Hanwei Announces Financial Results for the Third Quarter of 2008

  • Revenue grows 332% in quarter and 134% in the nine-month period
  • FRP Pipe sales continue to grow

Vancouver, BC, November 17, 2008. Hanwei Energy Services Corp. ("Hanwei" or the "Company") today announced its financial results for the three and nine months ended September 30, 2008. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

For the three months ended September 30, 2008, revenues grew 332 percent to $14.5 million, compared to three months ended September 30, 2007. In the three-month period, 96 percent of revenues, or $13.9 million was generated from fiberglass reinforced plastic (FRP) pipe segment, and 4 percent or $0.6 million from the flu gas desulphurization (FGD) segment. The wind power segment generated no revenues in the third quarter as no wind power products manufactured during the period were delivered before September 30, 2008.

Revenues were $39.3 million for the nine months ended September 30, 2008, an increase of $22.5 million or 134 percent compared to the nine months ended September 30, 2007. For the nine-month period in 2008, 63 percent of revenues, or $25 million, was generated from the FRP pipe segment, 33 percent or $13 million from the wind power equipment segment, and 4 percent, or $1.5 million from the FGD segment. The growth in revenues in the nine-month period ended September 30, 2008 was driven by the successful implementation of the Company's strategy to develop products for new energy sectors. For the same period of 2007, 96 percent of revenues, or $16.1 million, was from the FRP pipe segment and the remaining four percent or $0.7 million from the FGD segment.

Net income for the three months ended September 30, 2008 was $0.7 million, an increase of $1.0 million from a loss of $0.3 million for the three months ended September 30, 2007. Net income for the nine months ended September 30, 2008 was $2.9 million, an increase of $1.1 million or 63 percent compared to the nine months ended September 30 2007. The increase in the three-month period was driven by growth in revenues from the FRP pipe segment. In the nine-month period, the increase was primarily due to higher FRP pipe sales, and sales from the wind power equipment segment. There were no revenues generated by the wind power segment in the comparable period in 2007. The increase in net income was partially offset by the lower margins in the wind power business relative to those generated by the FRP pipe segment, increased stock based compensation expense and income tax expense.

Hanwei had basic and diluted earnings per share of $0.01 for the three months ended September 30, 2008 compared to basic and diluted earnings per share of nil for the same period of 2007. For the nine months ended September 30, 2008 the Company had basic and diluted earnings per share of $0.05 compared to basic and diluted earnings per share of $0.04 for the same period of 2007. The increase in basic and diluted earnings per share was due to growth in net income partially offset by increases in the number of basic and diluted shares outstanding. As at September 30, 2008, the Company had approximately 60.8 million common shares outstanding on a non-diluted basis.

Cash and cash equivalents were $6.5 million and short-term investments in Guaranteed Investment Certificates (GIC) which are cashable at anytime were $6.0 million as at September 30, 2008, representing a decrease of $23.4 million from December 31, 2007 due to increase in accounts receivable, prepayments and inventory to support expected growth in the wind power and FRP pipe segments. Working capital was $74 million as at September 30, 2008, a decrease of $9 million from $83 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.

During 2008 the Company sourced some $47 million in short term debt, mainly to provide working capital to support the growth in revenues for the pipe and wind segments.

Segment Highlights

FRP Pipe
FRP pipe revenues for the three months ended September 30, 2008 increased by 318% compared to the same period of 2007 and FRP pipe revenues for the nine months ended September 30, 2008 increased by 48% compared to the same period of 2007. This increase was driven by both growth in the domestic Chinese market and an expansion into Kazakhstan. In 2008, Hanwei has approximately $5 million sales of 10 and 12-inch large diameter pipe to the Kazakhstan market representing 20 percent of total sales year to date.

During the third quarter of 2008, the Company increased 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 satisfy the growing demand for its FRP pipe, and to provide capacity for the development of new products. The expansion is being funded through a credit facility established in July 2008 from China Construction Bank for up to RMB 100 million ($15.5 million). The credit facility is secured by Hanwei's oil pipe account receivables and carries an effective annual interest rate of 8.62%.

As at September 30, 2008, Hanwei had approximately RMB 73 million ($11 million) in additional confirmed orders for delivery in 2008. Subsequent to the end of the third quarter, the Company added an additional RMB 74 million ($11 million) to its order book for 2008 bringing total orders for delivery in the fourth quarter to RMB 147 million ($22 million) as at October 31, 2008.

Included in the total orders for delivery in the fourth quarter are orders for two products: (a) 2 7/8 inch down hole tubing used for water injection in oil wells and developed for an international client; and (b) 10-inch water transmission pipe, used for the delivery of drinking water in southern China.

Wind Power
The Company generated its first revenues in its wind power segment in the fourth quarter of 2007. The first sales contract was signed with Daqing Deta Electric Co. Ltd. ("Deta") 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 September 30, 2008, the Company has delivered 12 turbines, 3 sets of blades, 30 towers and various wind power equipment accessories with total sales revenues of $22 million, of which $12.9 million was captured in the first six months of 2008. The Company has completed an additional 8 turbines and 17 blades (5 and 2/3 sets) under this contract and expects to deliver them in the fourth quarter of 2008. No wind power equipment was delivered in the third quarter of 2008.

