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| Hanwei announces financial results for the first quarter of 2008
| | - Sales grow by 1658% to $5.9 million - TSX: HE VANCOUVER, May 15 /CNW/ - Hanwei Energy Services Corp. ("Hanwei" or the "Company") today announced its financial results for the three months ended March 31, 2008. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise. Sales revenue increased by 1658 percent to $5.9 million for the three months ended March 31, 2008, compared to the same period in 2007. In the first quarter of 2008, the Company increased revenues in the high pressure fibreglass reinforced plastic ("FRP") oil pipe business by 254 percent to $1.4 million, compared to the same period in 2007 and generated $4.4 million in revenues from the wind power equipment business. Revenues from the flue gas desulphurization ("FGD") pollution control business were $0.1 million for the three months ended March 31, 2008. In the first quarter of 2007, the Company generated $0.3 million in revenues all from the oil pipe business. Net loss decreased 52 percent to $0.7 million for the three months ended March 31, 2008 compared with the net loss of $1.5 million for the three months ended March 31, 2007. The decrease in net loss was due to an increase in revenues and gross profit from the oil pipe business and a 15 percent net profit after tax profit generated by the wind power business. This was partially offset by increased expenses due to expansion of the oil business and the commencing of the wind power equipment and FGD pollution control business. The Company had basic and diluted loss per share of $0.01 for the three months ended March 31, 2008 compared with basic and diluted loss per share of $0.06 in the same period in 2007, a year-over-year improvement of $0.05. "The strong growth and diversification of revenues in the first quarter of 2008 compared to the first quarter of 2007 are a result of the investments we made in 2007 to expand our oil pipe business and establish new product lines for wind power equipment and FRP FGD pollution control systems for coal fired plants," said Mr. Fulai Lang, president and CEO of Hanwei. "We are very pleased to have delivered our first wind power turbines and enjoyed a record first quarter for oil pipe deliveries. For 2008, we are focused on driving strong growth in revenues and earnings by completing our proposed acquisition of Deta and delivering wind power equipment, further expanding Chinese and international oil pipe sales and getting the Ershigs Joint Venture completed and up and running." A significant portion of Hanwei's revenues from its pipe business have been from one of three major oil and gas companies in China, with the vast majority of sales to subsidiaries of China National Petroleum Company ("CNPC"), which is also the parent company of Hanwei's partner in Daqing Harvest Longwall High Pressure Pipe Co. Ltd. The seasonality of Hanwei's pipe business is largely determined by the capital planning and expenditure cycles of its major clients, particularly CNPC's subsidiaries that own and operate the Daqing and Jilin oil fields in northeast China. Generally, oil field operators in northeast China focus on oil field design and engineering and planning their capital expenditures for the year in the previous year's fourth quarter and the first quarter and start placing orders and expressions of interest with suppliers in late first quarter and the second quarter. Hanwei expects the seasonality of the pipe business to gradually decrease as it expands its customer base in China and in other international markets. The Company expects that overall seasonality will be significantly reduced as the wind power equipment business and FGD pollution control business grow. However, since the wind power equipment business and FGD pollution control business are both in the early stages of their growth, the Company has not as yet identified seasonality trends. First Quarter 2008 Highlights: Delivered first wind power turbines. In January 2008, Hanwei delivered four 1.5 MW turbines to Daqing Deta Electric Co. Ltd ("Deta") under its wind power contract with Deta and Heilongjiang Ruihao Energy Technology Co., Ltd. ("Ruihao"). Two of these turbines have been installed in Ruihao's wind farm in Heilongjiang Province, China. Licensed blade-manufacturing technology. In January 2008, Hanwei entered into a licensing agreement with Aerodyn Energiesysteme GmbH ("Aerodyn") granting Hanwei the non-exclusive right to produce two versions of Aerodyn's aeroBlade 1.5 in China. The Agreement provides Hanwei with the moulds, technical know-how, specifications, and support to produce the 37.5 metre and 40.3 metre versions of the 1.5 megawatt blades and market them in China under the Hanwei brand. The first mould and related equipment is scheduled for delivery this month, with additional moulds expected to be delivered over the next six months. Entered MOU to acquire Deta. In a press release dated January 24, 2008, Hanwei announced that it had entered into a Memorandum of Understanding ("MOU") to acquire 100 percent of Deta for RMB 600 million ($85.3 million). As announced in a press release on May 13, 2008 Hanwei entered into a revised MOU (the "Revised MOU"), pursuant to which Hanwei Wind Power Equipment (Daqing) Co., Ltd. ("Hanwei Wind"), a wholly owned subsidiary of Hanwei, will acquire 99 percent of Deta, for RMB 591 million ($86.2 million), of which RMB 431 million ($62.8 million) will be paid under an earn out provision from 2008 to 2012 based on the performance of Deta. The earn out provision will be paid with RMB 300 million ($42.7 million) in Hanwei common shares (8,051,746 Hanwei common shares valued at $5.30 per share, based on the Bank of Canada exchange rate of 7.03 as of January 18, 2008) and RMB 131 million in cash. Hanwei Wind will have an option, to acquire the remaining 1 percent of Deta for RMB 6 million ($0.88 million) at any time, and the shareholders of Deta will have an option to require Hanwei Wind to purchase the remaining 1 percent of Deta for RMB 6 million ($0.88 million), twelve months after the close of the acquisition, subject to the approval of the Chinese government. Under the Revised MOU, signed by Hanwei, Deta and Ruihao, Deta will enter into a contract with Ruihao to provide 1,200 MW of wind power turbines, blades and towers valued at approximately RMB 8.4 billion ($1.2 billion). The parties will enter into a 200 MW manufacturing contract in 2008 and will thereafter negotiate an annual manufacturing contract for 250 MW of wind power equipment during the period of 2009 to 2012. Deta will also have a right of first refusal to provide all future wind power equipment for wind farms that Ruihao owns or controls. Negotiated RMB 500 million ($72.9 million) working capital facility. Hanwei entered into an agreement with Defeng Investment Co., Ltd. ("Defeng") pursuant to which Defeng will provide a short term loan of RMB 500 million ($72.9 million) to be released in three tranches. The first tranche of RMB 160 million ($23.5 million) will be released before June 20, 2008. The second and third tranches of RMB 190 million ($27.8 million) and RMB 150 million ($22.0 million) to be released, respectively, before July 31, 2008 and before the end of November 30, 2008. The loan bears interest of 8.83 percent per annum and has a one-year term from the date of release. This working capital facility will support the working capital requirements for the expanded manufacturing of wind power equipment pursuant to the Revised MOU. (See press release dated May 13, 2008) << Financial Highlights: ------------------------------------------------------------------------- In thousands of Canadian dollars except per share data For the three months ended Change ------------------------------------------------------------------------- March 31, 2008 March 31, 2007 ------------------------------------------------------------------------- Sales $5,941 $338 1658% ------------------------------------------------------------------------- Gross profit 1,920 227 746% ------------------------------------------------------------------------- Operating loss (648) (1,559) 58% ------------------------------------------------------------------------- Net loss (713) (1,498) 53% ------------------------------------------------------------------------- Loss per share (Basic and diluted) (0.01) (0.06) 0.05 ------------------------------------------------------------------------- >> Results of Operations: Sales revenue was $5.9 million for the three months ended March 31, 2008, an increase of $5.6 million or 1658 percent compared to the three months ended March 31, 2007. For the first quarter of 2008, 24 percent of revenues were generated from oil pipe business, 75 percent from wind power equipment business, and 1 percent from FGD business, compared with 100 percent from oil pipe business in the first quarter of 2007. Gross profit for the three months ended March 31, 2008 was $1.9 million, an increase of $1.7 million or 746 percent, compared with the same period of 2007. Gross profit as a percentage of revenues was 32 percent for the three months ended March 31, 2008 compared to 67 percent for the same period of 2007. This decrease was primarily due to changes in the product mix. In the first quarter of 2007, all of the Company's revenues were from sales of high-margin accessory products in its oil pipe business, while in the first quarter of 2008, 75 percent of revenues were from the wind power equipment business which has a gross profit margin of 29 percent. Sales of oil pipe products represented 24 percent of revenues with an average gross margin of 43 percent. Gross margin as a percentage of revenues for the oil pipe business for the balance of 2008 is expected to increase from 43 percent in the first quarter of 2008 due to the Company's increased prices and relatively stable costs. Total gross margin for 2008 is expected to increase due to expected strong growth in revenues. However, gross margin as a percentage of revenue for 2008 is expected to decrease compared to 2007 as the wind business is expected to comprise an increasing percentage of total revenues. Sales and marketing expenses for the three months ended March 31, 2008 were $0.7 million, or 11 percent of revenue, compared to $0.7 million or 211 percent of revenue for the same period of 2007. The decrease of selling expenses as a percentage of revenue in 2008 compared to 2007 was driven by the significant year-over-year growth in revenue. The wind power equipment business did not incur any sales and marketing expense for the first quarter of 2008, as the Company is focused on delivering its current contract with its first customer. Selling expenses are expected to increase in 2008 due to increased sales and marketing activities in the oil pipe and FGD pollution control businesses. However, selling expense as a percentage of revenues is expected to be the same or lower than 2007, due to strong growth in revenues expected in the oil pipe and wind power businesses and the low selling expense associated with the wind power business. Research and development ("R&D") expenses increased to $0.1 million for the three months ended March 31, 2008. R&D expense is expected to increase in 2008 due to expenditures associated with improving wind power technologies and development of new products for the FRP oil pipe business, but is expected to remain less than 1 percent of revenues due to expected strong revenue growth. General and administrative ("G&A") expenses for the three months ended March 31, 2008 were $1.8 million, or 