Energy Agency, China must add 1,300 GW to its electricity-generating capacity to meet demand, which is more than all of the current installed capacity in the United States. Massive increases in electric generation capacity will also increase the amount of harmful emissions. China has already surpassed the U.S. to become the world’s largest emitter of greenhouse gases, and the country faces enormous challenges from pollution. Only 1% of China’s 560 million city dwellers breathe air considered safe by E.U. standards, environmental pollution has created industrial cities where people rarely see the sun, and birth defects in infants have soared nearly 40% since 2001. A 2005 report by Chinese environmental experts estimated that premature deaths attributable to air pollution in China were likely to reach 380,000 in 2010 and 550,000 in 2020. China has set internal goals for 20% improvements in energy efficiency per unit of GDP by 2010. Mayors across China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
each province are required to develop local plans for achieving this goal against which their future progress will be measured. Significant new investment in alternative energy and clean technologies, including energy recovery systems will be required to reach this national goal. China’s use of alternative and renewable energy is expanding rapidly; alternative energy sources already contribute approximately 16% of total electricity generation and 7.5% of primary energy supply. In China, hydropower is the dominant renewable energy source, accounting for more than 95% of total electricity from renewable energy in 2005. Wind energy accounted for only 1.1% of renewable energy in 2005, but China more than doubled its wind power capacity the following year by installing 1,347 MW of additional wind energy capacity. To reduce reliance on coal-fired generation, the Chinese government is stepping up incentives for renewable energy. The Renewable Energy Law and various incentive policies ranging from tax incentives to subsidies have been introduced to stimulate investment in renewable energy. NDRC, a macroeconomic management agency under the State Council, targets sourcing 16% of primary energy from renewable energy by 2020, up from a 7.5% actual share in 2005. This includes development of 300 GW of hydropower, 30 GW of wind power, 30 GW of biomass power, 1.8 GW of solar photovoltaic systems, and smaller amounts of solar thermal and geothermal power. Business Insights estimates that realizing this target will require 130 GW of new renewable energy capacity and investments of as much as $184 billion.
Financial Analysis CGYV derives revenues from: • Sales of energy recovery systems. The systems consist mainly of waste heat boilers and other related equipment manufactured according to customers’ specifications; • Design services. CGYV designs energy recovery systems and other related systems based on a customer’s requirements. The deliverable consists of engineering drawings; • Engineering, procurement and construction (EPC) services. The Company oversees the process from end-toend, from design, development and engineering to manufacturing to installation. Quarterly revenue trend, $ Million
Source: SEC Filings
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
CGYV’s quarterly revenues increased in 2008 due to increased sales volume of energy recovery systems and services and higher revenues per contract. During the first nine months of 2008, CGYV completed 60 contracts and realized average revenues per contract of $255,377. This compares to 36 completed contracts and values averaging $209,403 per contract for the same period in 2007. We believe the Company’s sales will continue to grow, despite the current global economic slowdown, because of its rising order backlog and CGYV’s unique position as one of the few industry participants with the necessary design and engineering expertise to build larger energy recovery systems. Income Statement, $ 2006
2007
%Chg
9 mo 2007
9 mo 2008
%Chg
Revenues Cost of sales Gross profit
5,456,683 4,471,900 984,783
11,846,892 9,718,424 2,128,468
117.1% 117.3% 116.1%
7,538,493 6,851,603 686,890
15,980,191 12,467,448 3,512,743
112.0% 82.0% 411.4%
Selling, general and administrative expenses Operating profit
1,014,458 (29,675)
1,365,321 763,147
34.6% 81.5%
842,776 (155,886)
2,273,105 1,239,638
169.7% n/m
-63,571 11,390 n/a
640,919 439,359 n/a
n/m 3757% n/m
-189,949 -239,363 -0.009
809,088 764,652 0.033
n/m n/m n/m
18.0% -0.5% -1.2%
18.0% 6.4% 5.4%
-0.1% 7.0% 6.6%
9.1% -2.1% -2.5%
22.0% 7.8% 5.1%
12.9% 9.8% 7.6%
Net income Comprehensive income Diluted EPS Gross margin Operating margin Net Margin
Source: SEC Filings
The Company significantly improved its gross margins in 2008 through sales growth, increasing contract prices and expanded offerings of higher-margin design services. Management expects steel and other raw materials prices will slightly decline or remain stable in 2009, allowing CGYV to stabilize gross margins at current levels. Increased operating and net margins were attributable to more completed contracts, improved operating efficiency and increased sales of higher-margin licensing and design service contracts. Liquidity and Capital resources The Company has a strong balance sheet, with cash and equivalents exceeding $6.9 million. During the first nine months of 2008, cash balances increased due to the issuance of Series A Convertible Preferred Stock on April 15, 2008 which generated net proceeds of $6,619,278. Operations provided net cash flow of $104,846 while investing activities consumed $194,188, consisting mainly of equipment purchases.