In 2008, Hanwei undertook numerous steps to improve 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. In the third quarter of 2008, Hanwei re-commenced blade production using improved Chinese technology, and licensed blade technologies from Aerodyn Energiesysteme GmbH, a leading international wind power-engineering firm.

On August 14, 2008, Hanwei announced that it has entered into binding purchase and sale agreements for the acquisition of 99% of Deta. With 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 sales value of the contracts to be approximately RMB 8.4 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. The Company has commenced production of turbines under the new 200MW contract. The completion of the transaction is conditional on the receipt of Deta audited financial statements that are satisfactory to Hanwei and the completion of certain regulatory filings. As at September 30, 2008, the audit of Deta's financial statements is in progress and the transaction with Deta is expected to close in the fourth quarter of 2008.

In support of the initial order to manufacture approximately RMB 200 million worth of wind power products, Hanwei has invested approximately $26 million in prepaid inventory to mitigate some of the delays caused by high demand for component parts throughout the wind power industry. To improve supply chain management, Hanwei has created a dedicated purchasing and logistics group, which has successfully established supplier relationships with key China based component and systems manufacturers. This group will manage all inventory procurement and co-ordinate key component deliveries.

Hanwei expects to complete and deliver an additional 20 turbines and 23 blades (7 and 2/3 sets) in the fourth quarter of 2008, for a total of 40 turbines and 40 blades (13 and 1/3 sets) for all of 2008.

FGD
Hanwei initiated its commercial production of pollution control products in early 2007 and realized sales of $1.5 million for the nine months ended September 30, 2008. Hanwei entered into joint venture agreements with Ershigs, Inc. ("Ershigs") on July 31, 2008. Through this joint venture, Hanwei expects to expand its product offering for the FGD business including, but not limited to, FRP duct and chimney liners. The addition of new products will position Hanwei as one of the few companies in China that can supply FRP ducts and FRP chimney liners in the Chinese market and is expected to significantly increase average sales per customer.

A joint venture holding company, Hanwei Ershigs FRP Holdings Ltd. (the "Joint Venture Company") was established on August 1, 2008 in the province of British Columbia, Canada, which will invest in a wholly foreign-owned enterprise ("WFOE") in China to manufacture and market FRP products used in pollution control processes for coal fired power plants. Hanwei and Ershigs will invest a total of RMB50 million ($7.7 million) in the WFOE on an equal basis during 2008 and 2009. Management expects the registration of the WFOE in China to be completed in the fourth quarter of 2008. Hanwei's portion will be funded by cash on hand and internally generated cash flow.

"All segments of Hanwei are successfully executing on their respective business objectives," stated Fulai Lang, President and CEO of Hanwei. "Our FRP pipe segment is on track to achieve its 70 percent sales growth target in 2008 as we continue to expand both domestic and international sales. We are making great progress in establishing our joint venture with Ershigs and expect the FGD segment will begin to make strong contributions in 2009. Our wind segment has made significant strides this year and we are very confident on our delivery targets for turbines and blades. We are also receiving very good initial performance data on our turbines and blades from the field-testing that is currently underway and are moving ahead on the new wind power contract that is part of the Deta acquisition, which we expect to close before year-end."

Financial Highlights

In thousands of Canadian dollars except per share data For the three months ended For the nine months ended
Sept 30, 2008 Sept 30, 2007 Change Sept 30, 2008 Sept 30, 2007 Change
Revenue $14,519 $3,363 332% $39,316 $16,764 134%
Gross Profit 5,154 1,031 399% 15,055 7,147 111%
Operating Income (Loss) 1,846 (876) n/a 5,327 1,850 188%
Net Income (Loss) 723 (260) n/a 2,920 1,788 63%
EPS
Basic 0.01 (0.00) 0.01 0.05 0.04 0.01
Fully Diluted 0.01 (0.00) 0.01 0.05 0.04 0.01
Weighted average shares outstanding (thousands)
Basic 60,678 57,870 5% 60,449 42,894 41%
Fully Diluted 61,808 57,870 7% 61,905 43,916 41%

Balance Sheet Highlights

(In thousands of Canadian dollars except ratios) September 30, 2008 December 31, 2007
Current ratio(1) 2.1 : 1 6.9 : 1
Cash and cash equivalents $6,527 $13,565
Working capital(2) $73,894 $82,656
Debt(3) $47,175 $2,346
Equity $110,035 $92,770
Debt to equity(4) 0.43 0.03

(1) Current ratio is current assets divided by current liabilities.
(2) Current assets less current liabilities.
(3) Debt includes short-term loans and amounts due to related parties.
(4) Debt to equity is debt divided by equity.

