Harbin Electric (NASDAQ:HRBN)

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. 

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.