Harbin Electric (NASDAQ:HRBN)

HARBIN, China, Nov. 1, 2011 /PRNewswire/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company"; NASDAQ: HRBN), a leading developer and manufacturer of a wide array of electric motors in the People's Republic of China, today announced it has commenced the closing process of the merger contemplated by the Agreement and Plan of Merger, dated June 19, 2011, as amended, pursuant to which the Company will become a wholly-owned subsidiary of Tech Full Electric Company Limited ("Tech Full Electric"), which is controlled by Mr. Tianfu Yang, the Company's Chairman and Chief Executive Officer.

As part of the closing process, the Company has filed the Articles of Merger with the Nevada Secretary of State.  Trading of the Company's common stock has been suspended on the NASDAQ Global Select Market as of market close today.  NASDAQ has filed a notification of removal of listing and registration on Form 25 with the Securities and Exchange Commission ("SEC") with respect to Harbin Electric's common stock.  

As previously announced, at the Company's Special Meeting of Shareholders held on October 29, 2011, the Merger Agreement was approved by approximately 90.6% of the outstanding shares of Harbin Electric common stock and approximately 84.2% of total unaffiliated shares of Harbin Electric, satisfying the majority of unaffiliated stockholders voting requirement set forth in the Merger Agreement.  

Due to the multi-jurisdictional nature of Harbin Electric and different time zones involved in the closing process, the Company currently anticipates the "going private" transaction will be completed on November 2, 2011 (U.S. time).  The Company intends to publicly announce when the closing of the transaction is completed.

In its report dated October 14, 2011, ISS stated:

• "The merger consideration provides shareholders with a significant premium in an all-cash transaction which carries certainty of value."*
• "The board and Special Committee undertook a robust strategic review process, taking prompt action to mitigate potential conflicts of interest that arose during the strategic process."*
• "Shareholder support for this transaction is warranted."*

The Company issued the following statement regarding the ISS recommendation.  See more

On October 5, 2011, the parties to the Nevada Action entered into a Memorandum of Understanding (the “MOU”) to settle the Nevada Action. The MOU includes an agreement by the parties to the merger agreement to amend Section 7.3(b) of the merger agreement to reduce the Company termination fee from $22.5 million to $19.75 million and an acknowledgment by the Company that Co-Lead Counsel were a significant causal factor in the Company’s decision to make certain additional disclosures in its preliminary proxy statements filed on Schedule 14A with the SEC on August 15, 2011, August 29, 2011, and September 13, 2011. The MOU also provides for dismissal of the Nevada Action and includes releases of the Company, its officers and directors, the members of the Special Committee in their respective capacities as such, and the members of the Buyer Group, among others. The parties to the MOU anticipate preparing a settlement agreement for presentation to the court. The effectiveness of the MOU and any settlement agreement is conditional upon preliminary approval of the Nevada state court and final approval by that court following notice to the class members. In addition, Co-Lead Counsel have the right to seek an award of attorneys’ fees and costs from the Company for the benefit, they contend, they provided the class. Please see the section entitled “Special Factors—Litigation Related to the Merger” on page 82 for a detailed discussion of the litigation.

The fifth paragraph on page 14 of the Definitive Proxy Statement is amended in its entirety to read as follows:

The Nevada and New York complaints generally allege that Mr. Tianfu Yang and other directors breached their fiduciary duties to stockholders by agreeing to sell the Company at a price that is unfair and inadequate, and by failing to inform the stockholders adequately concerning the proposed merger and thus precluding them from casting a fully informed vote. In some cases, the complaints further allege that the Company aided and abetted the directors’ purported breaches of their fiduciary duties. The complaints seek injunctive relief, rescission of the proposed merger to the extent already implemented, damages, and attorneys’ fees. On October 5, 2011, the parties to the Nevada Action entered into the MOU to settle the Nevada Action. The parties to the MOU anticipate preparing a settlement agreement for presentation to the court. The effectiveness of the MOU and any settlement agreement is conditional upon preliminary approval of the Nevada state court and final approval by that court following notice to the class members. Please see the section titled “Special Factors—Litigation Related to the Merger” beginning on page 82 for a detailed discussion of the litigation.

Below is the GeoTeam's view on HRBN's buyout proposal.

As of September 21, 2011, the risk equation at Harbin Electric (HRBN) has fundamentally changed due to the release of 2 new pieces of information which essentially prove that HRBN has made material misrepresentations to the SEC, the NASDAQ and to China Development Bank. The size and nature of these material misrepresentations is now too big and too public to be ignored by the SEC, the NASDAQ or China Development Bank. There now exists a very real basis for the NASDAQ to halt /delist the stock and for CDB to walk away from the financing.

The irrefutable misrepresentations boil down to this:

• One of HRBN's major customers doesn't even know who HRBN is!
• The Bait and Switch (ala YUII.PK): Creating a phony land acquisition and then attempting to replace it with another transaction after having been exposed.

To see the rest of our commentary on these developments, please go here.

