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Harbin Electric’s Motors Keep China Revved Up
China’s Rail Growth Should Help Company Chug Right Along
Harbin is a key inland port for China, much as Chicago is for the United States. The city, which is near Siberia, is best known for its power equipment and is responsible for about 30 percent of all installed hydro and thermal power capacity in China. All this power is transferred and generated by electric motors. These motors are made by Harbin Electric (ticker: HRBN), which merits closer attention for investors looking for overseas exposure to the Chinese growth story.
As reported in my March article about Hollysys Automation Technologies (HOLI), China is investing massively in the creation of railroads all over the country. Harbin Electric is the largest maker of electric motors in China and has promising growth prospects. Since the government mandates that many components need a minimum Chinese content of 70 percent, it’s understandable that Harbin Electric will benefit from the large railroad investments over the years to come.
The barriers to entry are high. Patents for the company’s electric motors are strong, resulting in 20 percent profit margins.
Harbin Electric is a direct play on China’s rapid industrialization; virtually all the company’s revenues are derived domestically. The company is controlled by the CEO, Tianfu Yang, and his managers. Together they own more than 35 percent of the company’s shares. When you invest in faraway places such as China, it’s always good to see strong insider ownership, as it aligns management’s interests with those of shareholders.
Harbin Electric shares trade only on the Nasdaq; the stock has no local listing in China or Hong Kong. Since Harbin is listed only in the United States, it has to file detailed 10-K and 10-Q forms with the Securities and Exchange Commission; hence, the disclosure is at a high level. Harbin, however, is followed by just three small brokerage houses in the United States.
In 2006, 2007, 2008 and 2009, Harbin’s sales respectively totaled $40 million, $65 million, $121 million and $222 million. Harbin continued to grow at a fast pace even during the turbulent economic environment of 2008 and 2009. Sales in 2010 are estimated to reach $426 million. Earnings per share was $1.01 in 2006 and will be an estimated $2.33 in 2010.
Obviously, this sort of exponential growth won’t last forever, but the company expects to double its size over the next few years and reach more than $1 billion in sales. During 2009, Harbin’s stock price fluctuated between $4.38 and $21.80. Currently around $23, the stock is trading at 10 times 2010 expected earnings. Since profits are expected to grow by more than 20 percent a year until 2013, the earnings multiple looks quite reasonable, especially when compared with stocks of similar companies around the world. The balance sheet looks solid as the company is in a net cash position.
Harbin merits your attention if you’re looking for investments in China. It could be considered the ideal stock for indirect exposure to the build-out of China’s high-speed rail network. (Companies mentioned in this article are for educational purposes only; no investment recommendation is intended. Readers are urged to conduct their own studies of any stocks of interest.)
Heavy regulation makes it difficult for competitors to come into these businesses; hence, the company generates good margins and return on equity. All companies face risks, however. In Harbin’s case, the company is technology-dependent, and as a result it’s always under pressure to stay ahead of the competition.
The product lineup includes:
• Gas pedals and power steering for cars
• Textile machinery
• Irrigation systems for agriculture
• Power plants
• Steel rolling mills for mining
• Milling, boring, stamping machines, etc.
• Ventilation systems