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No. of Recommendations: 8
China Fire announced this morning a record $92mm contract with Wuhan Iron & Steel to retrofit 32 of Wuhan's plants with appropriate and code-compliant fire safety equipment. This is a truly mammoth win that more than doubles the size of China Fire's work backlog:

Alongside this announcement China Fire issued 2010 guidance of 70% or so sales growth to about $140mm, earnings of about $50mm, and EPS of about $1.65:

The market has jumped on this news and driven the stock up 20%. The easy math here is to put a 15x multiple on the $1.65 EPS forecast and decide that this will be a $24 stock 12 months out.

Could that be the case? Sure. But while this news does cause me to raise my value estimate from $10 to $12, it does not solve a few of China Fire's core problems from an investment standpoint, including rising receivables and a company that seems very hesitant to strategically deploy its $28mm in cash. Remember that China Fire's cash generation has dramatically lagged its reported earnings, which can be a warning indicator of bad debts to come.

The company's 2010 guidance also quietly reveals that the company's 2009 results are going to come up short of previous guidance, with revenues checking in at just $80mm. Further, people who follow our Twitter feed may remember that I commented on some bizarre upward moves in China Fire's stock price last week. This is what I said at 11:39am on Feb. 3:

What is going on at $CFSG? +10% yesterday; +4% today. Odd given the market is otherwise very skeptical of China. (

The cynic in me would say that news of this contract win got leaked to a few people ahead of time. This can work on the flip side as well, which is why we as outside US shareholders should demand a wide margin of safety with any Chinese small cap.

All in all, though, this is good news and a stock I continue to watch, but I'd wait for the euphoria associated with this announcement to subside before jumping back in. I'd be interested at $10.50 or so based on a DCF analysis employing a 15% discount rate and a 15% bad debt provision on receivables accumulated.

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