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Who turned the HEAT off?

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April 16, 2010 – Comments (3)

Okay, here's this company in China, and they make stuff that makes buildings energy-efficient, and they install them in all the new buildings going up all over the big cities in China. They're called SmartHeat, Inc. (HEAT) and Ultralong picked them a little while back, and when I looked into their numbers - faith and begob! (I don't know Chinese idioms, so you'll have to make do with an Irish one) - they're amazing! Look at those growth rates! Look at that consistently high return on equity, that balance sheet, the low valuation! What a dream come true....

So I buy some (sell puts, actually).

Then, they report strong earnings growth in line with their guidance, and they get massacred because Wall Street had expected them to do even better (though Wall Street hadn't bid them up for some reason, somehow they managed to sell them off without having bid them up in the first place). My puts are in the red, but hey, that's okay. I'll just sell some more puts and wait for the Street to come back to their senses.

Well, HEAT keeps going down (no thermostat jokes, please), and by this time, I'm knee-deep in my margin account shelling out puts to whomever will buy them. So now I'm wondering: "What am I missing?"

Well, Jim Chanos has the answer! I'll look for the video (if I remember to) and post it in the comments section, Lord willing, but the gist of it is this:

China's real estate bubble is about to put ours to shame. They have ginormous, empty skyrises being flipped all the time, and no one in the middle class of their economy can afford any of them, and the super-rich are already overinvested in them as it is. Each tower of steel and concrete and glass is financed by a house of cards.

So I guess if they stop building buildings, the people who sell the energy efficiency crap for those buildings will probably see a sharp decline in their earnings and revenue growth. This reminds me of the time I was investing in the low-P/E BDC's in 2006 because their numbers looked great. 

I may or may not close my RL position in HEAT soon, and I may or may not close my CAPS pick. 

P.S. Invalid ticker: HEAT 

3 Comments – Post Your Own

#1) On April 16, 2010 at 3:51 PM, Option1307 (29.73) wrote:

I like HEAT long term a lot, basically for what you mentioned above. However I feel that there is likely to be some more short term downside. Just looking at their chart, I'd say we could pick this up at least in the mid 8's. Best of luck with your puts!

I know Chanos has been calling for the end of the China "bubble" lately, but personally I feel he might be a tad early. Time shall tell.

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#2) On April 16, 2010 at 3:51 PM, UULH (< 20) wrote:

I disagree somewhat.

1: SmartHeat sells to a lot of enterprises, such as Beijing airport, motorola. 

2: What about the older residential buildings? If they upgrade with SmartHeat, it'll save $$$ in the long run and energy. I don't know what percentage of the revenue comes from NEW residential buildings.

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#3) On April 19, 2010 at 10:44 AM, tupchurch95 (< 20) wrote:

Thanks for the comment, I have been buying this for the last 10% of the drop down to 9.05.  Now I am praying for some kind of support at 9.00 (which today looks to be broken).

However, I read that this company had a couple of very large one-time expenses last quarter.  I would expect that with these expenses out of the way we should see nice growth in the coming months given the company has stated they expect to see a strong 2010.

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