Harbin Electric Releases 2009 Chairman Letter and Annual Report

Jun 30, 2010, 07:00 ET from Harbin Electric, Inc.

HARBIN, China, June 30 /PRNewswire-Asia/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company", Nasdaq: HRBN), a leading developer and manufacturer of a wide array of electric motors in the People's Republic of China, released its annual report for the year ended December 31, 2009 and proxy statement for its 2010 annual meeting of shareholders. Both can be obtained from the Company's website at http://www.harbinelectric.com under the investor relations section.

The annual report includes the letter from Mr. Tianfu Yang, Chairman and Chief Executive Officer, to the Company's shareholders. This letter is reproduced below.

"Harbin Electric had the best year in its history in 2009. We saw higher sales across our three major product lines and particularly from our new subsidiary, Xi'an Tech Full Simo Electric Motor Co. Ltd. ("Xi'an Simo"), a leading developer and manufacturer of industrial rotary motors widely used for trains, power plants, and steel processing, as well as the materials, construction, chemical, and machinery industries. The addition of Xi'an Simo to our corporate family is a transformational event, doubling our revenues and taking us a long step toward our goal of becoming China's largest manufacturer of electric motors.

"Sales in 2009 increased by 85% over 2008 to $223.2 million, with Xi'an Simo contributing $44.1 million. Excluding $24.2 million in non-recurring and non-cash charges, we also saw a substantial increase in profitability to $43.8 million, an increase of 73% over 2008 and representing $1.71 per diluted share. With these items, net income was $19.6 million, or $0.77 per fully diluted share. We generated $62.5 million in cash from operations over the year, up 47% over 2008, further strengthening the Company's financial position. In August 2009, we closed a public offering of common stock that raised net proceeds of $107.5 million, which helped us pay down debt and complete the acquisition of Xi'an Simo.

"Our performance in 2009 was remarkable in part because the year began in the full throes of a global financial crisis, which created a drag on performance in the first half of the year. The domestic market recovered swiftly, however, as the central government's RMB 4 trillion (approximately US$586.5 billion) stimulus plan began to filter through the economy. This program has been augmented by at least RMB 8 trillion (approximately US$1.2 trillion) in spending by local governments, and will continue to deliver benefits over the next two to three years. As a result, the year ended on a far more optimistic note than it began. In 2010, we anticipate revenues in excess of $400 million, buoyed by continuing stimulus investment in infrastructure and urbanization programs.

Performance by Segment

Industrial Rotary Motors

"We have emerged as a diversified motor manufacturer following the $111.6 million purchase of Xi'an Simo in October 2009 and $54.8 million purchase of Weihai Tech Full Simo Electric Motor Co., Ltd. ("Weihai Tech Full") in July 2008. Industrial rotary motors are now a major product line for us, representing 52% of sales in 2009. Industrial rotary motors serve as the backbone of the industrial economy, and are critical components for industrial applications in the energy, agriculture, transport, construction, metallurgy, machinery, and materials sectors. We anticipate specialization rather than consolidation of our two main industrial motor manufacturing centers, in Shaanxi and Shandong provinces. Xi'an Simo will specialize in energy-efficient large-scale motors while Weihai Tech Full will specialize in small to mid-sized motors.

"The government's stimulus program, which includes subsidies for rural households to purchase agricultural equipment, consumer appliances and vehicles, as well as major infrastructure spending, energized this segment of our business. Sales of $116.3 million in 2009 accounted for 52% of revenues and were more than four times our sales of industrial rotary motors in 2008, which totaled $27.8 million or 23% of revenues. Weihai Tech Full for the first time contributed a full year of revenues.

"We have begun the work of integrating Xi'an Simo, formerly a state enterprise, into the Company, a process that requires some changes in management and a new approach to cost controls. We are also continuing the process of upgrading the relatively old and inefficient production equipment at Weihai Tech Full and Xi'an Simo. Given that the two operations focus on different types of industrial rotary motors, margins at Xi'an Simo and Weihai Tech Full are very different. Xi'an Simo, with a focus on large, specialized and customized products, had a gross profit margin of 31.6% in the fourth quarter of 2009, the first quarter we reported it, while Weihai Tech Full, with a focus on small to medium-sized motors and agricultural applications, had a gross margin of 11.2% in 2009. We have identified ways to improve margins at Weihai Tech Full, with a long-term target of 20%. Strong growth in sales of industrial rotary motors last year demonstrated the importance of these products to China's core economic sectors and justifies our strategic entry into this segment. In 2005, the latest year for which data is available, China represented 17% of total global sales of industrial rotary motors, with domestic sales growing at a rate of 9.5% per year. China's fiscal stimulus program is very clearly supporting similar levels of growth, even if the global financial crisis provided a temporary interruption.

