Hanwei announces third quarter financial results

TSX: HE

VANCOUVER , Nov. 17 /CNW/ - Hanwei Energy Services Corp. ("Hanwei" or the "Company") today announced its financial results for the three and nine months ended September 30, 2009 . All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

    
    Summary of Financial Highlights:

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    In thousands of               For the three months   For the nine months
     Canadian dollars except              ended                 ended
     per share data
    -------------------------------------------------------------------------
                                     Sep 30,    Sep 30,    Sep 30,    Sep 30,
                                       2009     2008(1)      2009     2008(1)
    -------------------------------------------------------------------------
    Sales                           $17,150    $14,519    $32,645    $39,316
    -------------------------------------------------------------------------
    Gross profit                      7,723      5,154     13,509     15,055
    -------------------------------------------------------------------------
    Operating income (loss)           2,673      1,846        301      5,327
    -------------------------------------------------------------------------
    Net Income (loss)                  (258)       723     (3,583)     2,659
    -------------------------------------------------------------------------
    Income per share
     - basic and fully diluted         0.00       0.01      (0.06)      0.04
    -------------------------------------------------------------------------

    (1) Hanwei identified amounts relating to foreign exchange losses
    capitalized as property, plant and equipment in the year ended December
    31, 2008 that should have been recorded as a period expense in the year
    ended December 31, 2008. The effects of the restatement on the
    comparative figures for the periods in 2008 are nil and a reduction in
    basic and fully diluted earnings per share of $0.01 for the three and
    nine month periods ended September 30, 2009 respectively. There is no
    effect in 2009.
    

Revenues were $17.2 million for the three months ended September 30, 2009 , an increase of $2.6 million or 18 percent compared to the same period in 2008 and driven primarily by increased FRP pipe and wind power equipment sales during the quarter. Revenues were $32.6 million for the nine months ended September 30, 2009 , a decrease of $6.7 million or 17 percent compared to the same period in 2008. The decrease in the nine- month period was caused primarily by reduced revenues from the wind power business and offset by increased sales in the pipe business. Net loss for the three months ended September 30, 2009 was $0.258 million compared to net income of $0.723 million for the same period in 2008. Net loss was $3.6 million for the nine months period in 2009 compared to net income of $2.2 million for the same period in 2008. The decrease in net income for the three and nine month periods were primarily driven by the timing of wind power deliveries, as well as a write-down of the capital investment associated with the proposed production facility in Kazakhstan of $1.0 million .

The Company had a basic and diluted loss per share of $0.00 for the three months ended September 30, 2009 versus basic and diluted earnings per share of $0.01 for same period in 2008. For the nine-month period, the Company reported a basic and diluted loss per share of $0.06 versus basic and diluted earnings per share of $0.04 for the comparable period in 2008. As at September 30, 2009 , the Company had approximately 60.9 million common shares issued and outstanding, which excludes the 8,051,746 shares issued and held in escrow under the earn-out provisions for the acquisition of Daqing Deta Electric Co., Ltd. ("Deta").

Working capital was $47.6 million as at September 30, 2009 , a decrease of $10.5 million from $58.1 million as of December 31, 2008 , primarily due to an increase in accounts payable and short-term loans. Cash totaled $2.7 million as at September 30, 2009 , representing a decrease of $9.2 million from December 31, 2008 .

Segmented Results

FRP Pipe

The pipe business grew by 6 percent and 12 percent respectively for the three and nine months ended September 30, 2009 . Revenues from the pipe business were $14.7 million for the three-month period and $27.9 million for the nine months ended September 30, 2009 . Although the results in this business segment were positive, growth of the pipe business was impacted by the economic downturn as oil fields delayed their projects. While economic conditions and energy demand continue to improve in China , the Company continues to anticipate that certain oil field development projects will be delayed in 2009, which could lead to a decrease in the demand for its FRP pipe products. As part of its FRP pipe business strategy, Hanwei has been developing products and customers in other industries and has been successful in diversifying its FRP pipe business and reducing its reliance on a few large customers, by investing in product development of larger diameter pipe and new joint methods and expanding its international sales and marketing team.