As of December 31, 2010, management has made a comprehensive review, evaluation and assessment of the effectiveness of the Company's internal control over financial reporting. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this review, evaluation, and assessment, our principal executive officers have concluded that, as a result of material weaknesses identified at our newly acquired subsidiary Xi’an Tech Full Simo Co., Ltd., as of December 31, 2010, our internal controls over financial reporting were not effective. Our assessment of the effectiveness of the Company’s internal control over financial reporting covered seven areas including corporate function, four major subsidiaries and manufacturing operations which are Harbin Tech Full Electric Co., Ltd. (“Harbin”), Shanghai Tech Full Electric Co., Ltd. (“Shanghai”), Weihai Tech Full Simo Motor Co., Ltd. (“Weihai”), and Xi’an Tech Full Simo Motor Co., Ltd. (“Xi’an Simo”) and two small subsidiaries, which are Advanced Electric Motors, Inc, and Advanced Automation Group, LLC. Through our evaluation process, management concluded that, as of December 31, 2010, we generally maintained effective controls over financial reporting in six of the seven areas we assessed, however, management identified material weaknesses attributable to Xi’an Simo, a former State-Owned-Enterprise (“SOE”) the Company acquired in October 2009, which rendered our internal control over financial reporting ineffective on the consolidated level. Xi’an Simo is a former SOE with more than 30 years of operating history and more than twenty subsidiaries, the majority of which are small sales offices, across China. When the Company acquired Xi’an Simo in October 2009, management recognized some control weaknesses inherent in a typical SOE and understood that it would be a challenging and time consuming process to integrate a former SOE into compliance within the Company in its internal controls over financial reporting. Since the beginning of 2010, management has engaged a leading independent accounting advisory firm to assist us in evaluating, developing and validating internal control systems over financial reporting at Xi’an Simo. With the assistance of a professional team from the advisory firm, management developed and implemented processes and procedures to enhance and improve the internal control systems at Xi’an Simo. Our work and efforts were given priority to address major issues in major operations at Xi’an Simo, and time was not sufficient to work through all smaller subsidiaries including sales offices.

Despite significant improvements achieved in its internal control systems, due to its very short history of being part of a U.S. public company, large size, many subsidiaries located away from its headquarters, and limited time to integrate it with the Company, material weaknesses in its internal control over financial reporting were not completely eliminated at Xi’an Simo as of December 31, 2010. The material weaknesses identified by the management at Xi’an Simo are described below.

 
 
1- Control activities related to bank reconciliation – At Xi’an Simo, the bank reconciliation for various bank accounts were not prepared accurately which impacted the valuation and existence of the cash in bank as of December 31, 2010.

 
 
2- Control activities related to the reconciliation and classification of notes receivable – At Xi’an Simo, notes receivables endorsed as payment to third parties were not properly recorded, resulting in a discrepancy between the physical notes receivables on hand and the general ledger. Additionally, the improper classifications of transactions has impacted the completeness, and valuation of accounts payable / advance to suppliers and notes receivable balances at the year ended December 31, 2010 at Xi’an Simo

3- Control activities related to the calculation of provision of income tax – At Xi’an Simo, due to ambiguities in PRC tax rules, the temporary and permanent differences in tax amounts were not properly identified.

 
 
4- Control activities related to valuation of inventory allowance – At Xi’an Simo, slow moving inventories that had not been used over a year were not properly evaluated for inventory allowance.

 
 
5- Control activities related to inventory recording –– At Xi’an Simo, inventory movement between manufacturing facilities and sales entities were not timely and properly recorded on the general ledger.

GeoTeam Corroborates AlfredLittle.com Findings on Harbin and Deer

Through its own set of recordings, GeoInvesting ("The GeoTeam" or "GEO") has confirmed details regarding the claims made by AlfredLittle.com that Harbin Electric (NASDAQ: HRBN) and Deer Consumer Products (NASDAQ: DEER) have likely misappropriated a combined approximately $44.0 million by exaggerating the price paid for land use rights. The GeoTeam is very familiar with issues surrounding land use rights. We have seen similar cases of misrepresentation of land use rights with stories we broke such as China Redstone (CGPI) and Lotus Pharmaceuticals (LTUS). CGPI denied our claims of land use right misrepresentations despite recordings with government officials and the publication of a PRC newspaper article, after our research report, which agreed with our findings. Our findings were even supported by quotes from employees of CGPI! The stock now trades near $0.70 per share. The key lesson to be learned is that ChinaHybrid paper and words cannot be trusted at face value.

HRBN Summary of Findings

1. We confirmed that Ms. Wang actually does exist and works at Xi’an Lintong Tourism & Business Development Zone Management.
2. Ms. Wang confirmed a much lower land price than indicated by HRBN.

DEER Summary of Findings

1. Contrary to DEER’s claims, we confirmed that Mr. Zhuang and Mr. Fei Li actually do exist and work at Wuhu Economic & Technological Development Area.
2. They both confirmed much lower land prices than indicated by DEER.

Please see the rest of the report here,(http://geoinvesting.com/companies/duediligence/hrbn_report2.aspx), as well as the supporting recordings and transcripts.

Sincerely,

The GeoTeam

Below is a copy of the report Alfredlittle.com originally published yesterday on HRBN and DEER regarding Chinese Government Official confirmations of land fraud.

The GeoTeam has learned that Alfredlittle.com is probing into the issues regarding Harbin Electric (NASDAQ:HRBN) and Deer Consumer Products (NASDAQ:DEER); Issues revolve around the misappropriation of a combined $44 million. Through the use of recordings, emails and face to face meetings with PRC government officials, Alfredlittle.com provides evidence that supports allegations that massive fraud issues exist regarding the purchase of land use rights by both HRBN and DEER. While these allegations seem very damming at face value, the GeoTeam is actively trying to confirm the findings.  Please stay tuned for more details as the story develops.

HRBN findings:

1.       Alfredlittle.com HRBN findings purport that the company made a $23 million prepayment to government for land use rights on June 30th 2011.

2.       Frazer Frost has not responded to allegations.  Frazer Frost is notorious for auditing companies accused of fraud.

3.       HRBN has exaggerated the true cost of the land use rights by at least 92%.

4.       Article shows evidence of some corruption that takes place at government level dealing with land use rights.

5.       Evidence sent to SEC and NASDAQ.

DEER findings:

1.       Alfredlittle.com DEER findings purport that the company paid $37 million to purchase land use rights but failed to disclose receipt of $21 million in rebates.

2.       Management has repeatedly refused to address findings.

3.       Still no construction activity at DEER’s 660 Mu project a year after the first parcel was purchased.  Local government is angered by this issue.

