Hanwei Announces Financial Results for the Second Quarter and First Half of 2008
- Revenue increases 85% to $24.8 million in the first half of 2008
- Company signs agreement for Deta acquisition and signs Ershigs JV subsequent to the end of the quarter
Vancouver, BC, August 14, 2008. Hanwei Energy Services Corp. ("Hanwei" or the "Company") today announced its financial results for the three and six months ended June 30, 2008. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.
Sales revenue increased by 85 percent to $24.8 million for the six months ended June 30, 2008, compared to the same period in 2007. The growth in sales revenue was driven by successful implementation of the Company's strategy to develop products for new energy sectors with the wind power business and flue gas desulphurization ("FGD") pollution control business accounting for 55% of revenues in the six months ended June 30, 2008 compared with nil for the same period of 2007.
Revenues from the high-pressure fibreglass reinforced plastic ("FRP") oil pipe business totalled $11.2 million in the first half of 2008, compared to $13.4 million in the same period in 2007. The decrease in sales year over year was due to timing delays in the delivery of pipe in China and Kazakhstan in the second quarter. Sales revenue for the delayed pipe is expected to be recorded in the third quarter of 2008. The Company generated $12.6 million in revenues from its wind power equipment business and $1.1 million from the FGD pollution control business for the six months ended June 30, 2008. In the first half of 2007, the Company generated virtually all of its revenues all from the oil pipe business.
For the three months ended June 30, 2008, revenue grew by 44 percent to $18.9 million. Revenue from FRP oil pipe sales was $9.7 million versus $13.1 million in the same period in 2007. FGD revenues were $0.99 million in the second quarter of 2008 and wind power equipment sales were $8.1 million for the three month period ended June 30, 2008 versus nil in 2007.
Net income was $2.2 million for the six months ended June 30, 2008, an increase of $0.2 million or 7% compared to the same period of 2007, and driven by the growth of revenue from the wind power equipment business and partially offset by lower margins in the wind power business and stock option and income tax expense. Net income was $2.9 million for the three months ended June 30, 2008, a decrease of $0.6 million or 18% compared to the same period of 2007. This decrease in net income was due to lower margins in the wind power business compared to the oil pipe business, partially offset by revenue growth due to the new sources of revenue from the wind power and FGD business, and the increase of stock option expense and income tax expense.
The Company had basic and diluted earnings per share ("EPS") of $0.04 for the six months ended June 30, 2008 compared to the basic and diluted earnings per share of $0.06 for the same period of 2007. For the second quarter, Hanwei reported EPS of $0.05 (basic and fully diluted) versus $0.08 basic and $0.07 fully diluted in the same period in 2007. The reduction in basic and diluted earnings per share for the three and six months ended June 30, 2008 compared to the same periods of 2007, was largely due to significant increases in the number of basic and diluted shares outstanding resulting from equity financings completed during the year of 2007. As at June 30, 2008, the Company had approximately 60.6 million common shares outstanding.
Segment Highlights
FRP Oil Pipe Business
Pipe revenue for the three months ended June 30, 2008 declined 26% compared to the same period of 2007 and pipe revenue for the six months ended June 30, 2008 declined 16% compared to the same period of 2007. This decline is primarily driven by two issues: 1) RMB20 million ($3 million) in sales orders in the Daqing market were shifted to the third quarter of 2008, 2) RMB42 million ($6.2 million) of shipments to Kazakhstan that left Daqing in the second quarter will not arrive at their destination until the third quarter of 2008. Accordingly, management believes that oil pipe revenue will show strong growth in the third quarter of 2008, compared to the third quarter of 2007. On a full year basis, the Company expects significant growth from the oil pipe business segment both in the Chinese market and in some international markets including Kazakhstan.
Subsequent to the end of the third quarter of 2008, the Company increased the capacity in its manufacturing facility in Daqing to 4,600 km per annum, compared with 3,200 km per annum at the end of 2007, to fulfill its expected sales orders for 2008. The capacity and sales expansion is being funded through a credit facility established in July 2008 from China Construction Bank for up to $15 million. The credit facility is secured by Hanwei's oil pipe account receivables and carries an effective annual interest rate of 8.62%.
In addition, a new 1,600 km per year manufacturing plant is proposed in Kazakhstan and is targeted for completion in the third quarter of 2009. The Company has also established a sales and marketing subsidiary in Russia to explore the market opportunities in the Russian market.
