Nf Energy Saving (NASDAQ:NFEC)

Rodman & Renshaw on Nf Energy Saving

Site Visit:We visited NFEC in Shenyang on October 15, 2010. We started the day at their new offices in down town Shenyang and then proceeded to their current and upcoming facilities located in Tieling City in Liaoning Province. The company’s existing facility manufactures energy-saving flow control equipment for China’s South-North Water Diversion Project and coal-fired power plants. We also saw finished and semi-finished products, primarily large industrial valves, ready to be shipped to Russia, India and Turkey. Mr. Jianwei Cui, general manager of Liaoning Nengfa Weiye Energy Technology, the Chinese subsidiary of NFEC, has been in charge of the daily valve manufacturing operation in the current facility. He gave us a brief tour of the factory and walked us through the production process for 3.6m, 4.3m, and 4.8m diameter energy saving valves. Mr. Cui also indicated that the company will expand on its manufacturing of high precision / automated energy saving equipment in the new facility in Tieling City’s new industrial zone. 

Tieling City’s new industrial zone appears to be a part of a new development plan and is being built from scratch. There are numerous factories coming up in this area and most of them are in late stages of completion. 

We visited NFEC’s new facility during the second half of the day. The new factory will comprise of two buildings that approximately will have 10,000 sq. mt. floor space each. Mr. Zhao, the site manager showed us two newly purchased high precision automated processing machines, totaling RMB 30 MM~40 MM. It appeared some of this equipment were still being tested. This equipment should allow NFEC to be one of very few in Northeast China capable of producing/processing high precision energy saving flow control equipment. To finish the construction of the new facility, NFEC needs to invest additional $4 MM ~$5 MM. 

Key Takeaways: We met with the company’s management, including Mr. Gang Li, Chairman & CEO and Jessica Yang, VP of Finance. The key takeaways from the visit are (1) Construction in the new facility seems to be well underway (2) Opportunity from overseas remains promising (3) Management has a clear growth strategy. However, it will have to demonstrate its ability to execute (4) the company is also taking initiatives to comply with SOX 404 to improve internal control and potentially upgrading its auditor. 

3Q10 Preview: Management indicated that during 3Q10 they experienced a slight delay in product delivery to one customer from Russia due to postponed testing. Therefore revenue from this contract may be pushed to 4Q10. We are making adjustments to our financial model accordingly. We are now projecting revenue and net income of $8.1 MM and $2.0 MM, with diluted EPS of $0.38 compared to $9.8 MM, $2.0 MM, and $0.38 earlier. For full year FY10, we are maintaining our estimates of $28.6 MM, $5.6 MM, and $1.03 per share, respectively. Our FY11 estimates are unchanged at $35.7 MM, $7.5 MM, and $1.25.

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This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

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Rodman & Renshaw on NFEC

Overview: We are initiating coverage on NF Energy Saving Corp. (NFEC) with a Market Outperform / Speculative Risk rating and a 12-month price target of $5.00. NFEC is a specialized energy saving solutions provider. The company’s senior management team led one of the pilot projects in China’s ESCO space when the World Bank jump started this industry in China in 1998. Since then the company has grown into manufacturing energy saving valves and flow systems in addition to providing energy efficiency related consulting services to industrial entities. 

Highlighting An Overlooked Opportunity: We view NFEC as an overlooked opportunity participating in a very relevant investment theme. China’s need for environmental remediation, we believe, is well documented and understood. Efficient energy and water consumption is one approach to arriving at a possible solution. Though the company came public in 2006 through a reverse merger, meaningful trading in the stock only began in mid 2009. The stock benefited from the market rally last year and touched a high of $7.75 at a time when other Chinese water plays and environmental remediation names were also outperforming. Since then the stock has suffered from an overall pull-back in small / micro cap China names and as a result liquidity has dried up. However, during this period the company has continued to demonstrate revenue and earnings growth (pls. see financial model). Lack of institutional ownership, absence of analyst coverage and an OTC BB listing has kept the story from being noticed by investors. We believe management is going to be pro-active in setting performance expectations and delivering on them as part of an effort to drive institutional interest in the story. 

We believe NFEC is still in the early stages of its growth strategy but has demonstrated its ability to maintain profitability. As a domestic energy services solution provider, we believe the company is already benefiting from highly favorable macro policies. We expect the upcoming Twelfth Five Year Plan to continue government policy and funding support for the energy efficiency and environmental remediation industry in China. The company’s existing partnerships and collaborations with major global players should allow it access to relevant technology to continue winning contracts.

Valuation: At current levels NFEC is trading at P/E multiples of ~6.3x and ~5.2x to our FY10 and FY11 earnings estimates. These multiples are well below industry averages of 14x and 12x. We are comfortable assigning NFEC a $5.00 price target, which translates into P/E multiples of 12x and 10x to our estimates for FY10 and FY11. We believe these are reasonable multiples given that historically clean technology and environmental remediation companies have traded within a range of 8x to 25x on a P/E basis. 

Investment Risks: (1) Revenue Collection & Accounts Receivable Issue (2) Customer Concentration (3) Volatility In Raw Material Cost (4) Highly Competitive Industry (5) Risks Associated With International Relationship


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.