Interactive Q&A: Brian Lin, CEO of China Fire and Security Group, Inc. (CFSG.OB)

This is the latest in Seeking Alpha's series of interviews with leading companies of interest to our readers. Ours are interviews with a twist: the respondent has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.

This interactive Q&A is with Brian Lin, CEO of China Fire and Security Group, Inc. (CFSG.OB). China Fire and Security, Inc. was founded in 1995 and listed in the U.S in October 2006, China Fire & Security Group, Inc. “China Fire” is currently the largest manufacturer, distributor and installer of industrial fire protection products and services in China. The Company currently offers a broad product portfolio including fire detection, fire control and fire extinguishers to customers operating in the iron, steel, power and petrochemical industries, in addition to providing the necessary design and installation service for each system. Sales are conducted through company owned and liaison offices in more than 20 cities across China. The Company’s established suite of products and services are sold under the “Sureland” brand name. In addition, China Fire sells and integrates other manufacturers' products to offer a total packaged solution. The Company has 28 issued patents covering fire detection, system control and fire extinguishing technologies with 3 additional patents pending. In 2006 the Company reported revenue of over $32 million and proforma net income of over $9 million. (See the latest CFSG earnings call transcript, Roth Conference presentation transcript, and corporate fact sheet for more background on the company.)

China Fire has sponsored this interview, which works like this:

• Brian briefly introduces himself and the issues he's focused on below.
• Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
• Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or hostile language.
• Brian will respond to the questions and remarks beginning Monday, July 9th. Readers can track his answers and respond to them during that period.

Yahoo Finance readers may join the Q&A by following this link.

Over to Brian:

• • •

My name is Brian Lin and I'm Chief Executive Officer of China Fire and Security Group (CFSG.OB). Thanks to Seeking Alpha for providing this opportunity to interact with investors.

I'm happy to discuss a range of topics with Seeking Alpha readers, including:

1. Our focus on providing fire prevention and remediation solutions to the rapidly growing Chinese industrial manufacturing sectors.

2. Initiation of new rules and regulations by the Chinese government which are driving demand for our products.

3. Recent contract wins and expansion opportunities.

4. The competitive landscape.

5. Plans to move from the bulletin board to a national exchange.

Please leave your questions by using the comment box below.

Thank you!

-- Brian

This Q&A represents the opinion of China Fire and Security Group, Inc. management and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. Except for the statements of historical fact, information presented herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions, the ability to fund operations, the ability to forge partnerships and other factors over which China Fire and Security Group, Inc. has little or no control. China Fire and Security Group, Inc. assumes no obligation to publicly update or revise any forward-looking statements provided in this Q&A, or to correct any erroneous information presented in any investor questions herein.

For information on sponsoring Q&As please contact us.

Comments

[ChinaMart]

Hello Brian,

Thank you for appearing in this forum to answer our questions!

I have two questions:

1. I read in a previous PR by CFSG that the company helped the Chinese government write the industrial fire safety codes that came out in April of this year. Can you go into more detail about how this will drive demand for your products going forward? And as a follow-up, I think I also read that at the moment, CFSG is the only company in China that has products that meet some of the new standards. Is that still the case?


2. I know you can't say at this point when exactly CFSG will be going to a national exchange, but do you believe it will be by the end of this year?

Thank you,

Gary

[Brian Lin]

Gary,

Thanks for your questions. I would like to answer them in the order they appeared:

1. CFSG has been helping Chinese government drafting, reviewing and finalizing fire codes for different industries. In particular, on April 13, 2007, the Ministry of Construction has issued “Code of Design on Fire Protection and Prevention for Iron and Steel Metallurgy Enterprises” where our Chinese subsidiary, Sureland Industrial Fire Safety Limited, is one of the two chief editors. The fire codes are quite comprehensive focusing on automated fire detection and alarm systems, and automated fire extinguishing systems, among other features. All design institutes will design new Iron & Steel plants based on the new fire codes. All regional fire bureaus will certify plants for fire safety based on the new fire codes. CFSG is the leader with many patents in Linear Heat Detector (LHD) which is the key fire detection product for industrial environment. CFSG also has water mist system which is commonly used as part of the automated fire extinguishing systems.
2. As we announced in our news release dated April 17, 2007, we have set up an independent board of directors and applied for a listing with NASDAQ. We are progressing pretty well and hope we will be listed by the end of the year.

Thanks,

Brian

[allan rudolf]

hi brian,
i noticed that when you compute your earnings, it is based on a very low tax rate, if i am not mistaken about 12%. my question is, do you expect this low rate to continue and is this more or less a standard rate for companies in china?
thank you.
allan

[Brian Lin]

Allan,

Thank you for your question.

As high-tech enterprises and Foreign Invested Enterprises (“FIEs”), the income tax rates for our Chinese subsidiaries for 2007 are zero. Going forward, for 2008, Sureland Industrial and HuaAn will continue to pay zero tax rate while Sureland Equipment will start paying 12% tax.

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The key changes are:
a. The new standard EIT rate of 25% will replace the 33% rate currently applicable to both DES and FIEs, except for High Tech companies who pays a reduced rate of 15%;
b. Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner. These companies will pay the standard tax rate as defined in point a above during the grace period.

Our subsidiaries were established before March 16, 2007 and therefore are qualified to continue enjoying the reduced tax rate as described before. Since the detailed guidelines of the new tax law is not publicized yet, the Company can not determined what the new tax rate (15% or 25%) will be applicable to the Company and its subsidiaries after the end of their respective tax holiday terms.

For detailed description of our taxes, please refer to our 10-QSB:
yahoo.brand.edgar-onli...;Type=HTML

The income tax rate of zero percent doesn’t mean certain Chinese companies don’t pay taxes at all. In comparison with US income taxes, Chinese companies pay a Value Added Tax (VAT) of 17% for any product sales. For example, if a contract value is $1 million, we would pay government a VAT of $145,299, assuming there is no VAT deductible. CFSG has reported VAT on sales and VAT on purchases of $1,333,888 for the three months ended March 31, 2007.

Hope this helps,

Brian

[dweiss60]

Hi Brian, thanks for taking questions. Could you talk about:

1) progress you are making signing OEM supply relationships for your linear heat detectors?

2) any changes since the 1Q conf call on pricing for linear heat detectors? Do you continue to think your technology will support price increases?

3) are you continuing to grow your backlog?

4) current manufacturing capacity utilization?

Thanks,
Doug

[Brian Lin]

Doug,

You asked some really tricky questions :)

1. We have been working with multinational companies on OEM agreements for our products, including LHDs. We already have one agreement and expect to have more in the near future.

2. There is not much changes since our Q1 conference call. With the new features, we do expect the selling prices for the new LHDs to be higher than the old LHDs.

3. We have been following many contracts some of them are quite significant in size. Our contract win with AnShan Iron & Steel showcases our capability in winning larger contracts even though we do have smaller contracts every week from our sales offices throughout China. However, we only release our backlog number on the annual basis.

4. As we reported before, we already expanded our manufacturing capacity for LHDs which is running about 50% of capacity. With fairly small investment, we could double our LHD manufacturing capacity within relatively short period.

Brian

[suoucon]

I was wondering about the availability of investment by China mainland investors to purchase your stock. Do they have access and if so are you doing anything to get the story out? Will you be listing the stock on an Asian exchange?

Also you have stated that you applied to NASDAQ, how is that progressing?

I had previously heard an unconfirmed rumor that a non Chinese based company had expressed an interest in acquiring your company. Would CFSG ever consider the advances of a larger multi-national company taking them over?

Does a sense of nationalism help CFSG win business over foreign competition? "Buy Chinese" or is it purely based on price/value?

Thanks . . . keep putting out the fires!

[Brian Lin]

1. As far as we know, Chinese nationals have no access to investing in foreign markets due to foreign exchange control. As of today, we don’t have any plan of listing on any Asian exchange yet.
2. We are waiting for approval from NASDAQ.
3. We have not been officially offered to acquire our company since we became public since Oct 2006. If we do get such offers in the future, we will bring them to our board for appropriate actions.
4. Sometimes it helps, just as in the US, nationalism is important.