4.       Article shows evidence of some corruption that takes place at government level dealing with land use rights.

5.       Evidence sent to SEC and NASDAQ.

Disclosure: Short HRBN and DEER

Alert originally available to Premium Members only!!  You too can be the first to know.

HARBIN, China, Sept. 6, 2011 /PRNewswire/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company"; NASDAQ: HRBN, a leading developer and manufacturer of a wide array of electric motors in the People's Republic of China ("China"), today issued a statement regarding an anonymous blog posting, which includes a report with contributions made by persons that have a short interest in Harbin Electric.

"Harbin Electric categorically denies the latest baseless accusations made in an anonymous report posted on a blog earlier today, which includes contributions by short sellers.  Regarding the land purchase referenced in the report, the Company stands by the statements as disclosed in its 10-Q dated August 9, 2011.  Harbin Electric confirms that the land purchase was done in full compliance with various relevant Chinese government entities and notes this transaction structure is a common practice in China."

The Company cautions shareholders to disregard and not be distracted by these and all previous accusations raised by short sellers.  The $24.00 per share all cash going private transaction was reaffirmed today by the purchasing group, including Mr. Tianfu Yang, Chairman and Chief Executive Officer of Harbin Electric, and Abax Global Capital ("Abax").  The China Development Bank Corporation also today reaffirmed its commitment to provide financing for the going private transaction.

HARBIN, China, Aug. 24, 2011 /PRNewswire-Asia-FirstCall/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company") (NASDAQ: HRBN) today responded to allegations made by a blog posting today (the "Report").

"As I have mentioned before, we fully expected that die-hard short sellers would continue to try and create opportunities to make money for themselves to the detriment of the large community of loyal shareholders of the Company as we get closer to the expected completion of the pending going private transaction," said Mr. Yang Tianfu, Chairman and CEO.

"I am happy to reiterate emphatically that we stand by the accuracy of our filings with the SEC. As disclosed in the Company's recent filings of the preliminary proxy statement in connection with the pending going private transaction, the Company was subject to extensive due diligence conducted by third parties and provided all requested materials, including its relevant PRC tax filings.

"At this stage, I believe that our loyal shareholders fully understand the motivations behind this type of 'research work' and are clearly focused on their opportunity to finally speak with their votes and be rewarded accordingly. I am happy to leave it at that."

The Company reserves the right to bring legal actions against the author(s) of the Report for their unfounded allegations.

Second Quarter 2011 Financial Summary

HARBIN, China, June 17, 2011 /PRNewswire-Asia-FirstCall/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company") (NASDAQ: HRBN) today responded to allegations made by Citron Research in a posting on CitronResearch.com dated June 16, 2011 as yet another attempt to drive its stock price down that is based on factually incorrect as well as out-of- context information.

Mr. Yang Tianfu's brother, Mr. Yang Tianli is not, and has never been, a member of the Board of Directors of Harbin Electric.

There has never been a Civil Settlement. The case was settled privately approximately 10 years after the alleged facts with no admission of guilt by Mr. Yang Tianfu or Mr. Yang Tianli. The sole involvement of Mr. Yang Tianfu, in the referenced settlement agreement was to provide financial assistance to his brother, Yang Tianli, to settle a dispute to which neither Mr. Yang Tianfu himself nor Harbin Electric was a party.

Mr. Yang Tianfu and the Company reserve the right to bring legal actions against Citron Research for these erroneous allegations.

As to the comparison between the Company's financial statements in the filings with the PRC State Administration for Industry and Commerce (SAIC) and the SEC filings, the Company's SAIC filings may not precisely match its SEC filings because of a number of reasons.  First, there are significant differences between PRC accounting standards, which are used for the Company's financial statements in SAIC filings, and the U.S. GAAP, which are used for the Company's financial statements filed with the SEC.  Second, SAIC filings are not made on the Company's consolidated basis and each subsidiary often includes inter-company transactions between the Company's different subsidiaries. Therefore, financial reports based on the SAIC filing are not an accurate reflection of the Company's consolidated financial statements, and should not be relied upon as accurate and fair presentation of the Company's financial position. The Company has recently reconciled its PRC tax filings with its financial statements reported in the SEC filings for fiscal year 2009 and has not found any inconsistency in any material respect, and stands by the accuracy of its historical filings with the SEC.

Finally, through discussions with China Development Bank Corporation Hong Kong Branch ("CDB") held on June 17, 2011 in Hong Kong, CDB confirmed that it would abide the Facility Agreement dated as of June 9, 2011 to provide a $400 million term loan to fund the proposed purchase of all of the outstanding shares of Common Stock of Harbin Electric by Mr. Yang Tianfu, Abax and their respective affiliates, subject to certain conditions.  

The special committee of independent directors formed by Harbin Electric's Board of Directors (the "Special Committee") to consider and evaluate this proposal is continuing its work with the assistance of its financial and legal advisors. There can be no assurance that any definitive agreement will be executed with respect to this proposal or that this or any other transaction will be approved or consummated.

A copy of the Facility Agreement between Tech Full and CDB was filed with the SEC in an SC 13D/A Form on June 9, 2011.

HARBIN, China, June 10, 2011 /PRNewswire-Asia-FirstCall/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company") (NASDAQ: HRBN) today announced that its Board of Directors has received a letter from its Chairman and Chief Executive Officer, Mr. Tianfu Yang ("Mr. Yang"), and Abax Global Capital ("Abax") reaffirming their proposal to acquire all of the outstanding shares of Common Stock of Harbin Electric not currently owned by Mr. Yang, Abax and their respective affiliates in a going private transaction for $24.00 per share in cash.  Mr. Yang, Abax and their respective affiliates collectively own approximately 40.72% of Harbin Electric's Common Stock.  In addition, Harbin Electric today announced that its Board of Directors has received from Mr. Yang and Abax an executed copy of a Facility Agreement between Tech Full Electric Company Limited ("Tech Full"), the acquisition vehicle formed for use in connection with the proposed acquisition and going private transaction, and China Development Bank Corporation Hong Kong Branch ("CDB"), pursuant to which CDB has agreed to provide to Tech Full a $400 million term loan to fund Tech Full's proposed purchase of all of the outstanding shares of Common Stock of Harbin Electric not currently owned by Mr. Yang, Abax and their respective affiliates, subject to certain conditions.  

Shares of Harbin Electric, Inc. (Nasdaq: HRBN) are moving higher following an amended 13D from the CEO noting a $400 million term loan facility.

From Filing:

On June 9, 2011, Tech Full entered into a facility agreement (the “Facility Agreement”) with China Development Bank Corporation Hong Kong Branch (“CDB”). Under the terms and subject to the conditions of the Facility Agreement, CDB will provide a $400 million term loan facility (the “Loan”) to Tech Full to fund the payment of the acquisition consideration for the proposed purchase of the publicly held shares of the Company and transaction costs and fees in connections therewith. A copy of the Facility Agreement is filed as Exhibit 7.01 and is incorporated herein by reference.

HARBIN, China, May 27, 2011 /PRNewswire-Asia-FirstCall/ -- Harbin Electric, Inc. a leading developer and manufacturer of a wide array of electric motors in the People's Republic of China, has received telephone calls and emails from a number of investment professionals inquiring about rumors concerning its Chairman and Chief Executive Officer, Mr. Tianfu Yang ("Mr. Yang") and its Chief Financial Officer, Mr. Zedong Xu ("Mr. Xu"), including that Mr. Yang and Mr. Xu have gone missing.

The Company, Mr. Tianfu Yang and Mr. Zedong Xu categorically deny such rumors. The Company is happy to report that the entire management team of the Company including Mr. Yang and Mr. Xu have been and are at work and are fully performing their respective corporate duties.

First Quarter Results:

• For the first quarter of 2011, total revenues were $103.8 million, down slightly from $105.5 million in the first quarter of 2010
• The Company recorded a net income attributable to controlling interest of $10.8 million, or $0.34 per diluted share in the first quarter of 2011, compared with a net income attributable to controlling interest of $20.6 million, or $0.66 per diluted share in the same period of 2010

GeoTeam® Note: 2011 First quarter analyst EPS estimates were $0.59.

"We had a flat quarter year over year as we have reached full capacity in rotary motors while sales of older linear and micro motors slowed as we started to ramp up sales of new products," said Mr. Tianfu Yang, Chairman and Chief Executive Officer of Harbin Electric.

On October 10, 2010, our Board of Directors received a non-binding proposal from Mr. Tianfu Yang ("Mr. Yang") and Baring Private Equity Asia Group Limited ("Baring") for Mr. Yang and an investment fund advised by Baring to acquire all of the outstanding shares of Common Stock of Harbin Electric not currently owned by Mr. Yang and his affiliates for $24.00 per share in cash, subject to certain conditions ("Going Private Proposal"). Mr. Yang owns 31.1% of our Common Stock. According to the proposal letter, Mr. Yang and Baring intended to form an acquisition vehicle for the purpose of completing the acquisition and that they intend to finance the acquisition with a combination of debt and equity capital. On November 22, 2010,  Mr. Yang advised our Board of Directors that, by mutual agreement, Mr. Yang and Baring had amended and restated their previously announced agreement, pursuant to which they had agreed to work together exclusively on the Going Private Proposal to provide that Baring's participation in the Going Private Proposal would consist solely of a right (but not an obligation) to provide up to 10% of the financing for the transaction, in the form of debt and/or equity and that Mr. Yang would not be restricted from seeking alternative sources of financing, in the form of debt and/or equity, for the transaction

We and our independent registered public accounting firm, in connection with management's assessment of and the audit of our internal control over financial reporting as of December 31, 2010, identified five material weaknesses in our internal control over financial reporting. The material weakness identified were attributable to Xi’an Simo, a former State-Owned-Enterprise ("SOE") the Company acquired in October 2009, which rendered our internal control over financial reporting ineffective on the consolidated level.  Despite significant improvements achieved in its internal control systems, due to its very short history of being part of a U.S. public company, large size, many subsidiaries located away from its headquarters, and limited time to integrate it with the Company, material weaknesses in its internal control over financial reporting were not completely eliminated at Xi’an Simo as of December 31, 2010. The material weaknesses identified by the management at Xi’an Simo are described below.

   · Control activities related to bank reconciliation – At Xi’an Simo, the bank reconciliation for various bank accounts were not prepared accurately which impacted the valuation and existence of the cash in bank as of December 31, 2010. 

   · Control activities related to the reconciliation and classification of notes receivable – At Xi’an Simo, notes receivables endorsed as payment to third parties were not properly recorded, resulting in a discrepancy between the physical notes receivables on hand and the general ledger. Additionally, the improper classifications of transactions has impacted the completeness, and valuation of accounts payable / advance to suppliers and notes receivable balances at the year ended December 31, 2010 at Xi’an Simo. 

   · Control activities related to the calculation of provision of income tax – At Xi’an Simo, due to ambiguities in the PRC tax rules, the temporary and permanent differences in tax amounts were not properly identified. 

   · Control activities related to valuation of inventory allowance – At Xi’an Simo, slow moving inventories that had not been used over a year were not properly evaluated for inventory allowance. 

   · Control activities related to inventory recording –– At Xi’an Simo, inventory movement between manufacturing facilities and sales entities were not timely and properly recorded on the general ledger.

Maxim on HRBN:

Harbin Electric, Inc. Buy
(HRBN – Nasdaq – $18.60)
LBO proposal may be nearing the end of the tunnel;

Reiterate Buy rating and $24 price target

• We believe that after more than six months, the time is near to see
  some evidence of debt and equity investment for the LBO.

