To OTC Journal Members: 
 

Last One In: China Energy Recovery (OTC BB: CGYV); Not Too Bad

These Q3 numbers have been very important as a guideline to where we are with the current OTC Journal offerings, and China Energy Recovery, my only pre crash China idea and the worst performer of the bunch, finally filed their 10Q last week. Here's a review of the numbers, and some thoughts on where we are with this idea. 

In the next day or two I plan to publish an overview of each of the current followings, and tell you which ones I believe are the best to own in the order of upside potential- in my view.

CGYV was delinquent in publishing their numbers- never a good sign. I was concerned they were going to deliver another horrendous quarter (see Q1 of 2009). However, Q3 was not bad- it was far from horrendous, and might even set the stage for a rebound in this situation.

First- a little historical perspective. I first looked at CGYV in the spring of 2008, and I thought this one would be a monster winner. After all, all they did was clean up pollution and recycle energy from smokestacks in China, and they had nearly doubled in size for three years in a row.

I first started covering the company in September of '08 at $3.40 at what I thought was a reasonable valuation. Then the world fell apart, and everything changed. The '08 valuations no longer held up, and the stock collapsed under the extreme weight of the Q4 '08 once-in-a-century market collapse.

It was regaining form at the end of the year, and was nearly double its current price last May when Q1 numbers came out. This was our first clue the 3 years of 100% plus growth had come to an end, and the company would break its string of successes.

Here's the record- $5 million in '06, $13 million in '07, $23 million in '08, and $40 million forecast in '09. Instead, '09 has been a flop. The company has not delivered growth this year, and is losing a very small amount of money. A big disappointment to shareholders.

Through the first nine months of 2009, CGYV has only delivered $15 million in revenues, down about $1 million from '08. The company has lost $700k during the year, which is a bit of a non event. Through the first three quarters of '08 CGYV had earned $765k, so it is not consequential.

When I read through last week's filing, I was heartened to learn the company has not fallen too far behind the '08 performance. The lack of growth this year is the big problem, especially in light of what investors were led to expect.

CGYV has been busy blaming their lack of growth and profitability on the recession in China. What recession? 8% GDP growth hardly seems like a recession. I can't explain it. There's business around, and there are other companies in this industry doing very well (See CREG).

However, lest you think this is all bad news, let me enlighten you. I actually am rather optimistic about this company's future at this point, and I also believe the bad news has been fully priced into the stock.

For starters- let's look at one development CGYV included in its press release. Their new state-of-the-art facility is now under construction. CGYV drew down 100% of the $5 million credit facility made available by a Hong Kong fund. They expect to be operating in this new $20 million facility before the end of 2010, and they will be capable of delivering over $100 million in revenues in the new facility.

Furthermore, and of far greater interest to me, are the terms of the $5 million credit facility. This is a convertible note bearing 9.5% interest. I was concerned there would be a modification in the conversion price in light of the poor performance of the stock. There hasn't been. This note still converts at $1.80 per share. The financier will need to see this stock appreciate 70% before the equity side of the transaction starts to have any value. To make any money, the stock will have to go much higher and have far greater liquidity.

Adding to my optimism is a statement from the CEO in the press release associated with the Q3 results. Mr. Wu states "we see the rate of new orders returning to normal and we anticipate growth in new orders going forward". I'm encouraged as this is the first optimistic indication out of the company for many months. 

My thesis for this one remains unchanged based on the Q3 numbers. It's a good speculative long term hold. It's far from the best idea I have today, but I expect and hope 2010 to be a much better year for CGYV. I also expect the company to return to very robust growth in 2011- especially in light of their new manufacturing facilty. It will make them a world class company in an industry that has massive growth potential for the coming years. 

Technically, last week's revelations out of the company have the stock moving in the right direction for the first time in months. I believe the sellers are simply exhausted. In short, everyone who wanted to sell the stock and lock in their tax loss for 2009 has done so, and the stock is perking back up.

Seasonally, we're now getting past tax selling, and supplies are exhausted. I wouldn't be surprised to see a number of oversold stocks start to rebound.  With only a $30 million market value at $1, I could see a triple from these levels over the next two years. I just can't predict exactly when.

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