30 percent of sales compared to $1.0 million or 304 percent of sales for the three months ended March 31, 2007. The increase in total G&A expense was mainly due to the addition of the wind power business, which incurred $0.5 million of G&A expenses, and an increase in stock based compensation expenses. G&A expense is expected to increase in 2008 due to the expansion of all three business lines; however, G&A expense as a percentage of revenues is expected to be the same or lower than 2007, due to strong growth in revenues expected in the oil pipe and wind power businesses. The Company had an operating loss of $0.6 million for the three months ended March 31, 2008 compared with an operating loss of $1.6 million for the three months ended March 31, 2007. The $1.0 million improvement was mostly due to the growth in sales from the oil pipe business and the additional revenue from the wind power equipment business. Net loss was $0.7 million for the three months ended March 31, 2008 compared with the net loss of $1.5 million for the three months ended March 31, 2007, a decrease in net loss of $0.8 million or 52 percent. This decrease in net loss was due to an increase in revenues and gross profit from the oil pipe business and a 15 percent net profit after tax profit generated by the wind power business, offset partially by increased expenses due to expansion of the oil business and the initiation of the wind power equipment and FGD pollution control businesses. The Company had basic and diluted loss per share of $0.01 for the three months ended March 31, 2008 compared with basic and diluted loss per share of $0.06 for the three months ended March 31, 2007. As at March 31, 2008, the Company had approximately 60.6 million common shares outstanding. Cash, cash equivalents and short-term investments totalled $24.9 million as at March 31, 2008, representing a decrease of $11.0 million from December 31, 2007. Working capital was $81.4 million as at March 31, 2008, a decrease of $1.4 million from $82.7 million as at December 31, 2007. This decrease was largely due to the repayment of a short-term loan. As at March 31, 2008, Hanwei had total assets of $115.6 million, liabilities of $11.8 million and no long-term debt. Outlook Management expects continued strong revenue growth of more than 70 percent in its high pressure FRP pipe business for the oil industry in 2008. This includes its continued expansion in the Chinese market, significant growth in the Kazakhstan market, and the potential entry into other international markets. Production capacity will be added as needed at the Company's Daqing facility to meet the increasing demand for the Company's high pressure FRP oil pipe and meet its production and sales targets. As of the end of the first quarter of 2008, the Company had sales orders for oil pipe of more than 30 percent of its sales target for 2008. This includes over $10 million in sales orders for Kazakhstan for delivery in 2008, compared with $1.9 million in oil pipe sales in Kazakhstan in 2007. Apart from its existing products, the Company is actively seeking opportunities to expand its product offering through research or acquisition. The construction of the new oil pipe manufacturing facility planned for Kazakhstan has been postponed due to delays in the installation of utilities to the site. As previously disclosed, a site of approximately 70,000 square metres (753,473 square feet) has been identified and rented for USD $100,000 per year for an eight-year term. The facility is planned to have eight production lines with an annual production capacity of 1,600 km of standard FRP pipe. In order to satisfy the growing demand in Kazakhstan during the construction delay, Hanwei will add required capacity to its existing production facilities in Daqing. The adjusted target date to start operations in Kazakhstan is the second half of 2009. With the commercialization of the Company's FRP spray headers for FGD pollution control systems, the Company has a product in the growing market in China for clean coal technologies. The joint venture with Ershigs, to be formed pursuant to a memorandum of understanding signed in late 2007, is expected to significantly expand its product offering in pollution control systems and the average size of sales per customer. Management expects significant growth in this segment in 2008 as well. The Company's original 2008 growth plan requires additional working capital and investments totalling approximately RMB 950 million ($130 million) in 2008. This includes working capital to support the growth in the wind power business, investments in manufacturing facilities in Tianjin, China and Kazakhstan, licensing of wind power technology, the proposed acquisition of Deta, and the proposed joint venture with Ershigs. Hanwei estimates that the postponement of Kazakhstan will reduce the 2008 CAPEX requirement by more than $20 million. The Company plans to finance the 2008 working capital and investments with cash on hand, cash from operations and expected new debt facilities. As at March 31, 2008, the Company had cash, cash equivalents, and short-term investments of $24.9 million and has negotiated a RMB 500 million ($72.9 million) working capital facility. Hanwei will be holding a conference call to discuss its financial results for the three months ended March 31, 2008. Mr. Kim Oishi, Senior Vice President of Finance and Business Development, and Mr. Yucai (Rick) Huang, Chief Financial Officer, will host the call. << Date: May 15, 2008 Time: 10:00am Eastern Time Dial in number: 1-888-458-1598 or 416-883-0139 Taped Replay: 1-877-653-0545 or 1-403-232-0933 (available for 14 days) Taped Replay Pass Code: 619457 Live Webcast Link: http://events.onlinebroadcasting.com/hanwei/051208/index.php >> FORWARD-LOOKING INFORMATION AND