Currently, Hanwei has sufficient FRP pipe capacity at Daqing for 2009; however, the Company may need to add capacity to have the flexibility to grow the business in 2010. Hanwei is considering to increase capacity in China by adding FRP pipe production lines to its new Tianjin facility. The Company expects that the new lines could be added at a very low capital cost, and within the 2009 capital expenditure budget since the infrastructure is already in place.

Wind Power

Revenues from the wind power business were $1.7 million for the three months ended September 30, 2009 compared to nil the same period in 2008, and $3.6 million for the nine months ended September 30, 2009 , a 72 percent decrease compared to the same period in 2008. As set out in previous disclosure, Deliveries of turbines to the Company's wind power customer have been delayed to the first half of 2010 due to the later than expected government approval of some of their wind farm projects.

Hanwei delivered 11 sets of wind turbine blades (3 blades per set) for the three months ended September 30, 2009 . For the nine-month period, Hanwei delivered 17 sets of wind turbine blades compared to 12 turbines for the same period in 2008. This decrease of wind power revenues is due to a timing difference in deliveries as well as the lower dollar value of blades versus turbines. Deliveries for the wind power business are driven by the customer's wind farm development schedules and are expected to increase in 2010.

Hanwei sales and marketing efforts are primarily focused on orders for delivery in 2010 and beyond. Hanwei's research and development team are working to improve the current 1.5 MW turbines, focusing on the quality and cost of the supply chain and improving performance under regional weather conditions. Hanwei is working on a development plan for 2.0 MW and 2.5 MW technologies, including the consideration of licensing or joint development programs. The Company continues to recruit appropriate technical expertise to strengthen its internal research and development capability.

FGD

Revenues in the FGD business increased by 31 percent in the third quarter, but declined by 24 percent in the nine months ended September 30, 2009 . Revenues from the FGD business were $$0.8 million and $1.2 million for the corresponding periods respectively. Starting February 1, 2009 , the Company began to account for 50 percent of its joint venture interest in Hanwei Ershigs joint venture on a proportionate consolidation basis. New technologies gained from its joint venture partner have yet to generate any revenue.

The FGD business is dependent on regulations in China that require coal power companies to install sulphur dioxide scrubbers, but it is expected that China's big five coal power companies will delay most new coal plant construction in 2009 due to the reduced demand for new capacity in China caused by the economic slow-down. These projects are expected to proceed in the medium term and in the long-term as demand for new coal fired energy capacity in China is expected to be very strong.

The Hanwei Ershigs joint venture is progressing as expected with technology transfer, production training and business development and is now in a position to bid for large diameter chimney liners and duct projects for new coal power plant construction in 2010. Spray header sales are expected to grow in 2010 compared to 2009, due to the continuation of retrofitting FGD installations in 2009. However, as Hanwei is operating in this segment under a 50 percent owned joint venture, Hanwei's share of revenues from this segment is expected to be flat in 2009 compared to its revenues in 2008 when Hanwei owned 100 percent of the business. As previously disclosed, Hanwei expects revenues from FGD products to account for less than 10 percent of total revenues in 2010.

Results from Operations

Gross Profit

Gross profit was $7.7 million for the three months ended September 30, 2009 , an increase of 52 percent compared to the same period of 2008. The increase in gross profit was primarily driven by growth in revenues and an improvement in the gross profit margin in the pipe business. Gross profit was $13.5 million for the nine months ended September 30, 2009 , representing a decrease of 10 percent compared to the same periods of 2008. The decrease in gross profit was driven by reduced revenues from the wind power business.

Gross profit as a percentage of revenues was 45 percent and 41 percent respectively for the three and nine months ended September 30, 2009 compared to 35 percent and 38 percent respectively for the same periods of 2008. The improvement of gross profit margins was primarily driven by two factors. Firstly, there was a change in the customer mix resulted in more revenues generated from Chinese customers in the third quarter of 2009, which generated higher gross profit margins. Secondly, for revenues generated from international markets such as Kazakhstan , pricing improved in the third quarter, which resulted in a higher gross profit margin.

