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NF Energy Savings Corporation: growing fast

Renewable energy schemes are increasingly being embraced by countries worldwide as a key component in the solution to the problems of energy security and climate change. For example, even the US – traditionally sceptical of the theory of manmade climate change and whose foreign policy over the past decade (let’s face it) has been about guaranteeing supplies of oil and gas – has recently become more keen to develop clean energy as an alternative to hydrocarbons. But while President Obama wants to “harness the sun and the wind and the soil to fuel our cars and run our factories”, there is also a recognition that something must be done about energy consumption.

In the US, energy efficiency has not proved a vote winner in the past (it was one of the policies that did for Jimmy Carter’s presidency). But Obama has ensured that the economic “Stimpack”, the $311bn of investments and grants designed to boost the US economy, includes $6.3bn in energy efficiency and conservation grants, and for good reason: the amount of energy currently lost in industrial processes is so great that it is estimated the US could generate 20% of all its electricity simply by using existing technologies to capture the energy that industry wastes (source:  US Environmental Protection Agency).

Meanwhile, China is taking energy efficiency very seriously indeed. Its latest Five-Year Plan (which runs from 2005-2010) has set a series of energy conservation and emission reduction targets to be achieved by local governments and industries.

The country is investing more than RMB 1 trillion ($146bn) to reach its energy savings goals by 2010. The government is rewarding enterprises according to the total savings they make from energy-saving projects, while it has also set aside RMB 7 billion ($1bn) to support the top 10 key energy saving projects. Additionally, emissions reduction is now being seen as an important factor in evaluating the performances of the leaders of local governments and large, state-owned enterprises.

So, Chinese companies involved in helping make industrial processes more efficient look set to do well. One such is NF Energy Savings Corporation, a Chinese business based in Shenyang but whose shares are quoted on the OTC Bulletin Board – the US’s over-the-counter equities quotation service.

NF Energy supplies energy saving and emissions reduction equipment and services to industrial companies in China and abroad. Products include flow control devices that regulate the transportation of water, oil, heat and gas, and which can have a great effect on the efficiency of pipeline systems.

Additionally, the business provides services for energy efficiency and emissions reduction projects at large factories, hospitals, schools and other institutions, while it also manufactures components for wind power systems.

At the end of May, NF Energy announced record backlog orders for this year of $21.5m, spread across 47 contracts. This month, it announced a further significant increase in its order book after signing a $5.2m deal to supply components to two of China’s new ultra-supercritical coal-fired power plants and a $3.3m deal to supply a hydro power plant in Yunnan province in the south-west of China.

NF Energy will supply the two ultra-supercritical coal-fired plants being constructed in China’s Guangdong province with energy-efficient flow control systems during the second half of 2009. The plants, each with a capacity of 1GW, are being built to replace small, dirty and inefficient coal plants in Guangdong’s Pearl River Delta region.

Supercritical plants use steam that is heated to temperatures above the critical point of water (374 degrees centigrade). Because of the pressure generated at these high temperatures the efficiency of coal-fired thermal power generation is far greater than sub-critical plants.
The Yunnan deal will see NF Energy supply its flow control systems to a 99MW hydro power plant, with $1.1m worth of these systems being delivered in the third quarter of this year.

NF Energy’s wind power components business includes products such as hubs, forward engine room foundations, bearing seats, and principal axles for 1.5MW wind systems. The company says that a new facility due to come online this year will dramatically increase production capacity.

The construction of the facility, begun in Q1 2009, is being sped up after the company reported a significant increased interest in its wind power equipment. Total wind power generating capacity in China is currently 12GW, but the country wants to raise it to 20GW by 2010.

NF Energy has already successfully installed its wind power equipment at the Dali wind farm in Inner Mongolia, and reported this month that this has been operating smoothly since its installation in February this year.

Not surprisingly, amid all this good news, the company is upbeat about its prospects.
“We’re very pleased with our strong pipeline in such a challenging economy both in China and globally,” says Gang Li, NF Energy’s chairman and chief executive officer. “Our constantly increasing backlog orders provide us [with] good visibility for our performance in 2009, especially for the second half of that period. Our pipeline has also been expanding which is expected to further enhance our performance for the whole year of 2009 and beyond.”

The $34m market cap company has seen a strong rise in its share price in recent months. At the start of the year its shares changed hands for less than 10 cents each, while now they are now close to $1.

Before this month’s announcement of NF Energy’s ultra-supercritical coal plant contracts, independent analysts Harbinger Research had estimated full-year revenues of $22.1m (2008: $15.8m), with net income coming in at $5.1m (2008: $3.7m). For next year, Harbinger expects revenues of $35.2m and net income of $9.4m.

The income figures translate to earnings per share of 12.7 cents and 23.6 cents for 2009 and 2010 respectively, which prices NF Energy at 7.5 times and four times prospective earnings.
Consequently, the NF Energy’s shares look good value if the company can convert its record order book into revenues this year.