Check on China: Hanwei Energy Services
In late January and the first half of February, China's worst snowstorms and most severe winter weather since the government began keeping records in 1950 wreaked havoc on the country's energy infrastructure. Heavy snowfall, sleet and freezing temperatures disrupted coal shipments, crippled mainland transportation networks near oil and gas production facilities, snapped power lines, froze pipelines and even caused a number of power plants to shut down.
Outages left millions without power. Coal, which fuels 80% of China’s electricity supply, soared to record prices. Inflation in the country surged to an 11-year high in February. And electricity shortages, spikes in energy prices and the Chinese government's freezing of oil, natural gas, electricity and water prices for individual consumers are squeezing energy company profits.
The good news is the unusually rough weather that caused $3 billion in damages, according to the Civil Affairs Ministry, has blown over. And while it promises to be a tough year for China's battered energy industry, Chinese power companies and their suppliers remain good long-term bets, since the country's energy demand will continue to be robust (many industry analysts say Chinese power companies can expect double-digit consumption growth).
Hanwei Energy Services Corp. (TSE: HE.TO) serves major energy companies by providing products for the oil, coal, and wind power industries. The company manufactures and sells high-pressure, FRP (fiberglass reinforced plastic) pipes to the oil industry, develops pollution control products for the coal industry, and also engages in wind blade and other wind power product production.
Last December, Hanwei entered into an agreement with Daqing Deta Electric Co. Ltd., a provider of wind power turbines, blades, towers and control systems, to supply $232 million of wind power equipment over a three-year period. The initial order called for Hanwei to engineer, build and provide Deta with various wind power products, including 20 FRP wind blade sets, 20 turbines and 30 towers.
"With the commencement of commercial production of FRP wind blades, we now provide products for the oil, clean coal and wind power sectors. These sectors have tremendous growth opportunities driven by China's growing demand for energy and government policies mandating and supporting the implementation of more efficient and environmentally friendly technologies," Fulai Lang, president and CEO of Hanwei, said of the deal.
Hanwei also inked a deal with Concept Management Consulting Private Ltd., an Indian firm, to provide FRP pipe production equipment and technology for projects in India. Hanwei will receive a one-time $2.9 million licensing fee in exchange for equipment and technology to produce about 250 miles of FRP pipe annually, and the exclusive right to produce and sell the product in India for 10 years.
In late January, Hanwei signed a Memorandum of Understanding to acquire Daqing Deta Electric Co., Ltd. for RMB 600 million (about $85 million). The 50% cash and 50% stock deal does not affect the existing wind power equipment manufacturing contract between the two companies.
On top of the acquisitions, Hanwei announced in early February that it hired four senior executives and engineers with significant wind industry experience, and also entered into a licensing agreement with Aerodyn Energiesysteme GmbH ("Aerodyn"), a leading German-based international wind power engineering firm. The deal, which gives Hanwei the non-exclusive right to produce two versions of Aerodyn's aeroBlade 1.5 turbine blades in China, will enhance Hanwei's reputation (Aerodyn's high-performance blades are highly regarded in the industry) and bolster the company's wind blade manufacturing capabilities.
"Our goal in 2008 is to acquire the technology and expertise required to establish Hanwei as a leading provider of wind power generation equipment to China's growing wind power industry," Lang said. "Aerodyn's wind blade manufacturing technology, moulds and training will increase our effective capacity of top quality wind blades in 2008. The addition of the new members to our wind power team will assist us with meeting the technical and supply chain challenges of increasing production to deliver on the major contract that is part of our recently announced acquisition of Daqing Deta Electric Co. Ltd."
Looking ahead, the wind segment will become the company’s new area of growth, as Hanwei steps up efforts to establish itself as an industry leader and expand its market share. China's market for wind power equipment is estimated at over $30 billion, as the country continues its efforts to meet a government-set target of producing 30,000 megawatts of wind-generated electricity by 2020.
As China's demand for energy continues to grow due to rapid industrialization and urbanization, with its position in the Chinese energy arena, Hanwei is well situated to be a beneficiary of the long-term bull market on energy in China.
Hanwei (HE.TO) shares closed at $5.20 on Wednesday. The stock has traded between $3.92 and $6.29 over the past 52 weeks. Analyst John Chu of Research Capital maintains a "buy" rating on Hanwei with a 12-month target price of C$9.50. His EPS estimates for 2008 and 2009 are projected at C$0.46 and C$0.60, respectively.
