China Fire & Security Group Inc. (CFSG), China’s leading maker of fire-safety equipment and systems, has a $1 billion opportunity in its home market, thanks to a newly enacted fire code few industrial companies have complied with yet, an analyst wrote in a research note.

Michael H.V. Tieu, a China-technology stock specialist with investment researcher Brean Murray, has initiated coverage of China Fire & Security with a "Buy" rating, and established a target price of $19.

The Beijing-based company makes and markets industrial-grade fire-safety products, has the billion-dollar opportunity before it thanks to a national fire code that was put in place in April, Tieu wrote. But few are in compliance; indeed, in one major industrial sector alone, more than three-quarters of the major companies are still working to meet the new regulations, he said.

In related news, China Fire & Security yesterday (Wednesday) reported record revenue and earnings for the third quarter, with revenue jumping a much better than expected 44.2%, and net income soaring 187%. What’s more, the company said that by focusing on proprietary products – which carry much higher gross margins – overall corporate gross margins rose to 59.2%, also a new record.

All the results exceeded expectations.

For the quarter ended Sept. 30, China Fire & Security said that sales reached $11.6 million, up $3.6 million, or 44%, from the comparable quarter the year before. Operating income rose to $4.1 million, an increase of 253% from the $1.2 million reported during the third quarter of 2006. Net income rose 187%, from $1.5 million last year to $4.4 million in the third quarter of this year.

"We are pleased to report another consecutive quarter of record revenues," said Brian Lin, the company’s chief executive officer. "During this quarter, our top three customers are from [the] iron and steel, power, and petrochemical sectors."

In light of the record-breaking third quarter, China Fire raised its full-year estimate. Previously, the company had been forecasting net income in the range of $14.7 million to $15 million. Yesterday it boosted that to a minimum of $16.6 million.

Earnings per share should reach 60 cents on a fully diluted basis, compared with a prior range of 50 cents to 54 cents, the company said.

Formerly known as Unipro Financial Services Inc., China Fire & Security designs and manufactures industrial fire-safety systems. It also designs and installs industrial fire-safety systems, using its own products as the systems’ key building blocks. It markets these products, systems and services chiefly to companies in the iron-and-steel, power and petrochemical sectors in China.

The company’s three largest customers are Maanshan Iron and Steel Co. Ltd., Sichuan Dongfang Electronic Equipment, and PetroChina Co. Ltd. (PTR), accounting for approximately $4.9 million, or 43%, of the total revenue for the quarter, China Fire reported.

In addition to those mainstay markets, China Fire & Security has completed products for use in both highway and railway tunnels, tobacco warehouses, and a nuclear reactor – all facilities where the need for fire-safety measures are much higher than in conventional industrial facilities.

The company is now looking to move into such key business areas as transportation, wine-and-tobacco, ships and seagoing vessels, nuclear power plants, and public-space-markets. Those are all growth markets, given the emergence of a consumer class in China, and given that country’s position as a supplier of labor and components to the world. These also all represent a logical step for China Fire to make, since its products are readily adaptable to such uses, the company said.

China Fire & Security’s key products include linear heat detectors, and water-mist extinguishers.

In his research note – which was published last week, prior to yesterday’s earnings announcement – Tieu said that 80% of the 1,000 iron-and-steel manufacturers in China don’t comply with the new national fire code enacted in April. That equates to a market opportunity of almost $1 billion, said Tieu, who covers China-based technology stocks for Brean Murray.

China Fire & Security is a leader in this market, and its revenue pipeline is growing, Brean Murray added.

The $19 target price would represent a gain of 18% over the yesterday’s closing price of $16.09. China Fire’s shares actually soared $2.44 each, or 17.88%, after the company’s earnings report was released early yesterday.

News and Related Story Links:

• Newratings.com:
  China Fire & Security Initiated With a "Buy" Rating.

• China Fire & Security Group:
  Financial Report.

• CNNMoney.com:
  China Fire Rallies Following Better-Than-Expected 3Q Earnings, Raised Outlook.