Wind Power Business
Hanwei established its wind power business in fourth quarter of 2007. The revenues in 2008 were all pursuant to an initial order from Daqing Deta Electric Co. Ltd. ("Deta") signed in May 2007 to manufacture approximately RMB200 million ($27.6 million) worth of wind power products, including 20 turbines, 20 sets of blades and 30 towers. As at June 30, 2008, the Company has delivered 12 turbines, three sets of blades, 30 towers and various accessories. Revenues from the wind power equipment business were $12.6 million for the six months ended June 30, 2008 and $8.1 million for the three months ended June 30, 2008. The wind power equipment business did not have any revenue for the same period of 2007.
Hanwei announced today that it has entered into binding purchase and sale agreements for the acquisition of 99% of Deta. (See the Company's press release dated Aug. 14, 2008) The agreements will now be filed with the Chinese authorities to process the transfer of the 99% equity interest in Deta to Hanwei's 100% owned subsidiary, Hanwei Wind Power Equipment (Daqing) Co., Ltd. ("Hanwei Wind"), which, subject to satisfaction of customary conditions precedents, is expected to be completed in less than one month
Under the purchase agreements, Hanwei will make a cash payment of RMB100 million ($14.7 million) within 5 business days after closing and a cash payment of $RMB60 million ($8.8 million) after receiving title to the land and buildings, subject to Hanwei receiving funding, but no later than March 31, 2009, and payments of RMB 431 million ($63.2 million), subject to earn out provisions, to be paid over a five year period from 2008 to 2012. The earn out provisions will be comprised of cash payments of RMB131 million ($19.2 million), subject to the execution of annual sales agreements of 250 MW contracts in 2009 to 2012 and share payments of RMB300 million ($44.0 million), based on a share price of $5.30, subject to Deta achieving certain performance targets. The 1,200 MW agreement provides a right of first refusal for Deta to provide all future wind power equipment for wind farms that Deta's existing customer owns or controls. In return, Deta has granted its existing customer a right of first refusal to purchase, at market prices, all additional wind power equipment manufactured by Deta
Following the acquisition of Deta, Hanwei will own 1.5 MW turbine and blade technology licenses, and will have an agreement to provide 1,200 MW of wind power equipment (turbines, blades and towers) over a 5-year period (2008 to 2012), with 200-250 MW of wind power equipment manufactured and sold each year at a price fixed at the time of such annual contract. The Company estimates the total value of the annual contracts to be approximately RMB8.4 billion ($1.2 billion) to be executed from 2008 and 2012. Pursuant to the 1,200 MW contract, Deta has signed a manufacturing agreement for the first 200 MW of wind power equipment for delivery in 2008 and 2009. For future annual manufacturing contracts contemplated to be signed from 2009 through 2012, the purchase price will be negotiated based on the market price of the same type of products. In addition, pursuant to the agreement, the land and buildings that now host Hanwei's wind power manufacturing facility in Daqing will be transferred to Hanwei Wind.
In the three and six months ended June 30, 2008, the Company has improved its ability to produce wind power equipment by recruiting senior management with experience and expertise in the wind power business, building relationships and negotiating agreements with turbine component suppliers, and developing improved blade manufacturing processes and design using Deta's licensed technology. Subsequent to the end of the second quarter ended June 30, 2008, the Company re-commenced blade production using the improved Deta technology. The Company also licensed blade technologies from Aerodyn Energiesysteme GmbH ("Aerodyn"), a leading international wind power engineering firm for two versions of its blade technologies. The Company commenced a training program on Aerodyn's manufacturing process in the second quarter and the Company expects to start production with Aerodyn's blade technologies in September 2008.
Hanwei has arranged debt facilities to fund the acquisition of Deta and provide working capital to support the wind power business FGD Business
Hanwei initiated commercial production of pollution control products in early 2007. Revenues from the FGD business were $1.1 million for the six months ended June 30, 2008 and $1.0 million for the three months ended June 30, 2008. The FGD business did not have revenue for the same period of 2007.
On July 31, 2008, Hanwei completed its joint venture agreement with Ershigs, Inc. ("Ershigs"). A joint venture holding company was set up in the province of British Columbia, Canada and a 100% owned subsidiary by the holding company is being established in China for the FGD business. Through this joint venture, Hanwei expects to expand its product offering for the FGD business. New products that this joint venture is planning to offer include, but are not limited to, FRP duct and FRP chimney liners. The addition of new products will position Hanwei as one of the few companies that can supply FRP ducts and FRP chimney liners in the Chinese market and is expected to significantly increase average sales per customer. Hanwei is currently constructing a new facility in Tianjin, a portion of which will be utilized for the joint venture. The facility is scheduled to be completed in the second half of 2008.
"The completion of the Deta acquisition and the Ershigs joint venture, provides us with platforms of technology, expertise and customer base to grow into leaders in the China market for wind power equipment and FGD pollution control systems," said Mr. Fulai Lang, president and CEO of Hanwei. "In 2006 we generated 100% of our revenues from high pressure FRP oil pipe from mostly from one major customer in China. After becoming a listed company in December 2006, we raised some $77 million in new equity in 2007. We have invested that new equity, combined with debt funding and internally generated cash, in expanding the capacity of our oil pipe production and diversifying our oil pipe sales by adding new customers and international sales and in starting two new business segments that leverage our FRP manufacturing expertise and our knowledge of the China market. Based on the growth opportunities in all three sectors and our enhanced product portfolio, we are confident that the Company is well positioned to deliver great value to our customers and strong growth in revenues and earnings for our shareholders in 2008 and beyond. In 2008, we expect wind power equipment to be our largest source of revenues and earnings, and we expect accelerated growth in oil pipe revenues and earnings as we expand into Kazakhstan and other international regions. In 2009, we expect continued strong growth in our oil pipe and wind power equipment businesses, with the Ershigs joint venture starting to contribute significant shareholder value."
Financial Highlights:
In thousands of Canadian dollars except per share data
| For the 6 months ended | Change | For the 3 months ended | Change | |||
| June 30, 08 | June 30, 07 | June 30, 08 | June 30, 07 | |||
| Sales | $24,799 | $13,401 | 85% | $18,858 | $13,063 | 44% |
| Gross Profit | 9,903 | 6,115 | 62% | 7,983 | 5,889 | 36% |
| Operating Income | 3,483 | 2,726 | 28% | 4,131 | 4,286 | (4%) |
| Net Income | 2,198 | 2,048 | 7% | 2,911 | 3,546 | (18%) |
| Income per share | - | - | - | - | - | - |
| Basic | 0.04 | 0.06 | (0.02) | 0.05 | 0.08 | (0.03) |
| Fully Diluted | 0.04 | 0.06 | (0.02) | 0.05 | 0.07 | (0.02) |
| Weighted average shares outstanding | - | - | - | - | - | - |
| Basic | 60,333 | 35,282 | 71% | 60,585 | 46,506 | 30% |
| Fully Diluted | 61,954 | 36,712 | 69% | 62,000 | 48,271 | 28% |
Results of Operations:
For the three and six months ended June 30, 2008 and 2007, revenues from each business segment as a percentage of total revenues were as follows:
| 3 months ended June 30 | 6 months ended June 30 | |||
| 2008 | 2007 | 2008 | 2007 | |
| Pipe | 52% | 100% | 45% | 100% |
| Wind Power Equipment | 43% | - | 51% | - |
| FGD | 5% | - | 4% | - |
Gross Profit
Gross profit for the three months ended June 30, 2008, was $8.0 million, an increase of $2.1 million or 36% compared to the same period of 2007. Gross profit for six months ended June 30, 2008 was $9.9 million, an increase of $3.8 million or 62%, compared with same period of 2007. The growth in gross profit was primarily driven by the increase in revenues from wind power equipment business.
Gross profit as a percentage of revenue for the three months ended June 30, 2008 was 42% compared to 45% from the same period of 2007. Gross profit as a percentage of revenues was 40% for the six months ended June 30, 2008 compared to 46% for the same period of 2007. The decreases were primarily due to changes in the product mix. For the first two quarters of 2007, all of the Company's revenues were from the higher-margin oil pipe business, while in 2008, 51% percent of total revenue for the six months and 43% for the three months ended June 30, 2008 were from the wind power equipment business which has a gross profit margin of 35% for the three months ended June 30, 2008 and 38% for the six months ended June 30, 2008 compared to 46% for the oil pipe business for the three months ended June 30, 2008 and 45% for the six months ended June 30, 2008.
Total gross margin for 2008 is expected to increase due to expected strong growth in revenues from both the oil pipe business and from the wind power equipment business. However, gross margin as a percentage of revenue for 2008 is expected to decrease compared to 2007 as the wind business is expected to comprise an increasing percentage of total revenues.
