Harbin Electric (HRBN) Company Update

Eight months passed by since the last investment rationale was posted. HRBN experienced significant price volatility during the period. HRBN has remained profitable and its business prospects have stayed positive.

It was disappointing to see HRBN made little progress with their Shanghai auto micro-motor facility. Production may finally begin in 2Q09, after two quarters of delay from customers and another quarter or two from construction constraints.

Revenue has dipped in the last two quarters, and the $58M Hengda acquisition has not benefited HRBN’s shareholders. Since acquired in July 2008, Hengda has contributed about $1M of net income, a dismal annualized return of 2.3% from its price tag.

In addition, on a pro forma basis, if we include Hengda’s result in the 1Q08, as if business were acquired on January 1, 2008, the year-over-year quarterly revenue between 1Q09 and 1Q08 declined by 7%.

Some encouraging sights in 1Q09 were the significant reduction in accounts receivable and inventory from the previous two quarters, down from $66M to $43M. HRBN further solidified its balance sheet and has over $64M cash, which is almost enough to service its total debt.

Another encourage news is the recent filings by HRBN to sell additional shares up to $120M. HRBN can sell the shares any time at its own discretion. This has both costs and benefits for the current shareholders. On one hand, there is more share dilution, but on the other hand, more predominated institution investors will join the mix. This will increase the visibility of the company in the long-run.

The SEC filing from HRBN on June 5, 2009 outlined the long-term debt repurchase agreement between HRBN and Citadel Equity Capital. I am speculating that Citadel would want to receive equity shares as part of its early debt redemption. Details are unknown at the moment, so we don't really know if this is a good or bad news for current shareholders. From a top level perspective, this debt repurchase is indeed good news for HRBN because HRBN further establishes itself as a creditable company for willing risk takers.

Overall, HRBN is still a long-term buy given its business prospects, balance sheet strengths, and future expected appreciation of RMB. One thing to keep at the back of mind is managements tend to over-promise and under-deliver, it seems like this is the culture enticed from the CEO himself to make sure HRBN always present itself in the most favorable ways, while downplay any negative developments as much as possible.

(Disclosure: I am long on HRBN)