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October 13, 2009 – Comments (18)

Hanwei Energy Services Corp is headquarted in Vancouver, Canada and trades on the Toronto Stock Exchange. (HE.TO) 

“Hanwei Energy Services Corp. provides high value products and services for the global energy sector. Hanwei serves its major energy customers through manufacturing facilities in China, producing products for the oil, coal power and wind power industries. Hanwei is focusing on providing products and services that address the growing need for improved energy efficiency and environmental protection in the world.” 

OVERVIEW

Share price = $.80P/E = 9.9

Book Value = $2.20

Current Ratio = 1.5

Gross Margin = 28.6%

Insider Ownership = 22%

Since 2005, their CAGR is 81.3% 

PRODUCT LINES

Hanwei’s revenues come from three different product lines.  Below is a quick summary of each line.  Fiberglass Reinforcded plastic (FRP) – 49% of 2008 RevenuesFRP accounted for 49% of Hanwei’s revenue in 2008.  They are 1 of 2 companies producing high pressure FRP pipe for oil transmission and currently have more than 55% of the market share in China.  They are currently investing in product development of a larger diameter pipe and new joint methods. They have also recently added products for water applications. 

Their 2 – 12 inch high pressure FRP pipes are principally used in the following applications:

– Transmission line tie-in

– Down hole water injection

– Municipal water transport  Pipe sales grew by 52% in 2008. 

Wind Products - 48% of 2008 Revenues

Sales from their Wind products accounted for 48% of their revenue for 2008. They have invested extensively into their wind division and now have the design capacity to produce over 400 turbines and 100 blade sets per year.  Their revenue grew by over 400% y-o-y in 2008.  The Chinese market is 5th largest worldwide and has set a target of 100GW by 2020.  Currently they have an installed base of 12GW.   Foreign producers of wind turbines are slowly being phased out as government regulations are requiring “made in China” content.  This is considered a significant barrier to entry, which is good for Hanwei.  For example, in 2004 nearly 75% of turbine sales were from foreign companies.  In 2008, it was around 35%.   

Coal – 3% of 2008 Revenues

They manufacture FRP spray headers for SO2 scrubbers (FGD systems) which are pollution control devices.   Their spray header systems sales grew 127% in 2008. 

Why is their stock price so low?

Their most recent quarterly report was less than stellar.  The economic downturn has significantly affected their business due to cut backs in capital expenditures from energy companies.  For 6 months ended, their wind product line only accounted for only 13% of revenues, compared to 51% for 2008.  This is mainly due to a timing difference and management is forecasting a significant increase for the second half of 2009.  Their FRP pipe business actually grew 18% for six month ended when compared to 2008.  Overall, revenue was expected to grow in the 30-50% range for 2009 compared to 2008, but management recently came out warning that they will in fact miss those estimates.  They are now predicting revenues will be about the same as 2008.  This fairly recent news caused a 20% haircut to the share price. 

Their shares are near an all-time low of  $.80, which seems very unreasonable considering management’s good track record and the price of their assets alone.  Their share price was north of $6 in 2007. 

With the growth potential in China, especially in the energy sector, this seems to be trading at a discount. 

18 Comments – Post Your Own

#1) On October 13, 2009 at 10:31 AM, throwerw (29.35) wrote:

hey, you forgot to mention its trading at its net net current asset value. that means you get the business for free!

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#2) On October 13, 2009 at 10:36 AM, Bays (29.94) wrote:

Thanks for noting,,,,

I am still currently digging up information, but thought this would be a great start for people.  Ultra said he'd add/comment on this when he gets a chance.

Looks good on the surface so far.

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#3) On October 13, 2009 at 12:38 PM, devilzadvocate (22.31) wrote:

Recced.. Looks like a good find..

Did anyone mention.. its up 12% today?

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#4) On October 13, 2009 at 12:44 PM, Bays (29.94) wrote:

16% now!

It was at .82 when I posted this.

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#5) On October 14, 2009 at 1:28 PM, PaxtorReborn (29.73) wrote:

yeah bays, i bought this one on your recommendation (after my own research) before thanksgiving.

 

Something to give thanks for after all

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#6) On October 14, 2009 at 1:40 PM, Bays (29.94) wrote:

Youre a fellow canuck?  Im glad I could help.

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#7) On October 15, 2009 at 12:58 PM, sentinelbrit (82.50) wrote:

Don't you think it odd that management so misread revenues this year.  To estimate an increase of 30-50% only to then say they will be flat doesn't say a lot for their ability to know their customers. I hope they are right about a significant increase in the second half. Having said that, the stock looks cheap.

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#8) On October 15, 2009 at 2:13 PM, Bays (29.94) wrote:

I agree with you.  They should have known that their customers were going to hold off on capital expenditures until the economy stabilized.  This being said, it has presented us with an excellent buying opportunity so I can't really complain.

Their share price has rocketed 25% since I posted this blog.

