Friday, April 28, 2006
Harbin Electric (HRBN)
I had this company on my list of things to follow up on. Too bad I waited so long. This is just a brief look at the company.
They announced 2005 results here.
Reported net income was $10.0 [million] or fully diluted earnings per share of $0.66. Gross margins were 48.9% and operating margins were 42.1%. The Company finished the year with $16.5 million in working capital, of which $5.7 million was in cash. The Company has no long term debt.200510-K:
Year ends Dec 31, 2005. 16.6 million shares on March 29, 2006. Reverse merger with Torch Executive Services Ltd.
The Chinese government has issued research grants to domestic companies to study specific areas for linear motors, like high speed railroads.
Four types of products offered:
- Flat linear asynchronous (self cooled)
- Flat 3-phase linear asynchronous (forced ventilation)
- "The plane goods transmission installment" (do they mean "plain goods" or plane as in flat surface?)
- Micro-motors and armatures for home appliances like microwaves, refrigerators, fans, etc. Armatures for electric drills and other similar tools.
AR concentration: $5.1 million from these three customers.
The customers are:
GuiYang Putian Wanxiang Logistic Technology
Shanghai Junci Machine and Electric Equipments Company
Suifenghe Wanrong Business Trade Company
Four vendors provided 89% of raw materials: 52%, 16%, 11%, 10%.
In 2004, three vendors were 69% of raw materials.
Dependence on raw materials spot prices (possibly bad right now, but overblown in my opinion).
No legal proceedings.
400K options. 1.1 million possible future options.
AR allowance is only $29K out of $5.8 million. R&D costs are expensed when incurred (not capitalized).
Auditors: Kabani & Company, Inc. of Los Angeles. Unqualified opinion.
Also audited: FDRA, The KingThomason Group, Inc 2002, Advanced Optics Electronics (2004), Peoplenet International (2002), Film and Music Entertainment Inc., Manitoba Health Services Insurance Plan., Datalogic International, Providential Holdings 2002, Elephant Talk Communications 2003, Flexxtech Corporation (interesting 2001), ValCom Inc 2003?, Bodisen Biotech (I've looked at them), Netsol Technologies a 2005 prospectus with doubts about going concern.
Patents were all filed on early 2002 and expire in 2012. They're all utility patents (which is good).
- application for conveyor belt equipment with a linear motor.
- another conveyor belt with linear motors patent
- 3-phase async motor driving linear movement.
They claim they have no direct competitors of any meaningful size with the same business model in China. However, they just entered the global markets where competition definitely exists and is larger.
3 officers of the company together own 68.7% of the stock.
Assets are mostly PP&E, AR, and cash. Practically no liabilities and nearly all equity ($24.6 million).
Revenues skyrocketed from $4.9 million in 2004 to $23.6 million in 2005. Gross margins were 48.9% and operating margins were 42.1%, net margins were about the same as operating margins. BUT NO TAXES PAID (temporary tax holiday). Net income is $10 million (comprehensive income is higher, but we'll forget about that for now).
I'm going to assume 17 million totally diluted shares. That would mean net income of 59 cents per totally diluted share.
Question: how are the revenues ramping up each quarter?
Q4 2005: $7.2 million (AR = $5.8 million)
Q3 2005: $7.0 million (AR = $3.9 million)
Q2 2005: $5.3 million (AR = $1.9 million)
Q1 2005: $4.1 million (AR = $0.8 million)
Now, when we look at cash flow, there's almost none from operations and the data above says a lot. Starting with Q1 revenue as a base, each increase in revenues was associated with a larger increase in AR. So the products exchanged for cash hasn't increased, they've merely added a new line of business consisting of products exchanged for promises. Unsurprsingly, that line has done quite well.
Cash provided by operations is extremely low. Meanwhile, they've dumped $2.3 million into capex and $270K of acquisition of intangibles (patents, note 7). In the financing area, they generated $4.8 million by issuing shares.
At this point in time, it's difficult to distinguish whether the majority of their business model is the following or not: 1) sell shares in exchange for cash, 2) exchange cash for stuff, 3) exchange stuff for promises and accounting bonus points.
1. They briefly had a profitless joint venture with Baldor Electric Company which is also primarily owned by the CEO of HRBN (bad).
2. They claim no allowance is needed for the AR (bad). They made $2.7 million in advances to suppliers. Depreciation schedule is a bit on the long side. $111K in advertising costs.
HRBN is exempted from income tax until June 30, 2006.
3. Inventories are almost all finished goods.
4. PP&E is only about 5% depreciated.
Tianfu Yang, CEO, Chairman: Since January 24, 2005, Tianfu Yang, age 44, has been Chairman of the Board and Chief Executive Officer of Harbin Electric. From May 2003 until present, Mr Yang has been Chairman of the Board and CEO of Harbin Tech Full Electric Co., Ltd. From 2000 until present, Mr. Yang has served as Chairman of the Board and CEO of Harbin Tech Full Industry Co., Ltd. From 1994 to 2000, he was President of Harbin Tianheng Wood Industry Manufacture Co., Ltd. From 1991 to 1994, Mr. Yang was President of Hong Kong Lianfa Real Estate Company. From 1988 to 1991, he was President of Hong Kong Property Management Development. From 1986-1988, he was President of Helongjiang Cultural Development Company and Guangzhou Subsidiary Company. Mr. Yang graduated from Zhejiang University with a Masters degree in Electric Motor Automation and Control [having seen a bit of motor related control theory, I consider that a good education to have]. From 1978 to 1979, he was a professional member in the Heilongjiang Province Aeromodelling Team, twice becoming free-style aeromodelling champion in national competition. Mr. Yang is currently the commissioner of the China Electro-Technical Society (CES) in the Linear Motor and Electromagnetism Eradiation Specialist Committees. Mr. Yang is also the People’s Representative of the City of Harbin. In other words, he represents about 10 million people as a government official and in a pretty powerful industrial city way up in Manchuria. Considering that he's a major big-wig, it's worth noting that the risk factors actually mention corruption as a big risk. I consider this mention as being slightly good on the good-bad scale.
We may face political and/or judicial corruption in the PRC.Tianfu Yang owns 58.7% of the company (How did he acquire it? considering it's worth roughly $80 million). All other executives and directors own less than 4%.
Another obstacle to foreign investment is corruption. There is no assurance that we will be able to obtain recourse, if desired, through the PRC’s poorly developed and often corrupt judicial systems. Most of our assets are located in China, any dividends of proceeds from liquidation is subject to the approval of the relevant Chinese government agencies
Conclusion: I'm not buying it, although the company could end up doing very well over time.