One of the main reasons why I bought is purely based on the China potential alone.
Out of the 9 lakes just in the SW China Lakes Project Area, Newing identified the following four as potentially the most polluted but by the language used by our chairman in a recent interview, we have one and we have 8 more to come. That sounds like we will probably be treating all the lakes in that province, not just the following four but let's look at these four only;
Lake Xingyun is 34km2 and ave depth is 5.3m. Multiplying area by depth gives a volume of 180kmsqm (km squared x m).
Lake Qila is 37km2 x 4 = 148kmsqm
Lake Yilong is 32km2 x 4 = 128kmsqm
Lake Dianchi is MUCH larger at 298km2 x 4.4m deep for 1,311kmsqm (seven times the volume of Xingyun).
Combining the four, total km squared by depth is 1767 which is ten times the volume of Lake Xingyun. That's only four of the nine.
Lake Xingyun was originally a $1mill per month trial or $12 mill per year.
Now following the successful trial, "The scope of works includes the application of Phoslock® to rivers, canals and wetlands in the catchment area of one of eight very large lakes in the province. This will be followed by extensive applications to the lake itself. This, alone, is a large multi-year project."
The new contract there has been estimated by the chairman to be potentially ten times the amount of work originally anticipated and now also includes the treatment of rivers and canals feeding the lake and the construction of wetlands. Ten times the work might mean ten times the dollar value but if I assume only three times, that works out to $36 million per year. It could just as easily be five times the revenue or $60mill/year. Pick any multiple and it still looks like big revenue. For the skeptics, I'll go more conservative and assume that the "multifold increase" in the scope of work only works out to double the original trial revenue for $24mill per year. Pick the four lakes listed above out of the nine in the province and we have ten times the $24 million or $240 million per year revenue potential. That would likely result in a gross profit of $132mill or NPAT of around $60million or more.
With a PE multiple of 20, we would be looking at a market cap of $1.2billion. That is without any income from other parts of China or elsewhere internationally. That leaves plenty of upside potential from there so deserves a high PE. From the latest update;
"Interest in PET’s China catchment and lake work, along with the recent Chinese Ministry of Water Resources certification of Phoslock®, has already led to two major trial invitations on lakes and catchments projects elsewhere in China. These projects are potentially much larger than the southern China project. Planning for these trials is underway, with applications expected to commence in the next three months."
We all know how well the trials have gone so far so these two new potentially much larger projects are a high chance to be won and would add to the upside above.
Now it gets more interesting. Our factory is on the south western shore of Lake Taihu. This is a heavily polluted lake. I ask why build on the shore of that lake? This lake is not 34km2 like Lake Xingyun and its not 298kms like Lake Dianchi. Lake Taihu is a massive 2,250kms by 2m deep on average. That has a volume of 4,500kmsqm which is 25 times the volume of Lake Xingyun. We know Lake Xingyun had a minimum revenue of $12million per year just during the trial. 25 times that $12mill is a minimum revenue potential of $300million per year just from this one lake which was chosen as the location for our factory.
If you think that potential is massive, Lake Poyang is 3,207kms and much deeper at 8.4ms average. Its volume is 150 times the volume of Xingyun so the revenue potential there if it needed to be treated with Phoslock (forget for now wetland construction and treating of rivers, canals etc) is 150 x $12million or $1.8billion per year or potentially a gross profit of just under 1bill per year or a NPAT of around $400mill which is not that far off our market cap for the minimum potential from just this on lake.
I don't know if we will ever work on any of these enormous lakes but we might! If we don't, there are still more than enough smaller but still much larger lakes than the one we have won recently. My point is that the very large project the we have now won is in fact a minnow compared to many of the lakes in China. A very high forward PE is more than justified because there is seemingly no limit to the potential work we could do in China. We could double profits year on year for quite some time. I think the main limiting factor is how much China is willing to spend to clean its water. Then there's the rest of the world.
I'm not aiming to ramp. I don't know how many of these lakes we will work on or how long it will take but I am bullish and I just want to point out how large the potential is. The skeptics like to ask questions when a sp is dropping on inevitable corrections. It's worth looking at the upside as well!
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