Growth Strategy

Currently, the Company has three business units, each with significant growth opportunities. Hanwei's long term goal is to be a leading provider of energy products and services that enhance energy efficiency and reduce pollution – addressing long term market needs in China and international markets. Management of the Company is in the process of developing a three-year strategic plan which, subject to receipt of board approval, is expected to focus on enhancing competitive advantages and market share in its three core business units in targeted markets:

Pipe

The Company has a leading market share in China with only one other domestic producer of high pressure FRP oil pipe. It has developed and patented proprietary manufacturing technology that makes it a low cost producer of high quality products and has strong industry relationships with the major Chinese oil & gas companies. The Company's growth strategy for the pipe business is expected to include the following elements:

  1. Maintain leading market share in China and expand into selected international oil pipe markets with preference for markets where there is no local high pressure FRP oil pipe producers and where we can use our relationships with the three major Chinese oil companies to facilitate entry.
  2. Expand offering of oil pipe products and service to provide total solution to customers and add new revenue sources.
  3. Leverage FRP production technology and design expertise to develop pipe products for additional gas, water and chemical applications, for other sectors and industries, such as gas distribution, water treatment and distribution and petrochemical plants.

Wind Power

The Company has recruited a strong management team with experience in the Chinese wind power industry including turbine and blade manufacturing, supply chain management and sales. It has established a turbine and blade manufacturing plant in close proximity to its one customer, providing transportation cost and relationship advantages. It has licensed Chinese and German technology for 1.5 MW turbines and blades. In addition the Company has built a supply chain including alternate suppliers for key components and the Company sources almost all of its components and raw materials in China. The Company's growth strategy for the wind power equipment business is expected to include the following elements:

  1. Continue to improve production efficiency of current turbine and blade products to satisfy annual manufacturing agreements with Heilongjiang Ruihao Energy Technology Co. ("Ruihao").
  2. Focus on securing new customers in China, both state owned power companies and independent power producers, with the goal of achieving significant market share within three years.
  3. Consider bringing production of certain key components in the turbine supply chain in-house.
  4. Improve technology through multiple methods including, internal R&D, licensing and joint-ventures to meet demands for larger, more efficient turbines in China and to prepare for entry into international markets.

FGD

The Company has established industry and customer relationships in the China FGD market with its initial spray header product. The spray headers are manufactured using the same proprietary production technology used to produce its high pressure FRP pipes. The Hanwei Ershigs joint venture will have strong competitive advantages by combining Ershigs' proprietary FRP manufacturing technology and FGD design expertise with Hanwei's China market knowledge and operating expertise. The Company's growth strategy for the FGD business is expected to include the following elements:

  1. Hanwei Ershigs will focus on building a market leading position in China for a full range of FRP FGD products. Management believes that Hanwei Ershigs will be the only company in China to have domestic shop production and on-site production of large diameter FRP FGD products.
  2. Hanwei Ershigs will identify other industries in China where the Ershigs FRP manufacturing technology for large diameter products and tanks can be used to offer valuable solutions for the transport and storage of corrosive liquids and gases.

Outlook

Management expects continued strong growth in its high pressure FRP pipe business for the oil industry for the balance of 2008 and 2009. 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 wind power 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 continued growth in this segment in the fourth quarter of 2008 and 2009.

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 strong growth in this segment starting in 2009.

The Company's access to equity funding is expected to be very costly with the current economic downturn and the financial market situation. However, management believes the Company will be able to access or to expand its debt facilities in China to support its growth and expansion in the coming years. As the Company's customers primarily operate in the energy sector in China where strong growth is still expected, management believes that the impact on the demand for its products from the current economic downturn will be manageable.

Hanwei will be holding a conference call to discuss its financial results for the three and nine months ended September 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: Monday, November 17, 2008
Time: 2:00 p.m., Eastern Time
Dial in number: 1-877-857-6177 or 1-719-325-4760
Taped Replay: 1-888-203-1112 or 1-719-457-0820 (available for 14 days)
Taped Replay Pass Code: 4102083
Live Webcast Link: http://viavid.net/dce.aspx?sid=000058F8


For more information please contact:
Kim Oishi
Senior Vice President of Finance and Business Development
416-804-9228
koishi@hanweienergy.com

Kevin O'Connor
Investor Relations
416-962-3300
ko@spinnakercmi.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 press releases filed subsequent thereto, and the Company’s MD&A for the nine months ended September 30, 2008, 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 Company has included in this press release figures based on orders received, which are non-GAAP measures. Readers are cautioned that orders received are not recognized measures under Canadian GAAP and should not be construed to be an indicator of performance or liquidity or cash flows. The Company’s method of calculating this measure may differ from the method used by other entities and accordingly the Company’s measure may not be comparable to the measure used by other entities. The Company uses these figures because management has a high degree of confidence that the orders received will represent sales and it believes such figures provide a useful indication of the Company's progress.

THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS NEWS RELEASE REPRESENTS THE EXPECTATIONS OF THE COMPANY AS OF THE DATE OF THIS PRESS RELEASE AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE. READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE. WHILE THE COMPANY MAY ELECT TO, IT DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME, EXCEPT AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION.