Harbin Electric (Nasdaq: HRBN) is a growing manufacturer of linear motors
in China. Revenues are currently derived in China, but the company has its
sights on international markets. Strong demand for industrial applications in
China will drive the market for linear motors, including factory automation,
airport applications, packaging and the oil service industries. Low-cost
manufacturing facilities in a modern 200,000 square foot manufacturing facility
coupled with cheaper labor costs in China give Harbin an added competitive
advantage.
A linear motor is an electric motor that produces linear force, in contrast to
the rotary torque produced by conventional motors. More important, linear
technology is clean, efficient, and generates high speeds. Other advantages
include quietness, lower long-term maintenance costs, small size, easy control
and installation, and the ability to be used in adverse conditions.
The semiconductor market has been the most significant market for linear motors
but the rising awareness of linear motors and lower costs have helped to attract
more industrial applications. For example, as applications become smaller, the
use of linear motors is increasing because they can be manufactured to small
dimensions. Applications that require nanometer precision are expected to rise,
which will help drive demand for linear technology.
An area that holds promise for linear motors is the global rail mass
transportation market. Rail systems using linear propulsion are more cost
effective, save energy, are environmentally friendly, and are safe and reliable,
according to management. Harbin’s management is firmly behind the push into mass
transportation systems. In addition, the Chinese government is supporting the
development of the country’s linear motor industry via research grants. Harbin’s
subsidiary, Harbin Tech Full Electric, in a joint venture with the Institute of
Electrical Engineering of the Chinese Academy of Sciences (IEECAS), is working
on building a linear-powered train and track transportation system to be tested
at the Beijing Airport railway line.
In another sign of the promise that linear motor technology holds, Harbin
recently commenced shipment of customized motors to a “large diversified
automotive OEM supplier based in North America” to be used in electric seating
applications.
Revenues surged 70.9% to $40.4 million in 2006, from $23.6 million in 2005. Net
income increased 84.4%, to $18.4 million, or $1.01 per diluted share, in 2006,
from $10.0 million, or $0.67 per diluted share, in 2005. It should be noted that
$6.7 million, or $0.35 per diluted share, of the $18.4 million is related to a
change in the fair value of warrants.
In the first quarter of 2006, revenues grew 54% to $13.6 million, from $8.8
million a year earlier. Net income in the quarter totaled $3.4 million, or $0.19
per diluted share, versus $3.8 million, or $0.23 per diluted share, in the
year-ago quarter. It should be noted that excluding a $0.06 per share non-cash
charge related to amortization, EPS would have been $0.25 per share.
Guidance and Outlook
HRBN is estimated to earn $0.74 per diluted share on revenues of $60.3 million
in 2007, according to a single estimate gathered by Thomson Financial Network.
For 2008, the company is estimated to earn $1.40 per share on revenue growth of
74.3% to $105.2 million.
Based on these estimates and the current price of $15.15, shares of Harbin trade
at 20X the current year< estimate and a low 11X the forward year estimate. At
these pricing levels, we feel shares of Harbin Electric are a solid Buy with a
price target of $18.00, which represents 24X the current year earnings estimate
and 13X the forward year estimate.
Harbin Electric has demonstrated excellent revenue and earnings growth. Future
growth will be driven by the increased acceptance of linear motors solutions as
costs decline and applications rise. With $57 million in cash, the company’s
strong cash position should allow for the development of new products along with
further expansion in both China’s growing industrial manufacturing market and
international markets. The company’s listing moved from the OTC Bulletin Board
to the Nasdaq Stock Market on Jan. 31, 2007.