Brian

[ryan_plovie]

Brian,

Can you comment or share color on the average size deal that is coming through and what the pipeline looks going forward and the average size of those deals?

I understand you can only say so much!

Regards,

Ryan Plovie

[Brian Lin]

Ryan,

I’m sorry but I can’t comment on the questions you asked but they are valid questions. We will try to disclose the average size of the contracts for Total solutions, Product sales and Maintenance services in our future filings. As far as pipeline, we have a policy of releasing the information on the annual basis.

Brian

[FrankWaddell]

Hello, Brian. Thank you for taking the time to answer my questions.

1.) It was recently annonunced that approximately 80% of the Iron & Steel manufacturers are not compliant with new legislation creating ~$800 million dollar market opportunity for this industry. Given your company's bid success rate of +50% for the iron & steel industry, would it be realistic to assume that CFSG can get at least 30% of this opportunity? Do you have the capacity to meet this large opportunity?

2.) Do you believe China's abundant low-cost labor resouces will give CFSG a competitive advantage against non-chinese companies when bidding on international contracts? Will this allow chinese suppliers, such as CFSG, to compete more effectively on pricing while maintaining your high margins?

3.) It is my understanding that China's LHD standards are set higher than internationaly accepted UL standards. Do you believe that this situation will make it more difficult for other fire safety companies (both large and small) to compete with CFSG in the Chinese market due to their non-compliance?

Once again, thank you.

[Brian Lin]

Frank,

1. As a corporate policy, we don’t provide guidance on anything related to our financials. However, as a leader in China’s industrial fire protection industry, we certainly expect to have certain percentage of the market opportunities. We have moved our major manufacturing to a leased facility in Tianjin to support our continued growth.

2. CFSG has been providing fire protection total solutions for industrial clients in China with only a few contracts overseas. I agree with you that we should have cost advantages compared with our multinational competitors but we need to have a formal strategy laid out before we enter into international market place.

3. Chinese LHD standard is higher than the internationally accepted UL standard. Until today, none of the multinational companies have passed the latest Chinese LHD standards. From this perspective, CFSG does have the advantage of delivering certified products for Chinese market.

Brian

[allan rudolf]

hello brian,

besides being the ceo of cfsg, you, of course, are also a very knowledgeable investor in your company. as an investor, what risk do you worry about the most? and the second most?
thanks for taking the time to answer our questions.
all the best.

allan

[Brian Lin]

Allan,

I know this might be not what you want to hear, but it is important for you to carefully go over our 10kSB for disclosure on investing in our company.
yahoo.brand.edgar-onli...;Type=HTML

Brian

[suoucon]

Sir,

In you recent filing that you referred to it states " All our products meet or exceed both the China and US standards.", to that end what if any plans do you have for entry into the US or other foreign markets? Also, are the China & US standards the highest in the world or are there other countries with more demanding standards?

Would it require a large capital infusion, possible joint ventures to enter the US?

Thanks in advance.

[Brian Lin]

We currently don't have a plan for directly entering US or other foreign markets. We will make an announcement when we have such a plan. We don't know the standards of other countries at this point.

Brian

[RUFCrazy]

Hi Brian,

This is an excellent forum and I appreciate the chance for such dialog. I wish more companies would do this...

1) Can you share with us what the company's 2-3 year goals are for revenue and earnings growth - maybe a range such as 30% revenues, 25% earnings etc ? As an investor, it is incredibly useful to understand the companies aspirations for growth.
2) Have you determined what size of contract that would warrant a press release by the company ?
3) Most of your business has come from the steel industry. Going forward, on average over the next several years, what pecent of business would you expect to come from steel, and what other business areas are you targeting for growth ?

Thanks

RUF

[Brian Lin]

Ruf,

1) I'm sorry but we don't provide any guidance on our financial related information. But historically we have been growing over 30% top line and we don't see any reason we can slow down.

