China Fire & Security Group (CFSG) is a leading provider of industrial fire protection systems. The company’s China-based rivals tend to focus on low-end and technically less sophisticated products which are low-grade and unsuitable for large projects.

The market for the design and installation of fire safety systems is served by numerous small firms. Of these, China Fire has emerged as the largest in the past five years. The company’s leading position in the domestic industry helped it to win a high percentage of bids, which is around 60%-70% of bids in the iron and steel industry.

China Fire is benefiting also from the Chinese iron and steel industry’s Revitalization Scheme, which promotes production control, encourages industry consolidations and emphasizes the development of new technologies. This stimulus plan provides financial subsidies and loan discounts to leading iron and steel companies, allowing larger and more advanced steel producers to upgrade existing plants and develop new innovative facilities. China Fire sees huge growth potential for its Total Solutions business as the segment derives more than 80% of revenue from the iron and steel industry.

Although the company primarily serves the iron and steel industry, it is now looking to expand into other industrial sectors. In China, about three to five large-scale nuclear plants are expected to be built every year until 2020. This represents an attractive opportunity for China Fire to grow in a new industrial vertical as the Chinese government directs that at least 50% of the equipment used for new nuclear power plants should be sourced locally. As the largest industrial fire protection provider in China, China Fire will benefit from the government policy.

Given its brand reputation as a leading total solution provider and its comprehensive line of proprietary products, we believe China Fire is well-positioned to capitalize on the growth potential in China’s industrial fire protection market.

We are upgrading our rating on the stock from Neutral to Outperform.

Zacks Investment Research
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