Gross profit as % revenue by bussiness segents:
| 3 months ended June 30 | 6 months ended June 30 | |||
| 2008 | 2007 | 2008 | 2007 | |
| Oil Pipe | 46% | 46% | 46% | 47% |
| Wind Power Equipment | 38% | n.a. | 35% | n.a. |
| FGD | 48% | n.a. | 45% | n.a. |
| Total | 43% | 45% | 40% | 46% |
Expenses
Sales and marketing expense for three months ended June 30, 2008 were $1.4 million, or 7% of revenue, compared to $0.5 million or 4% of revenue for the same period of 2007. Sales and marketing expense for six months ended June 30, 2008 were $2.1 million, or 8% of revenue, compared to $1.3 million or 9% of revenue for the same period of 2007. Selling expense consisted mainly of salespersons' salaries and bonuses and marketing and promotion expense. Selling expenses also included commissions to distributors and related costs incurred for delivery of goods and providing services to customers. The decrease of selling expenses as a percentage of sales revenue for the six months ended June 30, 2008 compared to 2007 was driven by the growth in revenue and low selling expense incurred for the wind power business. The wind power equipment business incurred minimal sales and marketing expense as the Company is focused on delivering its current contracts with its first and only customer. The increase of selling expense as a percentage of revenue for the three months ended June 30, 2008 was primarily due to a lower sales for the oil pipe business in 2008 compared to 2007. Selling expense is expected to increase in 2008 due to increased sales and marketing activities in the oil pipe and FGD pollution control business. However, selling expense as a percentage of revenues in 2008 is expected to be the same or lower than 2007, due to expected strong growth in revenues in the oil pipe and wind power businesses and the low selling expense associated with the wind power business.
Research and development ("R&D") expense was $0.1 million for the three months ended June 30, 2008 compared to $0.04 million for the same period of 2007. R&D expense was $0.3 million for the six months ended June 30, 2008 compared to $0.1 million for the same period of 2007. R&D expenses are not significant due to the maturity of oil pipe technologies. R&D expense is expected to increase in 2008, but is expected to remain less than 1% of revenues, due to expected strong revenue growth.
General and administrative ("G&A") expenses for the three months ended June 30, 2008 were $2.3 million, or 12% of sales compared to $1.0 million or 8% of sales for the same period of 2007. G&A expenses for the six months ended June 30, 2008 were $4.1 million, or 17% of sales compared to $2.1 million or 15% of sales for the same period of 2007. The increase in total G&A expense was mainly due to the establishment of the wind power business and FGD business. Stock based compensation expenses as part of the G&A expenses also increased. As more stock options vested, the stock option expense increased from $0.1 million to $0.6 million. G&A expense is expected to increase in 2008 due to the expansion of all three business lines; however, G&A expense as a percentage of revenues is expected to be the same or lower than 2007, due to strong growth in revenues expected in the oil pipe and wind power businesses.
Operating Income
The operating income was $4.1 million for the three months ended June 30, 2008, a decrease of $0.2 million or 4% compared to the same period of 2007. This decrease was mostly due to a decline of sales in the oil pipe business. The Company had an operating income of $3.5 million for the six months ended June 30, 2008, an increase of $0.8 million or 28% compared to the same period of 2007. This increase was primarily driven by the increase of revenue from the wind power equipment business.
The interest income was $0.1 million for the three months ended June 30, 2008, which was flat, compared to the same period of 2007. Interest income was $0.2 million for the six months ended June 30, 2008, an increase of $0.1 million compared to same period of 2007. The interest income was derived from cash balances from three financings in 2007. Management does not expect to have significant interest income in the future.
Interest expenses were $0.3 million for the three months ended June 30, 2008, compared to $0.2 million for the same period of 2007. Interest expenses were $0.4 million for the six months ended June 30, 2008, compared to $0.4 million for the same period of 2007. The increase of interest expenses was due to an increase of short term loans in the second quarter of 2008.
Income tax expense was $0.8 million for the three months ended June 30, 2008 compared to $0.4 million for the same period of 2007.
Income tax expense was $1.0 million for the six months ended June 30, 2008 compared to $0.4 million for the same period of 2007. This increase in income tax expense was mainly the result of a higher income tax rate of 25% for the wind power business. Due to the launch of a new Chinese income tax law on January 1, 2008, applications for certain preferential tax rates for high-tech and environmental friendly industries have not been processed. Hanwei Wind Power has made applications in both categories, and can reduce its income tax rate to 15% or 0% if the applications aresuccessful.
Non controlling interest, from Changyuan's 8.925% equity ownership in Harvest, was $0.2 million for the three months ended June 30, 2008 compared to $0.7 million for the same period of 2007. Non controlling interest was $0.2 million for the six months ended June 30, 2008 compared to $0.4 million for the same period of 2007. This decrease was primarily due to a decrease of the non controlling interest in Harvest from 17.85% to 8.925% following an equity increase by Hanwei effected in May 2007 (refer to "Corporate Overview — Harvest").
