A growing number of Chinese security companies are tapping into US equities markets to gain access to the capital they need to grow and consolidate in China.

China Security and Surveillance Technology, Shenzen, which is involved in the manufacturing, installation and maintenance of security systems, gained a coveted listing on the New York Stock Exchange in October.

China Public Security Technology Inc., also in Shenzen, which has established a border crossing program and surveillance programs for public security, recently completed a private placement of its stock with US investors. It trades in the Over-the-Counter Bulletin Board and also is working on a listing on a major US exchange.

China Fire & Security Group Inc., Beijing, a designer and manufacturer of industrial fire safety equipment, came into existence as the result of an October 2006 share exchange between a Florida corporation and China Fire Protection Group Inc.  It now trades on the NASDAQ exchange. These so-called reverse mergers have emerged as a popular way for Chinese companies to quickly be able to list their stock in the United States.

International investors have been enthusiastic about the general investment climate in China. Rapid growth and increasing openness have resulted in high returns. Over the past year, the 885 companies listed on the Shanghai Stock Exchange increased their net profits by 73.8 percent.

The boom

With the potential size of the market and increasing awareness of security needs in China, Chinese homeland security stocks are moving to tap into US and other international investor enthusiasm. While US markets may be attracting the largest number of Chinese security companies, others are establishing listings in London, Hong Kong or Shanghai. In June 2007, BlueStar SecuTech Inc., a Beijing-based digital video recorder manufacturer, raised 11 million pounds sterling through a listing on the Alternative Investment Market of the London Stock Exchange.

There are clear reasons for bullishness on the Chinese security markets, Joshua Jabs, a homeland security analyst with Roth Capital Partners, Newport Beach, Calif., told HSToday. The growth of the market is extremely attractive. Roth Capital Partners estimates the surveillance segment of the security market is likely to increase from $1.2 billion to $1.7 billion in size and to grow by 25 percent to 30 percent annually.

Growth is being fueled by the 2008 Olympic Games in Beijing and the Expo 2010 World’s Fair in Shanghai. These international events are heightening awareness of security.

The Chinese government also imposed Ordinance 458 in 2006, which requires surveillance systems at all entertainment locations.

Add to this rapid growth in the Chinese real estate industry and increasing urbanization and there is tremendous potential for the growth of video surveillance.

US companies have their place in the rapidly growing Chinese market. They are working on large international projects such as the 2008 Olympics, in which General Electric Co., Norwalk, Conn., and Honeywell, Morristown, NJ, are playing leading security roles. Their scale and ability to move production into China or provide other large incentives gives them an advantage in such projects.

Yet smaller Chinese security companies have their own advantage on smaller projects, according to Jabs. Most of the market is based upon the close relationships that are the strength of Chinese companies.  They also have a low cost manufacturing advantage.

Chinese security companies are relatively small and operate in a fragmented market, allowing considerable potential for growth by acquiring other small companies once they gain access to Western capital.

Case study

China Security & Surveillance Technology, which does systems integration as well as manufacturing of digital video recorders, has established its position by moving earlier than competitors to list its equity in the United States. With the American capital it raised beginning in 2005, it has been able to make a string of five acquisitions that have fueled explosive growth. Another six are in various stages of negotiation. Revenues of $32.7 million in 2005 grew to $107 million in 2006, a 227 percent increase. Roth Capital Partners is projecting the company’s revenues will reach $231 million in 2007, another 116 percent increase. By 2008, they are projected to reach $323 million, 10 times the revenues of four years earlier.

Net income also has been growing quickly. In 2006, the company reported $22.9 million, up from $7.27 million the previous year. Still, earnings growth is not as consistent as revenue increases. Roth Capital Partners projects that the company will earn $20 million in 2007, with a strong increase to $55 million in 2008.

The high growth prospects for China Security & Surveillance Technology have been reflected in a wild ride for investors. Over the past year, the stock (symbol: CSR) has traded as low as $7.95 per share and as high as $35.35. It closed at press time at $21.86 per share.

New Chinese regulations on capital have slowed down the drive by additional Chinese companies to attract overseas investors, but this is a temporary setback, Jabs said. The drive into Western capital markets will continue over the longer term.