Linear Motors

"Our high-margin linear motors segment performed well in 2009, and we anticipate strong demand as our products penetrate industrial markets across China. This penetration is fueled by the advantages of this technology, including energy efficiency, low operating costs, precision movements, and low noise and vibration levels, compared to traditional rotary motors. Revenues for the segment in 2009 were $60.2 million, up 21.6% from $49.5 million in 2008. We improved our gross profit margin in this segment, from 54% to 59.3%, reflecting the growing contribution of higher margin products such as oil pumps and our newly-developed linear motor propulsion systems for coal transport.

"The fastest growing product line in this segment in 2009 was our proprietary linear motor oil pump. Our customer, Petro China's Daqing Oilfield Co., our neighbor in Heilongjiang, operates China's largest and oldest onshore oil field, which has produced over 10 billion barrels of oil since it began production in 1960. In 2009, we sold 540 of our proprietary linear motor oil pumps to Daqing, up from 214 oil pumps in 2008. We expect that oil field applications of our linear motor oil pumps will provide steady cash flow in this segment for many years to come.

"One of our most exciting breakthroughs in 2009 was in linear motor propulsion technology. After many years of research and development, we saw the first revenues from this technology in the fourth quarter of 2009, $7.3 million from freight trains for a test track at a coal mine in Inner Mongolia. This first coal transportation line using linear motor technology will take time to complete. Ultimately, it will be 32 kilometers long and, if successful, provide a model for similar facilities throughout China.

"We are in the final stages of testing the first domestically manufactured linear motor based metro train as part of a joint effort with Changchun Railway Vehicles Co. and the Institute of Electrical Engineering of the Chinese Academy of Sciences, which began more than two years ago. The market is sending us a message that it wants the trains to be available as quickly as possible because they are about half the cost of imported trains. We expect the test phase to be completed in the near term. The lengthy startup phase is due in part to strict requirements on the number of kilometers the new system has to run before it can be approved for commercial release.

"The opportunities in this segment are significant, and we have the enviable status of being first mover among domestic manufacturers. China is building over 500 kilometers of urban rail lines annually, and its metro rail network will exceed that of the United States by 2012. The central government has approved 25 cities to develop urban rail networks, and will spend over RMB 1 trillion (approximately US$146.6 billion) to expand urban rail from 940 kilometers at the end of 2009 to more than 3,000 kilometers by 2015. Guangzhou's metro lines 4 and 5, and the Beijing Capital International Airport Link have adopted linear motor propulsion technology, but to date have relied on imported equipment. We expect that there will be keen interest in our domestically developed and engineered products, with their significant pricing advantages, once testing of the prototypes has been completed.

Automotive Micro-motors

"The global financial crisis took a heavy toll on the North American auto industry, which severely impacted our auto micro-motor business in the last year. Demand is rising for our high-end automotive products in the Chinese automotive market, which is growing rapidly and now exceeds that of the US. We are pleased to see that revenues began to move in the right direction in the fourth quarter of 2009. We ended the year on a positive note, with $40.2 million in sales in this segment, up 18.9% over 2008 sales of $33.8 million.

"Our brand-new automotive micro-motor manufacturing facility in Shanghai started production in October. We have also consolidated production in this segment, moving the two automotive micro-motor production lines that were in Harbin to Shanghai. With three production lines fully operational, our Shanghai facility is still operating well below its design capacity of 10 million units per year. We plan to add new production lines and bring the facility to full capacity over the next two years as we launch new products developed for existing and new customers.

Sound financial structure

"Cash on hand as of the end of 2009 was $92.9 million, compared to $48.4 million at the end of 2008. Our public offering of 7,187,500 shares of common stock during the third quarter provided net proceeds of $107.5 million, while proceeds from the conversion of warrants and options totaled $11.9 million. Operating activities generated $62.5 million in cash in 2009, up 47.7% over 2008, when cash from operations totaled $42.3 million. At the same time, we saw significant changes in current assets and current liabilities due to the acquisition of Xi'an Simo, including an increase of $63 million in accounts receivable, an increase of $52 million in inventories, and a $38.7 million increase in accounts payable. Short-term debt increased by $40.2 million. We are confident that the opportunities presented by the acquisition of Xi'an Simo were well worth our investment. The proceeds of our equity offering were put to good use in retiring current debt and funding the acquisition of Xi'an Simo. Our debt-to-equity ratio remains low.


"In 2009, Harbin Electric was a major beneficiary of the central government's stimulus package, which budgeted substantial sums in sectors that had a direct impact on our business - RMB 1.6 trillion (US$234.6 billion) for rural investment, RMB 2 trillion (US$293.3 billion) for urban mass transit and highway construction, and RMB 27 billion (US$4 billion) for new energy development and large-scale construction. Each of these spending packages opened up broad new markets for us, and their impact will continue to be felt in 2010 and beyond.

