China’s public security information technology services sector is estimated to be worth US$4.5 billion a year, and analysts expect 19% annual growth over the next five years. Michael Lin, the vice-president of investor relations for leading public security solutions provider China Public Security Inc. (OTC Bulletin Board: CPBY.OB), talks to Amy Cheung of The China Perspective about China’s public security scene.

The China Perspective: China Public Security’s clients (CPBY) are mainly based in Shenzhen. Are you working on expanding your client base to other key cities in Guangdong or other provinces?
Michael Lin: Currently, CPBY’s customer base is concentrated in south China and particularly Guangdong province. This is largely because CPBY is based in Shenzhen. We are establishing an office in Shantou as well as sales offices in Beijing, Shanghai, Xian and Chengdu. All these offices are on schedule to be opened in the second half of 2007, paving the way for national expansion.

TCP: Can you characterize your contracting partnership with Shenzhen iASPEC Software Engineering Company Limited (iASPEC)? What does the recently announced Sha Tau Kok border contract means to CPBY?
ML: iASPEC is a Shenzhen-registered company and has acted as CPBY’s sales agent. The exclusive agreement we concluded allows CPBY’s subsidiary to receive all the future contracts of iASPEC.

The recently announced Sha Tau Kok border contract is highly significance for our company and our products. CPBY’s border control system was first launched in November 2006. The contract means our new product is fully recognized by the Ministry of Public Security (MPS). While the contract puts our technology on the map, it also allows us to expand our product lines. Once we have our sales offices set up, we will steer our expansion to strategic territorial gates located between key cities and their neighbors.

In the first quarter of 2007, iASPEC was awarded a US$3.8 million contract by the Shantou Special Economic Zone for building its First Responder Coordination System, with 100% of the value of the contract subcontracted to our subsidiary.

TCP: Close to 650 cities across China are expected to initiate responder emergency systems in the coming years. How does CPBY plan to tap the opportunities?
ML: Our public security solutions have become an integrated system for police and fire departments in Hainan province and a number of key cities in Guangdong. Since CPBY’s systems have help increased their communications efficiency, this in turn gives us a competitive advantage and serves as a platform to promote our systems to other city governments.

Government policy is actively promoting the use of information technology in public security. Instead of manual operation, internal city-wide security systems now have to employ IT systems to improve security and efficiency. Since 2004, CPBY has been assisting Guangdong MPS to use public security system and geographic information system (GIS) solutions. This increases our capability to tap similar commercial opportunities because successful examples in Shenzhen and Guangdong serve as examples for other cities.

TCP: What were the main growth drivers for CPBY? What will to drive CPBY’s growth in 2007 and 2008?
ML: In 2006, the main growth drivers for CPBY were the following. First, government awareness towards the importance of employing internal city-wide controls. Second, individual cities are now able to approve new public security-related contracts based on the first contract. Third, city use of public security system drove the overall growth of public security sector.

For 2007, CPBY estimates it will receive revenues of US$27 million and net profits of US$12.5 million. For 2008, revenue is estimated at US$45 million with net profits expected to reach US$21 million.

As the government increases its emphasis on border and public security controls, we will develop a more national focus and promote our public security product line through pushing city-wide border control systems. Our city-wide focus includes a GIS system to help cities secure and prevent problems or crime more efficiently. In 2007, city-wide public security systems and border controls will contribute more significantly to CPBY’s revenues, up to 11% from 6% in 2006.

In the first quarter of 2007, China Public Security's revenues grew 201% to US$3.4 million, compared to US$1.7 million in the first quarter of 2006.

TCP: Why did CPBY go public in the US? Are you considering a mainland listing as well?
ML: Our main consideration over our listing location was access to capital. The US is a bigger capital market, giving CPBY cheaper and easier capital access. We are currently not considering other listings.

TCP: How much potential is there for growth in China’s public security information technology market?
ML: Since the public security sector is fairly new for the Chinese government, there is so far no official data for government needs. Nevertheless, we believe the market is large, especially now the government is paying increasing attention to the issue. We estimate huge demand in the public security market in terms of both hardware and software.

It is on the government’s agenda to create a peaceful and secure society, which requires security-related issues to be handled efficiently, supported by more efficient communication and mobilization between city governments and ground forces.

TCP: What is CPBY’s share of the market at present and how do you plan to increase this?
ML: There is no official data on market shares since this is related to sensitive common security data. CPBY is also the only platform provider for Shenzhen fire, police and ambulance departments and we are also in similar contracts with Guangzhou, Hainan, Foshan and Shantou. We are in talks with several cities and plan to spin the three emergency numbers into one on our first responder system and GIS services.

Starting July 1 2007, our border control services will be installed at Shenzhen Bay and Futian Port. We will thus gain access to contracts for additional automatic installations.

CPBY sees significant opportunities to deploy our GIS solution capabilities in major urban areas in regions of China other than in Guangdong Province. There is also opportunity in the private sector, where we are currently working with China Unicom and China Telecom to develop our GIS solutions for private sector applications in logistics, asset management and location-based services. We are also working with other cities outside Guangdong province on public security issues and possible employment of our technology. We can see in the near future several contracts being concluded with these city governments.