• Overall, our confidence for a successful conclusion of HRBN’s
  LBO is based on our belief in: (1) the likeliness of available
  financing from Chinese institutions; (2) the feasibility for buying
  parties to buy back HRBN and re-list it on a Chinese exchange at a
  doubled (or even higher) valuation; and (3) HRBN’s reliable
  historical financials.

• Our positive outlook for HRBN’s LBO is case-specific and should
  not be generalized among other Chinese company buy-out
  proposals. 

A major factor in the Company’s liquidity and capital resource planning is its generation of operating cash flow, which is strongly dependent on the demand for our products. This is supplemented by our financing activities in the capital markets including potential debt and equity, which support major acquisitions and capital investments for business growth.

Our liquidity position remains adequate, with $98.8 million in cash and cash equivalents as of December 31, 2010, compared to $92.9 million as of December 31, 2009. Cash provided by operating activities totaled $93.2 million in 2010 compared to $62.5 million in 2009. Net proceeds from the Term Loan Facility totaled $49.6 million. Capital spending from operations for 2010 totaled approximately $57.5 million, compared to $16.5 million for 2009. The capital spending in both periods reflects primarily the investments in the construction and upgrading of our facilities and purchases of new production and testing equipment.

GeoTeam® Note: Investors should take these comments with a grain of salt, since the company has an open S-3 filing.

Fourth Quarter Highlights:

• For the quarter ended December 31, 2010, total revenues were $106.2 million, relatively flat compared with $107.2 million in 4Q09.
• Excluding these non-recurring items, the adjusted non-GAAP net income totaled to $19.6 million in 4Q10, or $0.62 per diluted share, as compared to $19.4 million in 4Q09, or $0.62 per diluted share.

"We are very pleased to report another record year in our Company's history," said Mr. Tianfu Yang, Chairman and Chief Executive Officer of Harbin Electric. "Revenues nearly doubled, while our earnings, including operating earnings and net earnings, grew significantly. Our growth was reflected in all product lines, thanks to successful acquisitions over the past few years that have enhanced our earnings power and strengthened our position in the industry. During the year, we were also able to secure $35 million and RMB100 million loan facilities and became one of very few small private enterprises to receive financing from China Development Bank. This, we believe, is recognition of our growing importance in China's economy and of the quality of our operational and financial performance.

Global Hunter on HRBN Going Private Speculation

Summary:

Abax Global Capital (Abax), a beneficial owner of the company, filed a S13D yesterday disclosing that it has filed confidentiality and standstill agreements with the company with respect to a possible negotiated transaction. We believe this indicates Abax has entered into the bidding process in the buyout transaction, and is likely to become one of the equity partners with the Chairman, Mr. Yang. We believe the deal is making progress, and the Chairman is most likely to be able to obtain the financing to complete the go private transaction. The $24 offering price provides investors a 37% upside from current levels. We therefore reiterate our Buy rating and $24 price target.

Global Hunter on HRBN Going Private Speculation

Net/Net: We do not believe Baring’s pull-back indicates a loss of confidence in the company as some investors perceived. We believe the Chairman will be able to find additional partners to finance the deal, including other private equity firms and domestic banks. We also believe the main challenges currently are the legal hurdles, since it is the first going-private deal of a US-listed Chinese company. Based on Mr. Yang's determination and the sources of financing that we believe he can access, we believe the deal is likely to go through. After the recent sell-off, HRBN shares are now trading at just 5x our FY11 EPS estimate. Even if HRBN remains a public company, we believe the current valuation is attractive based on the fundamentals of the company. Therefore, we reiterate our Buy rating and $24 price target, which is 8x our FY11 EPS estimate.

Global Hunter on HRBN

Harbin Electric, Inc. (Buy)
HRBN: Q3 missed on higher costs. Expect buyout deal to go through. Upgrading to Buy.

Upgrading from Neutral to Buy as we expect the go private deal to eventually go through at close to $24. Management did not discuss the buyout deal on the earnings call. It previously announced the engagement of Morgan Stanley to evaluate the transaction, which needs the approval of the special committee and shareholders. We see limited chances of failure for the deal given the premium to market offering price, the Chairman’s determination and track record of execution capability, and a high-profile deal team including Baring Private Equity and Goldman Sachs. The shares have dropped since our last update to a level that provides ~20% potential upside if the case goes through at close to $24. Therefore we are upgrading our rating from Neutral to Buy, and maintaining our price target at $24.

Harbin Electric (“Harbin”) reported Q3 earnings with revenue in line but the bottom line missed our/consensus estimates significantly. Gross margin declined from the previous quarter primarily due to increased raw material costs. R&D expenses were substantially higher due to concentrated payment to a number of new R&D projects. SG&A expenses were also higher because of a $2MM bad debt reserve and $0.9MM higher shipping & handling costs as the company shifts transportation of some products from rail to truck. Despite disappointing Q3 results, we believe demand remains strong. We expect some gross margin recovery in Q4 as the company passes through rising costs to customers, and we expect R&D and bad debt reserves to get back to more normalized levels. As Simo and Weihai facilities have reached full capacity, the company is building additional capacity, which we expect to speed up growth again next year. Regarding the proposal to go private, the company’s special committee has retained financial advisor to evaluate the transaction. We expect the deal to eventually go through at close to the $24 offering price. Shares at current levels provide potential upside of ~20% for investors. Therefore we are upgrading our rating from Neutral to Buy, and maintain our price target at $24.

Third quarter of 2010

• Revenues For the third quarter of 2010, total revenues were $109.35 million, up $62.42 million or 133%, compared with $46.93 million in the third quarter of 2009.
   
• Net income attributable to controlling interest of $17.87 million ($0.57 per diluted share) in the third quarter of 2010, compared with a net loss of $1.91 million (a loss of $0.07 per diluted share) in the same period of 2009. The net loss in the third quarter of 2009 included special non-cash and non-recurring items totaling a net loss of $12.86 million or $(0.47) per diluted share.

GeoTeam® Note: Estimates for the third quarter 2010 was $0.74

This morning, Harbin Electric announced  

that its Board of Directors has received a proposal letter from its Chairman and Chief Executive Officer, Mr. Tianfu Yang and Baring Private Equity Asia Group Limited for Mr. Yang and an investment fund advised by Baring to acquire all of the outstanding shares of Common Stock of Harbin not currently owned by Mr. Yang and his affiliates in a going private transaction for $24.00 per share in cash, subject to certain conditions.

This is a very interesting development.  Private buy out transactions and merger activity have been a key missing element in the ChinaHybrid space.  If completed, this transaction is important in that it could help bring some legitimacy to a space where reputable and significant value players may finally be eying up quality companies. This could lead to a short-term pop, that had already been set in motion, for deeply discounted ChinaHybrids, as investors speculate if third party transactions are on the horizon. 

Our challenge is to sift through the reverse takeover firms (RTO) to find the ones that have been improperly punished.

2010 Second Quarter Financial Highlights:

• Total revenues were $105.44 million, up 175% from $38.36 million in 2Q09.
  
• Operating income totaled $28.08 million, up 219% from $8.82 million in 2Q09.
  
• Adjusted net income attributable to controlling interest was $24.02 million, up 224% compared to $7.42 million in 2Q09.
  
• GAAP earnings per diluted share attributable to controlling interest were $0.82, compared to a net loss of $0.24 in 2Q09.
  
• Adjusted earnings per diluted share attributable to controlling interest were $0.77 per diluted share, compared to $0.33 in 2Q09

Outlook

"Despite concerns about the slowing down of the Chinese economy, we continue to see strong demand for many of our products. As we expect continued strong order volume for our rotary motors, our focus in the months ahead is to address production capacity constraints at our Weihai and Xi'an facilities. In our specialty motor lines including linear motors and specialty micro-motors, where speed of product development and market launch is the key to future growth, we have made substantial capital investments. We believe that capacity expansion and the expected and long-awaited launch of new products, coupled with our success in business integration, restructuring, and consolidation, will help us further extend our leadership position in the industry. "

Added to the GeoBargain list on November 10, 2009 @ $21.00

Catalyst: Strong 2010 estimates; Low valuation; Reduced debt.

Peak performance: Reached a high of $26.00 on March 10, 2010 

Current Price: $18.00

Current road block: 2011 EPS growth is forecast to grow only 6.8% to $2.99; Issued 2010 Revenue guidance, but no income guidance; Filed an S-3 which could signify an imminent capital raise; Still has $58.2 million in debt (although, debt to equity is still under 20%), most of which is short-term.

According to estimates, HRBN has two more quarter of above average EPS growth remaining. Adjusted EPS growth for the 2010 June and September quarters are forecast to grow 75.0% and 118.2%, respectively. EPS growth for the 2010 fourth quarter is expected to come in at only 12.9%. However, HRBN was able to quickly deploy its last capital raise quickly by paying down debt and completing accretive acquisitions. Thus, in the case of HRBN a capital raise may be welcomed by investors if used for purposes other than general working capital needs.

"A major factor in the Company’s liquidity and capital resource planning is its generation of operating cash flow, which is strongly dependent on the demand for our products. This is supplemented by our financing activities in the capital markets including potentially debt and equity, which support major acquisitions and capital investments for business growth."

Note: HRBN’s debt level may be a reason why the company has not achieved major a P/E expansion.

As far as liquidity goes the company has $77.8 million in cash and its annualized cash flow from operations is tracking at $69.4 million. We would strongly NOT favor a capital raise at current valuations, but with its debt position and need to maintain EPS growth, we can understand why an accretive raise my be necessary.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

- Is the company's auditor ranked in the top 100?
- Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm. Short sellers have been using this information as a tool to validate their opinions.
- Are the company's internal controls satisfactory?
- Are their any outstanding legal issues?
- Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.
- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better
- Is the company buying back stock?
- Chinese filings match respective SEC filings.(In process)

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

***Very Important GeoTeam® note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

"We believe that our business diversification efforts are paying off. We exited the quarter seeing continued strength in demand, setting us up nicely for the seasonally stronger second quarter. We are also encouraged by signs of stronger global economic activity, particularly in our North American market," commented Mr. Yang.

"We understand that some of our investors are concerned that the recent Chinese government efforts to cool down the real estate market and combat inflation might impact our business negatively. However, we believe that our business is a key foundation of China's overall economic growth and supports a wide range of economic sectors from agriculture to industry and manufacturing. Thanks to our diversification strategy, we do not expect a slowdown in the real estate sector in China to negatively impact our business. We continue to be very focused on restructuring our newly acquired Xi'an Simo business and improving manufacturing efficiency in Weihai. Our first quarter results reflect some early achievements in a very short period of time. We expect to expand on these positive results in the coming quarters."

Source: PR Newswire (May 10, 2010)

Dear Shareholders,

"Harbin Electric had the best year in its history in 2009. We saw higher sales across our three major product lines and particularly from our new subsidiary, Xi'an Tech Full Simo Electric Motor Co. Ltd. ("Xi'an Simo"), a leading developer and manufacturer of industrial rotary motors widely used for trains, power plants, and steel processing, as well as the materials, construction, chemical, and machinery industries. The addition of Xi'an Simo to our corporate family is a transformational event, doubling our revenues and taking us a long step toward our goal of becoming China's largest manufacturer of electric motors.

"Sales in 2009 increased by 85% over 2008 to $223.2 million, with Xi'an Simo contributing $44.1 million. Excluding $24.2 million in non-recurring and non-cash charges, we also saw a substantial increase in profitability to $43.8 million, an increase of 73% over 2008 and representing $1.71 per diluted share. With these items, net income was $19.6 million, or $0.77 per fully diluted share. We generated $62.5 million in cash from operations over the year, up 47% over 2008, further strengthening the Company's financial position. In August 2009, we closed a public offering of common stock that raised net proceeds of $107.5 million, which helped us pay down debt and complete the acquisition of Xi'an Simo.

