China Environmental (PINK:CNVP)

During the three months ended June 30, 2010, we reported

• Revenues of $15.8 million as compared to $8.24 million for the three months ended June 30, 2009, an increase of $7.58 million, or 92.01%.
  
• Net income of $3,124,408 for the three months ended June 30, 2010, as compared with $1,804,6352 during the three months ended June 30, 2009.

The increase in our revenue was attributable to the following reasons:

• Started from 2009, our company's business has undergone a big transition from traditional equipment sales to focus on the equipment installation projects. This transition has helped us to generate more sales revenue and higher margins.
  
• The market demand in China for high-quality waste water treatment equipment was huge, especially as more and more old waste water treatment plants all over China are undergoing improvement or upgrades, as required by many local governments.
  
• Our rich experience in this industry and well-known brand has helped us to win customer trust, resulting many clients are willing to establish good long-term relationship with us, and referring us to other new clients.
  
• We own several patents which technically helped to increase our voting power in the contract bidding process to successfully acquire customer orders.
  
• We have established good relationship with many local engineering design institutes and their decisions normally play an important role to affect many clients in the project bidding process.
  
• During the three months ended June 30, 2010, we strengthened our marketing efforts targeting several important market areas and several potential clients and eventually successfully obtained these product orders and projects.
  
• During the three months ended June 30, 2010, we improved our after-sales services and dedicated to maintain a long-lasting good relationship with many of our old customers, which also helps us attract new clients through old clients' referral.

GeoTeam® Note:

Even though CNVP has reported three straight quarters of impressive EPS growth, the company may need to tap the equity markets to maintain its growth trajectory.

"Based on our current operating plan, we believe that existing cash and cash equivalents balances, as well as cash forecast by management to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations.

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."

Also:

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially):

- Is the company's auditor ranked in the top 100?
- Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm. Short sellers have been using this information as a tool to validate their opinions.
- Are the company's internal controls satisfactory?
- Are their any outstanding legal issues?
- Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?

GeoTeam® Note:

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors' portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question. 

***Very Important GeoTeam® note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

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