China Environmental (PINK:CNVP)

China Environmental filed its 2010 second quarter filing yesterday evening. We were pleasantly surprised by the results:

Other highlights from the filing:

The increase in our revenue was attributable to the following

• In the same period of the prior year, we were focused on equipment sales, rather than on equipment-bundled installation projects which normally have a 5% to 10% higher profit margin than ordinary equipment sales. Starting in 2009, our business has transitioned from traditional equipment sales to a greater emphasis on the equipment installation projects
• The market demand in China for high-quality waste water treatment equipment we believe is growing substantially as more old waste water treatment plants throughout China are undergoing improvement or upgrades, as required by many local governments
• Experience in our industry and well-known brand has helped us obtain new and retain existing clients
• We own several patents which helped to increase our voting power in the contract bidding process to successfully acquire customer orders, because our equipments with such patents enable us to provide higher quality products and comprehensive technical supports to customers than our competitors do.
• We have established good relationships with many local engineering design institutes and their decisions normally play an important role to affect many clients in the project bidding process.

The increase in our net income was primarily attributable to our

• Increased revenue for the three months ended March 31, 2010
• Higher profit margin on the contracted projects versus sales of equipments in prior years, as our business continued to transition.

CNVP's trailing EPS is now $0.61 giving it a P/E of 9.8 on its previous day ask price of $6.00.

We have attempted to contact CNVP management on several occasions, but to no avail. We need to be aware that the company will now have to go up against touger quarters in the second half of its 2011 fiscal year ending september. EPS over the past four quarters has been in a tight range so we are not sure EPS growth will continue into the second half of 2010. We are assuming that the company may be operating at full capacity, necessitating the need for a capital raise despite the following comments in its filing:

"To date, we have financed our operations primarily through cash flows from operations and borrowings from PRC banks. As of March 31, 2010, we had $4,192,190 in working capital. Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as our bank loans, will be sufficient to meet our working capital requirement for our current operations over the next 12 months. To fully implement our business plan and continue our growth, however, we believe we will require additional capital. We currently have no agreement and/or commitment to obtain any such additional capital."

We will provide an update once we have contacted management.

Disclosure: Long CNVP

CNVP, previously TODT, announced the execution of a reverse split in connection with its reverse merger

Excerpt from February 12, 2010 8K:

Before the closing of the Merger, the Company affected a 4.61896118 for 1 reverse split of the outstanding common stock of the Company, so that after such split but before the issuance of the Merger Consideration there were approximately issued and outstanding 850,000 shares of common stock of the Company.

Apparently on February 12, 2010, the company had only effected the reverse split with respect to shares, but not price.

Yesterday's reverse split confirms our calculated share count of 17,000,000 shares. However, we must adjust the P/E to 25.7 based on its price of about $9.24. Currently, the stock is coded as a GeoBargain. With this new P/E information the decision to maintain the GeoBargain status has become more challenged. Yet, we certainly like the growth rates the company achieved in 2009, as well as its industry. Conservative investors may want to wait for the release of the company's 2010 first quarter financials and EPS figures before making an investment decision. Our several attempts to contact the company have been unsuccessful.

This is a similar situation that we believe to have encountered with Datone (OTC BB:DATI)

The GeoTeam will pay close attention to similar circumstances in the future.**

Hopefully, CNVP's new share price will bring it a step closer to listing on a major exchange.

**With help from an alert investor, we saw it necessary to release this update.

We are going out of the limb and coding TODT, a China-based water treatment equipment supplier and project contractor, as a GeoBargain. The company just became public through a reverse merger. Our initial pass indicates that the company reported 2009 EPS of $0.35 up from $0.09 in 2008. Unfortunately, we do not have any quarterly information and have been unsuccessful in our attempts to reach management in China. see merger summary.

However, the company's 8K filing on February 12, 2009, outlining the reverse merger, gives us some hope that strong growth will continue:

• We are a prominent China-based water treatment equipment supplier and project contractor. Holding six national patents and through sixteen years of development, we have relatively strong market share in waste water treatment sector in China and are ranked among top six of Yixing City’s best environmental protection enterprises based on Yixing Municipal Government’s ranking of 2009 outstanding environment protection enterprises (Yizhengfa Document No.[2010]18).
  
• The water treatment industry in China has experienced and is expected to continue to experience rapid growth. China faces severe water shortages and natural water resource pollution due to rapid growth in population, urbanization and industrialization. To address those issues, the Chinese government has enacted environmental standards and invested significantly in water treatment projects to promote sustainable economic growth and to provide its population with affordable, purified water.
  
• During the past 5 years, the market demand trend for waste water treatment equipment in China has been kept steadily increasing, primarily due to increased level of industrialization, urbanization, and awareness of environment protection among general public. According to the relevant data provided by Frost & Sullivan, more than 3,000 waste water treatment plants have been built and put into use in China from 2001 to 2005.
  
• China Environmental Protection Industry Association predicts that sales of waste water treatment equipment will increase from $2.1 billion in 2004 to $3.8 billion in 2010, with compound annual growth rate of 10.1%. In the meantime, revenue generated from waste water treatment related industry will increase from $3 billion in 2004 to $14.6 billion in 2010, with compound annual growth rate of 30.0%. The newly published laws and regulations relating to environment protection in China, as well as general public’s concerns on industrial pollution, have also educated enterprises and general public, enabling them to become aware of the importance and benefits of waste water treatment.

The stock has a meager trailing  P/E of 2.2 and meets 8 out 10 GeoBargain criteria. If we can confirms 30% EPS growth going forward this story could become exciting.

What we don’t yet know is the company’s immediate needs for capital, but here is what we do have on this matter:

To date, we have financed our operations primarily through cash flows from operations and borrowings from banks. As of September 30, 2009, we had $2,103,946 in working capital, as compared to $1,370,047 as of September 30, 2008. Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as the bank loans, will be sufficient to meet our working capital requirement for our current operations. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources.

We will issue updates as they become available. Please note, the stock is illiquid and has a wide Bid/Ask spread.