"Our performance in 2009 was remarkable in part because the year began in the full throes of a global financial crisis, which created a drag on performance in the first half of the year. The domestic market recovered swiftly, however, as the central government's RMB 4 trillion (approximately US$586.5 billion) stimulus plan began to filter through the economy. This program has been augmented by at least RMB 8 trillion (approximately US$1.2 trillion) in spending by local governments, and will continue to deliver benefits over the next two to three years. As a result, the year ended on a far more optimistic note than it began. In 2010, we anticipate revenues in excess of $400 million, buoyed by continuing stimulus investment in infrastructure and urbanization programs.

Performance by Segment

Industrial Rotary Motors

"We have emerged as a diversified motor manufacturer following the $111.6 million purchase of Xi'an Simo in October 2009 and $54.8 million purchase of Weihai Tech Full Simo Electric Motor Co., Ltd. ("Weihai Tech Full") in July 2008. Industrial rotary motors are now a major product line for us, representing 52% of sales in 2009. Industrial rotary motors serve as the backbone of the industrial economy, and are critical components for industrial applications in the energy, agriculture, transport, construction, metallurgy, machinery, and materials sectors. We anticipate specialization rather than consolidation of our two main industrial motor manufacturing centers, in Shaanxi and Shandong provinces. Xi'an Simo will specialize in energy-efficient large-scale motors while Weihai Tech Full will specialize in small to mid-sized motors.

"The government's stimulus program, which includes subsidies for rural households to purchase agricultural equipment, consumer appliances and vehicles, as well as major infrastructure spending, energized this segment of our business. Sales of $116.3 million in 2009 accounted for 52% of revenues and were more than four times our sales of industrial rotary motors in 2008, which totaled $27.8 million or 23% of revenues. Weihai Tech Full for the first time contributed a full year of revenues.

"We have begun the work of integrating Xi'an Simo, formerly a state enterprise, into the Company, a process that requires some changes in management and a new approach to cost controls. We are also continuing the process of upgrading the relatively old and inefficient production equipment at Weihai Tech Full and Xi'an Simo. Given that the two operations focus on different types of industrial rotary motors, margins at Xi'an Simo and Weihai Tech Full are very different. Xi'an Simo, with a focus on large, specialized and customized products, had a gross profit margin of 31.6% in the fourth quarter of 2009, the first quarter we reported it, while Weihai Tech Full, with a focus on small to medium-sized motors and agricultural applications, had a gross margin of 11.2% in 2009. We have identified ways to improve margins at Weihai Tech Full, with a long-term target of 20%. Strong growth in sales of industrial rotary motors last year demonstrated the importance of these products to China's core economic sectors and justifies our strategic entry into this segment. In 2005, the latest year for which data is available, China represented 17% of total global sales of industrial rotary motors, with domestic sales growing at a rate of 9.5% per year. China's fiscal stimulus program is very clearly supporting similar levels of growth, even if the global financial crisis provided a temporary interruption.

Linear Motors

"Our high-margin linear motors segment performed well in 2009, and we anticipate strong demand as our products penetrate industrial markets across China. This penetration is fueled by the advantages of this technology, including energy efficiency, low operating costs, precision movements, and low noise and vibration levels, compared to traditional rotary motors. Revenues for the segment in 2009 were $60.2 million, up 21.6% from $49.5 million in 2008. We improved our gross profit margin in this segment, from 54% to 59.3%, reflecting the growing contribution of higher margin products such as oil pumps and our newly-developed linear motor propulsion systems for coal transport.

"The fastest growing product line in this segment in 2009 was our proprietary linear motor oil pump. Our customer, Petro China's Daqing Oilfield Co., our neighbor in Heilongjiang, operates China's largest and oldest onshore oil field, which has produced over 10 billion barrels of oil since it began production in 1960. In 2009, we sold 540 of our proprietary linear motor oil pumps to Daqing, up from 214 oil pumps in 2008. We expect that oil field applications of our linear motor oil pumps will provide steady cash flow in this segment for many years to come.

"One of our most exciting breakthroughs in 2009 was in linear motor propulsion technology. After many years of research and development, we saw the first revenues from this technology in the fourth quarter of 2009, $7.3 million from freight trains for a test track at a coal mine in Inner Mongolia. This first coal transportation line using linear motor technology will take time to complete. Ultimately, it will be 32 kilometers long and, if successful, provide a model for similar facilities throughout China.

"We are in the final stages of testing the first domestically manufactured linear motor based metro train as part of a joint effort with Changchun Railway Vehicles Co. and the Institute of Electrical Engineering of the Chinese Academy of Sciences, which began more than two years ago. The market is sending us a message that it wants the trains to be available as quickly as possible because they are about half the cost of imported trains. We expect the test phase to be completed in the near term. The lengthy startup phase is due in part to strict requirements on the number of kilometers the new system has to run before it can be approved for commercial release.

"The opportunities in this segment are significant, and we have the enviable status of being first mover among domestic manufacturers. China is building over 500 kilometers of urban rail lines annually, and its metro rail network will exceed that of the United States by 2012. The central government has approved 25 cities to develop urban rail networks, and will spend over RMB 1 trillion (approximately US$146.6 billion) to expand urban rail from 940 kilometers at the end of 2009 to more than 3,000 kilometers by 2015. Guangzhou's metro lines 4 and 5, and the Beijing Capital International Airport Link have adopted linear motor propulsion technology, but to date have relied on imported equipment. We expect that there will be keen interest in our domestically developed and engineered products, with their significant pricing advantages, once testing of the prototypes has been completed.