NON-GAAP MEASURES Certain information in this news 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 information relating to the proposed acquisition of Deta outlined in the Revised MOU, the securing of orders for wind power equipment from Deta for the 2009 to 2012 period, the securing of loan advances from Defeng to provide the financing for the proposed acquisition of Deta, the establishment of relationships with new Chinese suppliers for key turbine components, and the ability to earn a 15 percent or higher net after tax profit. The forward-looking information in this news release describes Hanwei's expectations as of the date of this news release. The results or events anticipated or predicted in such forward-looking information may differ materially from actual results or events. Material factors or risks which could cause actual results or events to differ materially from a conclusion in such forward-looking information include the risks that the acquisition of Deta may not be completed on the terms set out in the Revised MOU or at all, that a definitive agreement for the proposed acquisition of Deta and the related escrow and employment agreements may not be agreed upon, that the acquisition may not complete on terms acceptable to the parties, that required approvals may not be obtained or may be subject to conditions that are unacceptable to the parties, that due diligence undertaken by the parties may not be satisfactory or may not identify all possible risks of the transaction, that Hanwei may not be able to complete the working capital facility from Defeng Investment Co., Ltd. in its entirety or at each of its funding stages, that Hanwei may not be able to raise the capital it requires from time to time to complete the transaction, or to make cash payments required from time to time, on terms favourable or acceptable to it or at all, that Hanwei may be required to issue shares under the share purchase agreement between Hanwei and Deta before the wind power equipment manufacturing contracts are completed, that manufacturing agreements may not be entered into between Deta and Ruihao as contemplated in the Revised MOU or at all, that Ruihao may not secure funding and approvals necessary to establish or acquire additional wind farms and accordingly not require additional wind farm equipment, that profit margins may be impacted by price inflation, that Hanwei may not be able to effectively integrate or manage expansion of its operations, that Hanwei may not be able to negotiate favourable pricing terms for supplies beyond the first year of the Wind Power Equipment Contract, that supply chain issues or changes in technology or product requirements may cause delays in delivery of products under current or future manufacturing contracts, that a robust market for wind power products is still developing in China, that there is significant uncertainty surrounding wind power regulation in China, that Hanwei must meet Chinese governmental localization requirements, that there are uncertainties related to certain of Hanwei's wind power agreements, that Hanwei depends on its intellectual property and the failure to protect that property may adversely affect future growth, that Hanwei faces significant competition and seasonal fluctuations in revenues, that there may be insufficient insurance for its operations, that changes in costs of raw materials or energy may adversely affect operating margins, that operations are subject to environmental risks and hazards, that there are specific risks associated with doing business in China (including those related to state ownership, government intervention, foreign investment, repatriation of profit, currency conversion, shareholders' rights and enforcement of judgments, a developing legal system, recent regulations relating to cross-border mergers and acquisitions, protection of intellectual property, permits and business licenses, appropriation, tax, infrastructure and interest rate fluctuations), and that exchange rates fluctuate. When relying on Hanwei's forward-looking information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Hanwei cautions that the foregoing list of material factors is not exhaustive and is subject to change. For additional information with respect to certain of these and other factors, refer to the risk factors section of Hanwei's Annual Information Form dated April 3, 2008 filed with Canadian securities regulators, which is available on SEDAR at www.sedar.com. The Company has included in this news release figures based on expressions of interest, orders received and shipments made, which are non-GAAP measures. Readers are cautioned that expressions of interest, orders received and shipments made are not recognized measures 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 these measures may differ from methods used by other entities and accordingly the Company's measures may not be comparable to similar measures used by other entities. The Company uses these figures because management has a high degree of confidence that the expressions of interest, orders received and shipments made will represent sales and it believes such figures provide a useful indication of the Company's progress in further developing its market in China and diversifying internationally. THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS NEWS RELEASE REPRESENTS THE EXPECTATIONS OF HANWEI AS OF THE DATE OF THIS NEWS 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 HANWEI MAY ELECT TO, IT DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME. For further information: Kim Oishi, SVP of Finance and Business Development, (416) 804-9228, koishi@hanweienergy.com; Kevin O'Connor, Investor Relations, (416) 962-3300, ko@spinnakercmi.com | | |
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