Expenses

Sales and marketing expenses were $1.6 million or 10 percent of revenues for the three months ended September 30, 2009 compared to $0.9 million or 6 percent of revenues for the same period of 2008. Sales and marketing expenses were $3.7 million or 11 percent of revenues for the nine months ended September 30, 2009 compared to $3.0 million or 8 percent of revenues for the same period of 2008. Sales and marketing expenses slightly increased due to increased efforts in the international markets for the pipe business and the addition of a new sales team for the wind power business. For the 12 months ending December 31, 2009 , sales and marketing expenses as a percentage of revenues are expected to be higher than that of 2008 due to the afore mentioned reasons.

Research and development ("R&D") expenses were $0.3 million or 2 percent of revenues for the three months ended September 30, 2009 compared to $0.1 million or 1 percent of revenues for the same period of 2008. Research and development expenses were $0.8 million or 3 percent of revenues for the nine months ended September 30, 2009 compared to $0.4 million or 1 percent revenues for the same period of 2008. The increase in R&D expenses was driven by increased activities in the pipe business for new large diameter products and the application of wind power technologies. For the 12 months ending December 31, 2009 , the Company will increase its investments in R&D to further expand its product portfolio for large diameter pipes and to develop new technologies for wind power turbines.

General and administrative ("G&A") expenses were $3.1 million or 18 percent of revenues for the three months ended September 30, 2009 compared to $2.3 million or 16 percent of revenues for the same period of 2008. G&A expense were $8.7 million or 27 percent of revenues for the nine months ended September 30, 2009 compared to $6.4 million or 16 percent of revenues for the same period of 2008. The increase in G&A expenses compared to 2008 was mainly due to new offices in Beijing and the growth in the wind power business. For the 12 months ending December 31, 2009 , management expects G&A expenses as a percentage of revenues to increase due to the aforementioned reasons.

Operating Income (Earnings before Interest, Taxes, and Non-Controlling- Interest)

The Company had operating income of $2.7 million for the three months ended September 30, 2009 , representing an increase of $0.9 million or 45 percent compared to the same period of 2008. The increase was driven by an increase in revenues and an improvement in gross profit margins. The Company had operating income of $0.3 million for the nine months ended September 30, 2009 , a decrease of $5.0 million or 94 percent compared to the same period of 2008. The decrease was due to lower revenues from the wind power business driven by delays in the wind farm installation schedules of the Company's wind power customer. Management expects operating income and operating income as a percentage of revenues to increase for the 12 months ending December 31, 2009 compared to 2008 due to improved margins.

Interest Expense

Interest expense was $0.9 million and $2.7 million respectively for the three and nine months ended September 30, 2009 compared to $0.9 million and $1.2 million respectively for the same periods of 2008. The increase in interest expenses was due to an increased utilization of debt facilities in 2009, which is consistent with the Company's funding strategies. The Company expects interest costs to increase for the 12 months ending December 31, 2009 .

Other Income (Expense)

The Company incurred certain non-recurring charges under "Other Income (Expense)" for the three and nine months ended September 30, 2009 . This includes $1.0 million related to the expenditures related to the Kazakhstan construction project. The Company established the Kazakhstan office in the first quarter of 2008 to support the construction of a manufacturing plant in Kazakhstan and incurred $1.0 million expenditures by the end of the third quarter of 2009. These expenditures were capitalized as part of Property, Plant and Equipment previously. During the third quarter of 2009, the Company announced that it has abandoned its construction project in Kazakhstan . The capitalized construction project costs were written off as a result of the abandonment of the project.

Income Tax Expense

Income tax expense was $0.8 million and $0.3 million respectively for the three and nine months ended September 30, 2009 compared to income tax expense of $0.2 million and $1.2 million respectively for the three and nine months ended September 30, 2008 . The income tax expense was driven by the net income or loss of each operating subsidiary.

Non-controlling Interest

The non-controlling interest of 1 percent for Deta, arising from Hanwei's acquisition of 99 percent of the equity interest of Deta in November 2008 , resulted in an immaterial amount for the three and nine months ended September 30, 2009 compared to $0.2 million and $0.3 million for the three and nine months ended September 30, 2008 . The amounts in 2008 resulted from a 9 percent minority interest of China National Petroleum Corporation ("CNPC") in Harvest. Hanwei acquired the 9 percent minority interest in Harvest from CNPC in November 2008 .