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Selected balance sheet data, $ Mn 31-Dec-07
30-Sep-08
Current Assets, including Cash and short-term investment Other assets Total Assets
10,347,540 395,265 1,052,096 12,049,028
26,175,433 6,964,952
Current liabilities, including Short-term debt Equity
12,263,016 (213,988)
21,091,751 380,380 7,040,582
28,132,333
Source: SEC Filings
On January 30, 2008, CGYV borrowed $380,380 for working capital purposes from Shenzhen Development Bank, Shanghai Branch, Baoshan Sub-branch. The loan agreement provides for monthly interest payments at an annual interest rate of 7.47% and matures in January 2009.
Valuation Outlook With the world’s sharply increased interest in more efficient energy use and cleaner emissions, we anticipate record revenues for CGYV in 2008 and an upward sales trend continuing in 2009. The Company has already reported revenues of approximately $16 million for the first nine months of 2008, which is 112% more than the same period of 2007. CGYV has also improved margins and turned profitable in 2008. The total value of contracts and orders completed in 2007 and 2008 exceeds $40 million and CGYV has already secured new orders valued at $19 million for 2009. We forecast CGYV’s revenues will climb to a $22 million range in 2008 and to $37 million in 2009 and project net income will rise to $1.5 million in 2008 and $3.6 million in 2009. EPS forecasts, $ 2006 Revenues Cost of sales Gross profit Selling, general and administrative expenses Operating income Other income, net EBIT Provision for income taxes Net income (loss) Diluted EPS
2007
2008e
2009e
5,456,683 4,471,900 984,783 1,014,458 -29,675 13,517 -16,158 47,413 -63,571
11,846,892 9,718,424 2,128,468 1,365,321 763,147 -31,187 731,960 91,041 640,919
23,328,636 18,200,568 5,128,068 3,318,386 1,809,682 -37,822 1,771,860 265,779 1,506,081
37,325,817 28,554,250 8,771,567 4,479,821 4,291,746 -47,278 4,244,469 636,670 3,607,798
n/a
n/a
0.055
0.114
Source: Historical SEC Filings and Analyst estimates
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Comparative analysis We based our valuation on comparative analysis, selecting companies that provide waste heat recovery construction and engineering services to the oil and gas, oil refining, chemical/petrochemical, pharmaceutical, environmental, power generation, and power plant industries worldwide.
Peer comparison Company name January 10, 2009
Ticker Symbol
Price per Mrkt. Cap. Share, $ $ Mn
P/E
P/S
2008
2009
2008
2009
Energy Recovery Inc. Foster Wheeler Ltd. AECOM Technology Corp. Jacobs Engineering Group Inc. Fluor Corp. Median
ERII FWLT ACM JEC FLR
7.43 26.31 29.6 51.15 48.7
372 3,520 3,050 6,280 8,840
46.44 7.07 17.72 13.71 13.60 13.71
30.96 6.94 14.80 13.05 12.75 13.05
7.15 0.50 0.46 0.48 0.40 0.48
5.38 0.49 0.42 0.44 0.37 0.44
China Energy Recovery, Inc.
CGYV
1.85
53
33.82
16.29
2.28
1.43
Source: Yahoo Finance
The peer group companies currently trade at forward Price/Sales multiples of only 0.44 times revenues mainly due to tough market conditions and declining oil prices, which have temporarily made energy efficiency projects less attractive. Over the long run, however, strong demand for energy and scarcity of fossil fuels will drive fuel prices higher and spur investment in energy efficiency projects. We believe CGYV warrants a premium to the peer group because of its successful record of project completions, growing backlog and improving profitability. We consider Energy Recovery, Inc. to be the Company’s closest peer and think CGYV deserves a comparable forward Price/Sales multiple. We are initiating coverage of CGYV with a Speculative Buy Rating and a $4.00 price target, based on a 3.0 times forward Price/Sales multiple and our $37.3 million 2009 revenue estimate. We think CGYV is attractively positioned in a high-growth market and has strong appreciation potential. However, we strongly advise prospective investors to consider the risk factors mentioned below before investing, since the Company has a limited track record and must overcome many challenges in achieving its growth goals.