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#9) On October 19, 2009 at 3:33 PM, PaxtorReborn (29.73) wrote:

yep, good buy

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#10) On November 13, 2009 at 5:20 PM, Bays (29.94) wrote:

Loading back up down here.

Trading below its NCAVPS.  I don't another company right now that can say the same?

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#11) On November 24, 2009 at 3:38 PM, UULH (< 20) wrote:

take a look at this memo Bays:

 http://www.slideshare.net/WalterHuang/china-wind-sales-briefing-memo20090601

From Hanwei's Q3 statement, first 9 months in 08, they delivered 12 wind turbines. And the first 9 months in 09, there's no turbines only blades, which translate into a 72% deline in revenue in wind, down to $3.6 million since Jan. Therefore each turbine is roughly 1.8 million since they delivered 12. (Math: 3.6 / (1-0.72) / 12 ~ 1.8).

The china wind slides said phase requires 26 turbines from Hanwei/Deta, and phase two for the same generation capacity, will need exactly 33 1.5MW turbines Let's assuming 30% depreciation annually in the per turbine revenue. So about $1.2 million per turbine, and let's say china wind will complete 70% of phase 2 in 2010, then Hanwei will sell 23 turbines (sole supplier!), that's close to $28 million in revenue for wind (without blades revenue).. 

Now I guess the million dollar questions: how much do we know about china wind? (ie: how good are they at sticking with schedules and pay on time). Like to hear your opinion Bays. 

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#12) On November 24, 2009 at 3:42 PM, UULH (< 20) wrote:

sorry, messed up the math a bit: should be about 1.28 million per turbine right now... the total revenue from turbines (assuming still 23 turbines sold in 2010) with 30% lower price should be $20.6 million, which is still a significant increase.

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#13) On November 24, 2009 at 7:11 PM, Bays (29.94) wrote:

UULH,

Let me read and comment on that memo tomorrow on my lunch break.

I am loving these prices right now.  The company actually made money this quarter when you dont count their one time loss.  Also, their most important business, their FRP pipe, actually grew.  

This being said, while their balance sheet is not as attractive as it once was, it does not justify their current stock price.

For example, June 30, 2007, they trading roughly near 6.50 with their book value per share near 1.84 and their NCAVPS at 1.55.  

Currently, their NCAVPS is at .70 while their book value per share is at 1.86.  (Info taken from their recent quarter's balance sheet)

Now is it safe to assume China Wind will be able to stick to their schedule?  I think yes. Regardless, the market has clearly over reacted to Hanwei's ability to meet revenue targets.   Their key business line has still done well when most companies drastically cut capital expenditures for 2009.  

The stock may go lower before it gets better -- I cannot predict short term movements as can no one.  This price is attractive enough for me to load up and wait until 2010 first half.

I'll get back to you on that memo.

Bays

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#14) On November 24, 2009 at 7:12 PM, Bays (29.94) wrote:

I'd also like to add Insider buying in October.  Not a significant amount, but is never a bad sign when the CFO is buying shares. 

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#15) On November 25, 2009 at 11:49 AM, UULH (< 20) wrote:

FYI, China Wind Power Intl Corp is currently trading on TSX venture under the symbol CNW.

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#16) On November 25, 2009 at 6:43 PM, Bays (29.94) wrote:

UULH,

I did see China Wind on the TSX Venture, but do not think they're undervalued like Hanwei is.

What I find more appealing is China Wind's plan of 299 turbines in phases 3-5, which takes them into year 2014.   That is a lot of revenue assuming 1million per turbine and about 200k per blade set.  Also, their operating margin has been pretty impressive with their wind busines (15% - 20%)

That will equate to a nice net income.

Where did you get the 30% depreciation annually?  Seems like a lot?

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#17) On November 26, 2009 at 10:28 AM, UULH (< 20) wrote:

the 30% depreciation is my own guess (I put it high enough to make sure I cover the worst case). From CNW's website, it looks like for phase two, there will be 29 1.5MW turbines and 6 1MW ones installed, which is less than the previously mentioned number (33 1.5MW turbines) from that memo.

http://www.chinawindpowerinternational.com/pages/134/phase-2/page.aspx

I believe all the 1.5MW turbines are now provided by hanwei. Previously in phase 1, 1.5MW turbines were provided by hanwei and deta, but deta was acquired by hanwei, so now hanwei has both imported german aerodyne turbine and deta's 1.5MW design? (I'm guessing a bit on that part). 

 

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#18) On February 05, 2010 at 6:32 PM, Bays (29.94) wrote:

If youre smart.... you will be buying HE.TO at .60/share.

China Wind Power is back on track with government approvals along with subsidies.

Hanwei is dirt cheap with huge growth potential.  I suspect they delivered some turbines during the 4th quarter, but cant be certain.  Either way, look for the big energy companies to start investing soon.  They cannot hold off on capital expenditures forever.

I purchased some shares today.  

Good luck

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