Cash Position
Cash and cash equivalents were $4.9 million and short-term investments in Guaranteed Investment Certificates (GIC) which are cashable at anytime were $6.5 million as at June 30, 2008, representing a decrease of $24.5 million from December 31, 2007 due to an increase in accounts receivable, prepayments and inventory to support expected growth in the wind power business and pipe business.
Cash used in operating activities was $27 million for the three months ended June 30, 2008 and $31 million for the six months ended June 30, 2008 to support the working capital needs for both the wind power equipment business and the oil pipe business. Cash used in investing activities, excluding the short-term investments in GIC which was included above as cash for analysis purposes was $6 million for the three months ended June 30, 2008 and $13 million for the six months ended June 30, 2008 which were primarily spent on the new manufacturing facility in Tianjin China and the expansion of the oil pipe facility at Daqing China. Cash from financing activities was $20 million for the three months ended June 30, 2008 and $19 million for the six month ended June 30, 2008 as the Company obtained certain short-term loans and credit lines from local banks and a third party.
Working Capital
Working capital was $80.4 million as at June 30, 2008, a decrease of $2.2 million from $82.7 million as at December 31, 2007. This decrease was driven by a reduction in cash balances offset by increases in prepayments, inventory and accounts receivables. As at June 30, 2008, prepayments increased by $31.2 million to secure wind power supplies with expected increase in output for later 2008 and 2009. Prepayments in total for the wind power business are expected to increase in later 2008 and 2009 due to increase in production, but prepayments outstanding as a number of days of sales will gradually decrease as the Company builds up raw material inventory and improves contract terms with suppliers. Accounts receivable increased by $7.1 million and inventory increased by $11.6 million both driven by sales cycles compared to December 31, 2007.
Outlook
Management expects continued strong growth in its high pressure FRP pipe business for the oil industry for the balance of 2008. This includes its continued expansion in the Chinese market, significant growth in the Kazakhstan market, and the potential entry into other international markets. Production capacity will be added as needed at the Company's Daqing facility or other facilities as appropriate. Apart from its existing products, the Company is actively seeking opportunities to expand its product offering through research or acquisition.
With the delivery of three sets of blades, 12 turbines, 30 towers and various equipment accessories, the Company has successfully entered into the wind power equipment business. The acquisition of Deta will enable the Company to build a direct relationship with a substantial wind farm customer, assist in procuring new customers in other parts of China, and upgrade its wind power related technologies to satisfy market demand. Management expects significant growth in this segment in 2008.
With the commercialization of the Company's FRP spray headers for FGD pollution control systems, the Company has a product in the growing market in China for clean coal technologies. The signing of the joint venture shareholders agreement with Ershigs will significantly expand its product offering in pollution control systems and the average size of sales per customer. Management also expects significant growth in this segment in 2008.
Hanwei will be holding a conference call to discuss its financial results for the three and six months ended June 30, 2008. Mr. Kim Oishi, Senior Vice President of Finance and Business Development, and Mr. Yucai (Rick) Huang, Chief Financial Officer, will host the call.
Date: August 14, 2008
Time: 2:00pm Eastern Time
Dial in number: 1-866-261-3038 or 416-915-9040
Taped Replay: 1-866-245-6755 or 416-915-1035 (available for 14 days)
Taped Replay Pass Code: 663858
Live Webcast Link: http://events.onlinebroadcasting.com/hanwei/081408/index.php
For more information please contact:
Kim Oishi, Senior Vice President of Finance and Business Development
416-804-9228
koishi@hanweienergy.com
Forward Looking Information and Non-Gaap Measures
Certain information in this press release is forward-looking within the meaning of certain securities laws, and is subject to important risks, uncertainties and assumptions. This forward-looking information includes, among other things, information with respect to management's estimates of capital requirements, as well as information with respect to the Company's beliefs, plans, expectations, anticipations, estimates and intentions. The words "may", "could", "should", "would", "suspect", "outlook", "believe", "anticipate", "estimate", "expect", "intend", "plan", "target" and similar words and expressions are used to identify forward-looking information. Material factors or risks which could cause actual results or event to differ materially from a conclusion in such forward-looking information include the risks set out in the risk factors section of Hanwei's Annual Information Form dated April 3, 2008, the Company's MD&A for the six months ended June 30, 2008 and the Company's press releases filed subsequent there to, all filed with Canadian securities regulators and available on SEDAR at www.sedar.com Potential investors and other readers are urged to consider these factors carefully in evaluating these forward-looking statements and information and are cautioned not to place undue reliance on them.
The forward-looking information contained in this press release presents the expectations of the Company as of the date of this press release and, accordingly, is subject to change after such date. While Hanwei may elect to, Hanwei does not undertake to update this information at any particular time, except as required by applicable securities legislation.
