BlueStar SecuTech

BUY

23/12/2008 James Crux

Chinese digital video surveillance specialist BlueStar is benefiting from government regulations forcing banks in the People’s Republic to install surveillance equipment.

Floated on AIM in 2007, the Beijing-headquartered venture makes, markets and supplies video network solutions and has grown on the back of new rules introduced in 2001. Future growth prospects are underpinned by requirements to replace such equipment every five years.

Interim results to September demonstrated stellar growth, with turnover increasing by 64% to RMB80.6m (£8m) and net profit moving higher from RMB11.4m to RMB12.6m. Half-time cash balances were robust at RMB67m, even after ongoing investment in product research and development.

Chief executive Xiao Gang described the period as one of strong trading, in spite of a lengthening of the contract cycle during the Beijing Olympics, which was more than offset by growth in networking projects. Banking sector clients continue to clamour for networked surveillance systems to replace analogue systems, as evidenced by recent networking wins with Bank of China, the Bank of China Hainan Province and China Construction Bank. Tellingly, the company has been appointed as the exclusive supplier of replacement and new ‘DVR’ products for China Construction Bank's Beijing branch, as part of a RMB30m programme.

Already flourishing in a fast-growing Chinese security and surveillance industry, BlueStar has the opportunity to take its know-how into sectors such as prisons, offices and petrol stations, as well as into overseas markets.

Full-year forecasts, pared back to reflect the tougher economic climate, suggest a pre-tax push from RMB52.2m to 56.1m, producing earnings of 6.61p (2008: 5.72p). On those metrics, shares in BlueStar look oversold, trading as they do on a prospective multiple of 4.2, while offering the possibility of near-term dividends. Buy for recovery.

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