To OTC Journal Members: 
 

China Energy Recovery (OTC BB: CGYV): A Wet Blanket On Hot Coals

I have been sharing a number of big money makers with you on the International front this year. NFEC, FXI, EWZ, UTA, XSEL (for a short period, now flat), TPI- all providing solid returns ranging from 120% down to about 5%.

I'm getting ready to feature two more big potential money makers in the China Space, but I can't really move on until I spend some time on China Energy Recovery, the wet blanket on an otherwise red hot fire.

I have to spend some time on this one because I know so many of you own the stock and have been very disappointed in its poor performance this year, especially relative to the other ideas I have come up with in the space. A number of you have reached out to me via my direct email and I've been candid about how I see this one playing out, but it's time for an update to all readers. If want to contact me directly anytime, just email editor@otcjournal.com. 

I'll share my thoughts based on my personal sense of where they are and some vague discussions with management, and let you decide for yourself what makes the most sense for you if you are a shareholder or thinking about becoming one.

In May of 2008 I started to take a serious interest in segueing most of my growth ideas in the direction of China. The BRIC nations (Brazil, China, India, Russia) offer far greater growth opportunities for investors over the next decade than any we can find here in the US. All have gigantic emerging consumer classes that have little at present, while the US consumer class is shrinking as the baby boomer bulge of population ages, approaches retirement, and becomes less productive.

In my view, China is the best to look at of the bunch. Russia is still highly corrupt has been a bit inept at adopting capitalism. India has a multi layered bureaucracy that oftentimes stands in the way of progress. 

Brazil is certainly worth a look. I have been recommending EWZ- the Brazil ETF, since last December at $35.  Today it's a $73.25 for a net gain of 110%. 

China has by far the largest emerging consumer class, the most cooperative government, and the most accumulated wealth to fuel infrastructure build out feed the appetites of an emerging consumer class. As I have written in the past, think of China as the Post WW II US, with 28 times as many people to participate in the next 40 years of growth.

You want a statistic to bring it all into focus? Consider this- there are 6 cities in the US with populations of 5 million or more. In China, there are 51. Chew on that.

Over the next twenty years there will be some booming growth companies coming out of China, and it is my goal to find a bunch of them for both you and myself. I have been developing a network for great growth ideas. I'm focusing on companies involved with retail, infrastructure build out, and energy saving technologies within China. I have no interest in manufacturers for export out of China.

Now, on to China Energy Recovery (CGYV). Anyone who has followed this stock knows despite the comeback in many China issues, this one has not traded very well this year while many others have come back. In fact, early in the year it was near the $2 level. Today, it is hanging on to $1.10.

There are two major challenges with this idea. First- this is the only "pre crash" idea from 2008, and the original idea was based on pre crash valuations which were a lot richer than today's. When looked at with the backdrop of strong values in Chinese growth companies in early 2008, and before the world fell apart last three months of 2008, the valuation seemed reasonable.

Since then valuations across the board have become far more stingy, so this one is going to need to generate some significant earnings to get back in the good graces of the markets.

Secondly and perhaps more importantly, CGYV seems to have been affected by the age old Peter Principle, which states both entities and beings tend to rise to their levels of incompetence.

Here's some history. In CYs '06 to '08, CGYV doubled in size each and every year. $5 million to $13 million to $23 million. Pretty good growth. However, 2009 has been a different story, and I believe the company has hit a wall it will take some time to climb over.

After reporting $23 million for the year ending in '08, CGYV delivered both a shocking and abysmal Q1 -coming in at $1.2 million for the quarter. Against a backdrop of an average of $5.75 million in Q4 of '08, this was indeed a shock to the markets.

In Q2 the company righted the ship a bit, reporting $7.6 million for the quarter- one of its highest ever. So, even if CGYV can achieve $7 million in Q3 and Q4, it will only match the numbers it delivered in 2008 at best.

The main problem is not the availability of projects to bid on- it's the company's infrastructure. It would appear CGYV can't deliver larger scale projects out of their current facility, which is a weakness for expansion.

To their credit, CGYV has recognized this problem as is doing something about it. Next month, CGYV should be breaking ground on a $20 million manufacturing facility that will be state of the art. It will have its own rail spur that backs directly into the loading dock, and the company has even optioned some nearby property on the Yangze River which could eventually offer shipping by boat. There are very significant local government subsidies making this very affordable.

This $20 million facility will allow the company to grow to $100 million plus in revenues, but is not scheduled to be ready to use until later in 2010, leaving a year out for the company to continue to work in its current facilities.

As far as the second half of 2009- the company will only say it will be better than the first half of 2009, which really isn't saying much. We're at $9 million in the first half of the year- a 30% improvement in the back half would be about $21 million for the year as compared to $23 million last year.

So, here's the dilemma. Investors have done poorly in this stock in 2009. The company has not provided any sort of updated forecast for the back half of the year. We are rapidly approaching tax selling season, wherein investors will shed their losers to lock in their tax losses for the calendar year, and I suspect you are seeing a bit of that now.

The stock will probably make its low in November or early December, then you might see some bargain hunting. As we move into 2010, the stock will likely start behaving better as we approach the christening of the new facility, especially if contract wins go along with the event.

Now that I've gotten through this rather long winded explanation, let's cut the the chase. In short, unless something dramatic changes, I see this stock continuing to trade poorly in the very near term. 

At about $.90, it will break through the $1 previous low, and probably freak everyone out. At this point, the stock will be more of a buy for a rebound.

If you can look two years out into the future, once they are in full operation at their new highly efficient manufacturing facility, I believe this one could have a good shot at $5 to $10. 

In my view, in order to see those kinds of returns, you will have to be a patient, long term investor. You have to make the decision. If you're currently a shareholder, and you have a long term mentality, there's nothing wrong with holding the stock. If you're concerned about opportunity cost and prefer to take advantage of the tax loss, now might be the time.

I can't judge your circumstances or decide for you if you want to be long term or more of a trader. That's your call. There's the facts with my viewpoint sprinkled in. I hope it helps you evaluate the situation. 

Not one, but two new China ideas coming shortly. Stand by for more preliminary information.

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