"We are not unduly concerned with policies aimed at curbing asset inflation in the property sector. This is a recurring issue that is perhaps inevitable given the historic scale of migration from China's countryside to its cities. Property prices rise and fall, but the urbanization of China's rural areas is an unstoppable force. Villages are literally on the move. Towns that once contained 40 villages now have 20, and the other 20 have moved to cities and established new communities. Since this is a planned migration, there are major implications in terms of infrastructure such as water and electricity supply. Meanwhile, urbanization has also provided new labor in support of a range of industries, leading to industrial growth across the country, including regions that were once predominantly rural.

"The combined effect has led to growth in demand for machinery production equipment; equipment for power stations; construction equipment for highways, railways, tunnels, bridges; and equipment for pipeline networks, pumps, ventilation systems, air compressors. As these have been deployed, demand has increased for our products.

"Government policy is supportive for us to develop energy-efficient products. The government is enforcing new policies for energy conservation, energy efficiency, and renewable energy. These programs are mutually reinforcing. Nonetheless, the quickest way to achieve gains in energy conservation is through energy efficiency. China is a developing country, and virtually all the existing, vast inventory of machinery is energy intensive. China has an estimated 1 billion motors, and the electricity they consume is about 70% of all electricity consumed in the whole nation. Given this astonishing number, it is no wonder that the government calls for energy conservation, emissions reduction, and development of high efficiency motors.

"Our specialized linear motors and micro-motors are consistent with government policy. We are also seeking ways to improve the quality and energy efficiency for our industrial rotary motor product line. Our goal is to provide industrial rotary motors with a quality and efficiency comparable to those made by international companies in advanced countries, yet at lower cost. This would open the entire international market for us in the high volume industrial rotary motor line, while strengthening our leading position in the domestic market.

"Finally, with the substantial acquisitions we have made in the last two years, we believe we have built a solid manufacturing platform and diversified business portfolio, significantly enhancing our competitiveness. As 2010 unfolds, we are shifting our focus from expansion to integrating, consolidating, and optimizing operations. On the management side, our priorities are to further enhance the management team, upgrade internal controls for both operational and financial management, and strengthen corporate governance. We believe that these efforts are essential for the Company to move to a higher level and become a top-tier company.

A Note of Appreciation

"Last year, despite gloomy expectations at the beginning of 2009, was an exceptional one for us. We have successfully managed the transition to become one of China's major manufacturers of electric motors, with a diversified business portfolio and a high-technology edge. None of this would have been possible without contributions from all of our stakeholders - our hard working management team and advisors; our employees who are now spread across China; our customers in China and around the world; and you, our shareholders. Let me make a commitment to you that we at Harbin Electric will do everything in our power to continue to create value for our shareholders. Thank you for your support."

About Harbin Electric, Inc.

Harbin Electric, headquartered in Harbin, China, is a leading developer and manufacturer of a wide array of electric motors with a focus on innovative, customized, and value-added products. Its major product lines include industrial rotary motors, linear motors, and specialty micro-motors. The Company's products are purchased by a broad range of domestic and international customers, including those involved in the energy industry, factory automation, food processing, packaging, transportation, automobile, medical devices, machinery and tool manufacturing, chemical, petrochemical, as well as in the metallurgical and mining industries. The Company operates four manufacturing facilities in China located in Xi'an, Weihai, Harbin, and Shanghai.

Harbin Electric has built a strong research and development capability by recruiting talent worldwide and through collaborations with top scientific institutions. The Company owns numerous patents in China and has developed award-winning products for its customers. Relying on its own proprietary technology, the Company developed an energy efficient linear motor driven oil pump, the first of its kind in the world, for the largest oil filed in China. Its self-developed linear motor propulsion system is powering China's first domestically made linear motor driven metro train. As China continues to grow its industrial base, Harbin Electric aspires to be a leader in the industrialization and technology transformation of the Chinese manufacturing sector. To learn more about Harbin Electric, visit http://www.harbinelectric.com .

Safe Harbor Statement

The actual results of Harbin Electric, Inc. could differ materially from those described in this press release. Detailed information regarding factors that may cause actual results to differ materially from the results expressed or implied by statements in this press release may be found in the Company's periodic filings with the U.S. Securities and Exchange Commission, including the factors described in the section entitled "Risk Factors" in its annual report on Form 10-K for the year ended December 31, 2009. The Company does not undertake any obligation to update forward-looking statements contained in the press release. This press release contains forward-looking information about the Company that is intended to be covered by the safe harbor for forward- looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, and statements about industry trends and the Company's future performance, operations and products.

    For investor and media inquiries, please contact:

     Christy Shue
     Harbin Electric, Inc.
     Executive VP, Finance & Investor Relations
     Tel:   +1-631-312-8612
     Email: IR@HarbinElectric.com

     Kathy Li
     Christensen Investor Relations
     Tel:   +1-212-618-1978
     Email: kli@christensenir.com

SOURCE Harbin Electric, Inc.