Cash Position

As at September 30, 2009 , the Company has cash and short-term investments of $4.0 million . As of October 30, 2009 , the Company has cash and short-term investments of approximately $3.5 million . The Company's 2009 growth plan requires working capital and investments totalling approximately RMB150 million ( $24 million ) for the fourth quarter of 2009. This includes working capital to support the growth in the pipe and wind power businesses, investments in the Tianjin manufacturing facility, and the payment for the acquisition of the 9 percent minority interest in Harvest. Management plans to finance these working capital and investment needs with cash on hand, cash from operations and debt facilities, which have been arranged with Chinese banks. Management also believes that it has the ability to access additional equity financing if needed even though the cost of such financing could be very expensive with the current financial market situation. However, if such debt facilities are not available or such equity issuances are not available on the terms that are acceptable to the Company, the Company may be required to curtail its intended initiatives and transactions, which may result in incurring certain costs associated therewith.

Outlook

Hanwei provided an operational update and revised guidance in a press release on October 5, 2009 , which is available on SEDAR at www.sedar.com. In that release Hanwei stated that it expected revenues to be flat for the 12 months ending December 31, 2009 compared to the same period in 2008. Hanwei now expects that revenues to be lower for the 12 months ending December 31, 2009 compared to the same period in 2008 due to lower than expected deliveries for wind power equipment and FRP pipe. Hanwei continues to expect earnings per share for the 12 months ending December 31, 2009 to be lower compared to the same period of 2008 due to increased overhead expenses to support anticipated growth.

On May 25, 2009 , the Company announced that it has changed its fiscal year-end from December 31 to March 31 . For the transition year, the Company will be required to provide audited financial statements for the fifteen-month period from January 1, 2009 to March 31, 2010 . A notice of change in year-end, which sets out the length and ending dates of periods, including the comparative periods, of the interim and annual financial statements required for Hanwei's transaction year and its new financial year, has been filed on SEDAR and is accessible at www.sedar.com.

Hanwei will hold a conference call to discuss its financial results for the three and nine months ended September 30, 2009 . Mr. Kim Oishi , Senior Vice President of Finance and Business Development, and Mr. Yucai (Rick) Huang, Chief Financial Officer, will host the call.

    
    Date:                    Tuesday November 17, 2009

    Time:                    10:00 a.m., Eastern Time

    Dial in number:          1-800-210-9006 or 1-719-234-0008

    Taped Replay:            1-888-203-1112 or 1-719-457-0820 (available for
                             14 days)

    Taped Replay Pass Code:  5532466

    Live Webcast Link:  http://viavid.net/dce.aspx?sid=00006CED


              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 the demand for FRP pipe products, the need for additional FRP pipe capacity and its cost, the demand for and deliveries of wind power equipment, the demand for FGD products, the expected revenues from FGD products, the sales and revenues of the businesses, the changes in expenses, the financing of working capital and investment needs, the recovery of the Chinese economy, 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. The forward-looking information in this press release describes the Company's expectations as of the date of this press release. Material factors or risks which could cause actual results or events to differ materially from a conclusion in such forward-looking information include the risk that the demand for FRP pipe products is not as expected, the requirement for additional FRP pipe capacity is not required or, if required, the cost of adding such capacity is greater than expected, the risk that the demand for wind power equipment is not as expected or deliveries of such equipment is not made or less than expected, the demand and revenues for FGD products are not as expected, the risk that sales and revenues do not grow, the Chinese economy does not recover as expected, as well as the risks set out in the risk factors section of Hanwei's Annual Information Form dated March 31, 2009 , and the Company's press releases filed subsequent there to, all filed with Canadian securities regulators and available on SEDAR at www.sedar.com.

The Company has included in this press release figures based on, gross profit, gross margin, working capital and orders received, which are non-GAAP measures. Readers are cautioned that such measures are not recognized 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 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. 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, THE COMPANY DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME, EXCEPT AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION.

For further information: Kim Oishi, Senior Vice President, Finance and Business Development, Telephone: [phone], [email protected]; Yucai (Rick) Huang, Chief Financial Officer, Telephone: [phone], [email protected]; Kevin O'Connor, Investor Relations, Telephone: [phone], [email protected]