2) In our last press release, we announced that we will issue a press release for contracts over US$3 million.

3) We have been very strong in Iron and Steel industry with a significant portion of our business coming from clients in this industry. We can't say the exact percentage over the years but Iron and Steel industry will remain a focus of CFSG, probably still be the relatively largest contributor to our revenue. In our 10-KSB, we stated that we are expanding into other vertical industries, including Transportations

Brian

[ryan_plovie]

Brian,

Is CFSG attracting any reputable Wall St. Analysts, or are institutional investors nervous of investing in a small chinese company?

Ryan

[Brian Lin]

Ryan,

There are currently three independent analysts covering the Company. They are Roth Capital Partners, Susquehanna International Group and HC Wainwright. Please contact your sales person at each respective firm if you would like a copy of the report.

Brian

[FrankWaddell]

Hello again, Brian. A couple more questions if you don't mind...

Your new linear heat detectors are highly recomended for companies in the Iron & Steel Industry. Are there any other industries where your new linear heat detectors are highly recommended that will provide additonal growth? Is there any legislation in the works (or that has already been approved) in either China or abroad in these other industries for those linear heat detectors?

Thank you,

Frank

[Brian Lin]

Frank,

Sorry about my late reply but I thought I submitted it earlier. Anyways, here is my comment:

Linear Heat Detectors are used in many industrial environments, including Iron and Steel plants, Power plants, Petrochemical plants, highway tunnels, etc. In China, we are working with government to release fire codes for different industries to ensure appropriate amount of linear heat detectors are deployed in industrial plants for fire detection. Even though there is no legislation on non-compliance yet, plant owners are paying more and more attention to fire safety due to various potential liabilities.

Brian

[ryan_plovie]

Brian,

Instead of asking questions that you cannot give the answers to. Could you share with us investors, what we should be looking for from the company that will let us know that you are executing the business plan and what kind of things we have to look forward to this year that could result in price appreciation for the stock or get the company on people's radar.

[Brian Lin]

Ryan,

Thanks for the understanding.

We are doing everything we can do increase shareholder value. Financially, even though we don't provide guidance for 2007, we do have a committment to our PIPE investors in the form of "make Good" number - comprehensive income above $0.46 per share. If we don't make this number, certain personal shares of the Chairman and myself will be given to PIPE investors. Business wise, in addition to our continous focus on Iron and Steel industry, Power plant, and Petrochemical plants, we are expanding into Transportation industry and other vertical industries. We also very much focus on investor relations. I personally go to US and meet with institional investors on the quarterly basis. We have talked with many analysts and have research reports from three brokerage firms. We applied for Nasdaq and was just approved by Nasdaq on July 10. This showcases our focus on improving our corporate governance and this move will lead to increased visibility, liquidity and institutional sponsorship for the Company.

Brian

[ChinaMart]

Hi Brian,

I just wanted to say thanks for the Nasdaq listing!

Now CFSG can trade at a PE it deserves going forward.

You seem to have a pattern of underpromsing and overdelivering which I really like.

Keep up the great work.

Gary

[Brian Lin]

Gary,

Thanks for the compliments. We certainly will work hard to increase values of our shareholders.

Brian

[Brian Lin]

Thank you all for your comments and I enjoyed talking with you here for the last three days. As a closing remark, I would like to thank you to Seeking Alpha for allowing us to participate in this event. As the only Chinese Fire Safety company listed in the US stock market (and will be trading on Nasdaq on Monday, July 16, 2007), we feel we are uniquely positioned to capitalize on this large and
growing market opportunity as China begins to implement these necessary fire
safety standards. We look forward to updating investors on our progress over
the balance of the year as we continue to reach our corporate initiatives.

Brian Lin
Chief Executive Officer,
China Fire & Security Group, Inc.

[SeekingAlphaEditors]

This Seeking Alpha interactive Q & A is now closed for further questions. Thank you very much to Brian Lin of China Fire & Security Group, and to our readers who participated.

~ The Seeking Alpha Team