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Risk Factors Limited operating history The Company’s limited operating history and the unpredictable growth of the emerging energy recovery industry make it difficult to evaluate CGYV’s business prospects. The risks and difficulties that the Company is facing include challenges in accurate financial planning and uncertainties resulting from having relatively limited information on which to evaluate CGYV’s business strategies as compared to companies with longer operating histories. Questions about the Company’s ability to manage growth The Company is in the process of significantly expanding its business to meet increasing demand for energy recovery products and services and capture new market opportunities. As CGYV grows, it must improve its operating and financial systems, procedures and controls, increase manufacturing capacity and output, and expand, train and manage a growing employee base. To fund growth, CGYV must have sufficient internal sources of liquidity and access to funding from external sources. Dependence on a limited number of customer segments The Company currently sells most of its energy recovery systems to companies in the chemical or paper manufacturing sectors. In 2007, approximately 97% and 3% of sales were derived from the chemical and paper manufacturing sectors, respectively. Reduced demand for CGYV’s systems from these manufacturing segments, advances in industry manufacturing processes and/or failure to successfully implement its systems for one or more customers within these sectors may adversely affect the Company’s reputation and sales. Significant marketing and distribution risks Marketing, distribution and sales of its products expose the Company to a number of risks, including: increased costs associated with maintaining marketing efforts in various countries; marketing campaigns that are either ineffective or negatively perceived in some countries or industry sectors; difficulty and cost relating to compliance with differing commercial and legal requirements in the international markets where CGYV operates; inability to obtain, maintain or enforce intellectual property rights; and trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase product costs and make the Company’s offering less competitive in some countries. Fluctuations in exchange rates A portion of the Company’s sales is denominated in U.S. dollars, with the remainder in Renminbi and Euros, while a substantial portion of costs and expenses is denominated in U.S. dollars and Renminbi, with the remainder in Euros. Fluctuations in currency exchange rates could have a material adverse effect on CGYV’s financial condition and results of operations.
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
Management Wu Qinghuan Chief Executive Officer and Chairman of the Board
Mr. Wu has devoted his entire career to the design and production of energy recovery systems. Mr. Wu founded CGYV in 1995. He currently serves as the executive member of the Chinese Sulfur Industry Association and was recently recognized for “Most Progressive Technology” by China Science. Prior to founding CGYV, Mr. Wu spent 23 years as an engineer for Nanjing Chemical Industry Research Institute, the largest research institute under the Ministry of Chemical Industry.
Chen Qi General Manager
Mr. Qi joined GCYV in 1997 and was part of the design, engineering, and sales departments before becoming General Manager in May 2007. Prior to joining the Company, Mr. Qi worked as a trader for Xiamen Trading and Development Co.
Richard Liu Chief Financial Officer
Mr. Liu has served as a senior financial executive for numerous private and public U.S. and Chinese companies, and has managed more than six private and public equity financings. He previously worked for Arthur Andersen, LLP, and is a licensed CPA. Mr. Liu earned an MBA from the Andersen Graduate School of Management at UCLA and is a Cum Laude graduate of Shanghai Jiao Tong University.
Jie (James) Zhao Chief Technology Officer
Before joining China Energy Recovery, Mr. Zhao served as National Sales Manager for Ashland (China) Company Ltd., a leading U.S. specialty chemical company. In this role, Mr. Zhao was responsible for the sales and marketing of unsaturated resin in China and the daily operation of the Performance Material Division. During this period, Ashland’s China business grew from $12 million to $80 million. From May 1990 to October 2005, Mr. Zhao worked as Sales Manager for Monsanto (China), a leading U.S. chemical company specializing in sulfuric acid processes. Mr. Zhao successfully sold several projects, including the Zhangjianggang sulfuric acid plant with heat recovery system. Mr. Zhao holds a MBA from Washington University in Seattle and a BS in Fine Chemical from the East China University of Chemical and Technology.
China Energy Recovery Inc. (OTCBB: CGYV)
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Analyst: Victor Sula, Ph.D. Initial Report January 14th, 2009
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However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable. To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information). We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org. All decisions are made solely by the analyst and independent of outside parties or influence. I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.
China Energy Recovery Inc. (OTCBB: CGYV)
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