Harbin Electric (HRBN) is an electric motor company in China with a market cap of $650 million. Analysts are looking for 2010 earnings per share of $2.10 vs. $1.53 per share for 2009. This represents a 37% growth and a meager forward P/E of 10. We were impressed that the company recently reduced its debt to $9 million from $46 million, a development that may help investors justify the P/E multiple expansion that has already begun.
Through a diversified product line that includes linear, micro and rotary motors, the company is capable of addressing a wide variety of industry sectors. In simple terms, the application of each product line depends on the industry served:
will serve most industrial automation applications;
focus on offering a more efficient, technologically advanced alternative to some industrial applications;
address non-industrial applications, such as automotive seats.
Harbin plans on targeting higher-end niche market segments, while methodically entering new markets as applications for its motors evolve.
Until recently, Harbin's product portfolio only consisted of linear and micro motors. The rotary motor line was recently added through the acquisitions of Weihai Simo Motors in July 2008 and Xi'an Simo Motors in October 2009.
At a November China Growth conference, we asked Executive Vice President Christy Shue why Harbin is aggressively targeting the rotary market, given the benefits of the linear motors with respect to energy efficiency and maintenance and the ability to be configured into different sizes and shapes. She initially responded by emphasizing that Harbin sees growth potential in all three motor segments.
She went on to explain that Harbin found it prudent to enter the rotary market for several reasons. First, entry into this market helps the company gain exposure into a large market that will boost growth. To put that into perspective, she stated that 95% of all motors are rotary motors.
In addition, she said the adaption of linear technology will take some time. Although the future for linear motors is bright and offers opportunities, many applications are still years away from being technologically ready for linear motor implementation. The rotary market will never disappear, as there are many industries that require intense energy usage that linear applications cannot address.
"For the long-run, the company still intends to develop relationships with new customers who have a need for Harbin's linear technologies as transitions occur. For example, China has started to build mass transportation using linear motor technology, relying on imported technologies and products. "Recently, China has embarked on its first mass transportation project using domestic linear motor technology and Harbin is one of the major manufacturers participating in this project. It is important to note that HRBN is the only company producing commercial LM motors in china."
Second, one needs to realize that 75% of all electricity in China is driven by electric motors and that rotary motors have historically dominated China's electric motor market. There is a huge opportunity for Harbin to attack this market to meet the country's demands for energy conservation by offering its more efficient rotary motors in new projects as well as replacing outdated motors.
Third, it has always been Harbin's long-term goal to gain a presence in the entire motor spectrum. Doing this gives the company more diversification, expands its customer base and offers synergies across all product lines with respect to raw material, R&D, operating costs, management and cross marketing activities.
As for micro-motors, Harbin primarily targets the auto sector -- a situation the company believes will be in place for the near future. Currently, 50% of the company's micro-motor revenue is generated internationally. Its immediate goal is to increase international penetration and solidify its reputation, which will eventually be leveraged domestically.
Additionally, although most micro-motors are imported into China, Harbin believes it can effectively compete and steal market share due to its close design relationship with its customer and lower cost structure inherent in doing business in China.
We capped off our discussion with Shue with inquiries related to financing needs heading into 2010. She commented that Harbin anticipates a need to increase capacity, but at the moment, current cash-flow generation should satisfy this requirement.
In conclusion, now that it offers a diverse product line, Harbin is exceptionally excited about its prospects. As the company enters 2010, the newest rotary line will nearly double revenues, increase the company's customer base and boost its domestic electric market share from 3% to approximately 8%. Combined with China's increased industrialization efforts, growth opportunities could be plentiful.
Two other companies that we interviewed at the conference were
. As you may recall, the GeoTeam
. We plan on following up soon with a column on SIHI.
At the time of publication, Soueidan was long Harbin Electric and Biostar Pharmaceuticals
Maj Soueidan founded The Market's Edge, Ltd. in 1994, The Markets Edge Hedge Fund in 2006 and GeoInvesting, LLC in 2007. Through his involvement with the equity markets, he developed the strategies that are now at the core of the hedge fund and
. He currently leads a team of researchers and analysts (the GeoTeam) that help investors identify opportunities in today's volatile stock market. The team uses fundamental criteria to analyze stocks in the micro-cap to small-cap arena.