Automotive Micro-motors

"The global financial crisis took a heavy toll on the North American auto industry, which severely impacted our auto micro-motor business in the last year. Demand is rising for our high-end automotive products in the Chinese automotive market, which is growing rapidly and now exceeds that of the US. We are pleased to see that revenues began to move in the right direction in the fourth quarter of 2009. We ended the year on a positive note, with $40.2 million in sales in this segment, up 18.9% over 2008 sales of $33.8 million.

"Our brand-new automotive micro-motor manufacturing facility in Shanghai started production in October. We have also consolidated production in this segment, moving the two automotive micro-motor production lines that were in Harbin to Shanghai. With three production lines fully operational, our Shanghai facility is still operating well below its design capacity of 10 million units per year. We plan to add new production lines and bring the facility to full capacity over the next two years as we launch new products developed for existing and new customers.

Sound financial structure

"Cash on hand as of the end of 2009 was $92.9 million, compared to $48.4 million at the end of 2008. Our public offering of 7,187,500 shares of common stock during the third quarter provided net proceeds of $107.5 million, while proceeds from the conversion of warrants and options totaled $11.9 million. Operating activities generated $62.5 million in cash in 2009, up 47.7% over 2008, when cash from operations totaled $42.3 million. At the same time, we saw significant changes in current assets and current liabilities due to the acquisition of Xi'an Simo, including an increase of $63 million in accounts receivable, an increase of $52 million in inventories, and a $38.7 million increase in accounts payable. Short-term debt increased by $40.2 million. We are confident that the opportunities presented by the acquisition of Xi'an Simo were well worth our investment. The proceeds of our equity offering were put to good use in retiring current debt and funding the acquisition of Xi'an Simo. Our debt-to-equity ratio remains low.

Outlook

"In 2009, Harbin Electric was a major beneficiary of the central government's stimulus package, which budgeted substantial sums in sectors that had a direct impact on our business - RMB 1.6 trillion (US$234.6 billion) for rural investment, RMB 2 trillion (US$293.3 billion) for urban mass transit and highway construction, and RMB 27 billion (US$4 billion) for new energy development and large-scale construction. Each of these spending packages opened up broad new markets for us, and their impact will continue to be felt in 2010 and beyond.

"We are not unduly concerned with policies aimed at curbing asset inflation in the property sector. This is a recurring issue that is perhaps inevitable given the historic scale of migration from China's countryside to its cities. Property prices rise and fall, but the urbanization of China's rural areas is an unstoppable force. Villages are literally on the move. Towns that once contained 40 villages now have 20, and the other 20 have moved to cities and established new communities. Since this is a planned migration, there are major implications in terms of infrastructure such as water and electricity supply. Meanwhile, urbanization has also provided new labor in support of a range of industries, leading to industrial growth across the country, including regions that were once predominantly rural.

"The combined effect has led to growth in demand for machinery production equipment; equipment for power stations; construction equipment for highways, railways, tunnels, bridges; and equipment for pipeline networks, pumps, ventilation systems, air compressors. As these have been deployed, demand has increased for our products.

"Government policy is supportive for us to develop energy-efficient products. The government is enforcing new policies for energy conservation, energy efficiency, and renewable energy. These programs are mutually reinforcing. Nonetheless, the quickest way to achieve gains in energy conservation is through energy efficiency. China is a developing country, and virtually all the existing, vast inventory of machinery is energy intensive. China has an estimated 1 billion motors, and the electricity they consume is about 70% of all electricity consumed in the whole nation. Given this astonishing number, it is no wonder that the government calls for energy conservation, emissions reduction, and development of high efficiency motors.

"Our specialized linear motors and micro-motors are consistent with government policy. We are also seeking ways to improve the quality and energy efficiency for our industrial rotary motor product line. Our goal is to provide industrial rotary motors with a quality and efficiency comparable to those made by international companies in advanced countries, yet at lower cost. This would open the entire international market for us in the high volume industrial rotary motor line, while strengthening our leading position in the domestic market.

"Finally, with the substantial acquisitions we have made in the last two years, we believe we have built a solid manufacturing platform and diversified business portfolio, significantly enhancing our competitiveness. As 2010 unfolds, we are shifting our focus from expansion to integrating, consolidating, and optimizing operations. On the management side, our priorities are to further enhance the management team, upgrade internal controls for both operational and financial management, and strengthen corporate governance. We believe that these efforts are essential for the Company to move to a higher level and become a top-tier company.

A Note of Appreciation

"Last year, despite gloomy expectations at the beginning of 2009, was an exceptional one for us. We have successfully managed the transition to become one of China's major manufacturers of electric motors, with a diversified business portfolio and a high-technology edge. None of this would have been possible without contributions from all of our stakeholders - our hard working management team and advisors; our employees who are now spread across China; our customers in China and around the world; and you, our shareholders. Let me make a commitment to you that we at Harbin Electric will do everything in our power to continue to create value for our shareholders. Thank you for your support."

Sincerely,

Tianfu Yang, Chairman and Chief Executive Officer

Looking ahead, Mr. Yang commented, "We are ready to move the Company forward to a sustained profitability in 2010 supported by a solid platform that we have built over the past years as we expect continuous growth and leverage our strong financial position and promising portfolio of products. Although the first quarter is traditionally slower with the long Chinese new-year holiday, we do not expect this seasonality to impact our business significantly compared to the fourth quarter. We also expect that the Chinese government's commitment to sustainable economic growth and the accelerated industrialization and urbanization of China will continue to drive our business and support our long term growth objectives. We look forward to a productive 2010 as we continue to capture the synergies of the Xi'an Simo acquisition, advance R&D and strengthen growth in all core businesses. We believe that 2010 will be another strong year for Harbin Electric and we remain committed to our strategies to achieve both our near and long term goals and maximize value for our shareholders."

Source: PR Newswire (March 10, 2010)