NF Energy: Growth Play on China Clean Energy Infrastructure

Jul.26.09 | About: NF Energy (NFEC)

NF Energy Savings Corp. (NFES.OB) is a manufacturer and service provider for the improvement of energy efficiency and the reduction of emissions in China. NFES is a leading provider of wind cogeneration equipment and flow control systems for coal, hydro, and nuclear cogeneration facilities with 20-30% market share in the rapidly growing thermal power device market and 10% share in the market for hydropower devices.

NF Energy experienced revenue growth of 53% in 2008 to a level of $15.8 million while generating net income of $3.7 million. As of 7/13/09, the company has been awarded 48 contracts with a backlog of about $38 million, including about $23 million expected to be completed in 2009 while nine additional contracts valued at $27 million are pending final negotiations.

Future demand for the company’s products and services is expected to grow rapidly due to higher domestic energy-saving standards in China and government subsidies (e.g. 5% of China’s RMB4 trillion economic stimulus plan are earmarked for environmental projects).

During 2008, 69% of the company’s revenue was generated from the production and sales of energy-saving valves, intelligent valves and flow control equipment while 31% was generated from energy efficiency consulting and retrofitting services. In 2009, NFES expects product revenue to account for 89% of total sales.

Conservative estimates call for 8.5-9.4% annual power consumption growth in China from 2010-2015 as rapid GDP growth in the country fuels consistent growth in power usage. China currently has 800GW of generation capacity, which ranks as the second largest installed capacity in the world behind only the U.S. In addition, China is expected to add 140GW of new power generation through 2010. Per capital electrical consumption has experienced 11% annual growth over the past decade in China due to rapid urbanization and growing consumer income levels.

Currently, China depends on inefficient coal power for more than 75% of its power generation capacity. At the end of 2007, coal power generation contributed to 77.7% of China’s installed capacity compared to 20.4% for hydropower, 1.2% for nuclear, and 0.7% for wind + others. Hydropower, nuclear, and wind power are expected to gain more than 2% of the total power generation distribution mix with nuclear power capacity share increasing by over 1.5X.

NF Energy can significantly increase the thermal efficiency of coal boilers by transforming these boilers into circulating fluidized bed boilers, which can combust low quality coal and also achieve higher thermal efficiency. Additional benefits include using residual ash residue as building materials, achieving higher efficiency through retrofitting upgrades, and reclaiming residual heat from the boiler and waste water.

In addition to adding new power generation capacity, there is a renewed emphasis in China to shut down small and inefficient operations and retrofitting others to increase efficiency while decreasing emissions. NF Energy has the ability to significantly increase thermal efficiency through its retrofitting as 95% of China’s industrial boilers are coal fired and most of these boilers and coal cogeneration systems operate at just 60-70% efficiency versus 90% globally. As part of the 11th Five Year Plan (FYP), China plans to shut down 50GW of small and inefficient coal-fired power plants nationwide for replacement through 2010 with 10GW of small and inefficient replacement units expected each year beyond 2010.

NF Energy recently supplied $1.7 million of flow control systems equipment for Phases I and II of a major national hydropower project and the company expects to deliver additional products as the project progresses. The project will channel water from the country's longest river (Yangtze) to three rivers in the north (Yellow, Huai and Hai); whose basins are running dry. Planned for completion in 2050, this hydropower initiative will eventually divert 44.8bn m³ of water annually to the population centers of the drier north, with a network of over 3,000km pipes at an estimated cost exceeding $62 billion.

The company’s flow control system equipment regulates the transportation of water, oil, heat, and gas and is the key factor in determining the efficiency in all pipeline systems. NF Energy’s flow control systems can reduce energy usage by 20% and have been successfully installed in projects in throughout China. The company’s technology was awarded “Number One Energy Saving Value of China” by the Chinese Energy Conservation Association.

NF Energy recently supplied $2.7m of flow control systems equipment for Phase III of the Guodian Zhejiang Beilun Power Plant, which is an important government project in China. The valves are used in coal-fired generating units, installed at the entrance and exit of water recovery condenser to recycle water cooling pipes to control the flow. The valves reduce energy consumption 20% by providing (1) two-way zero leakage seal device; (2) intelligence control of valves to open and close at any angle according to flow; and (3) flow resistance minimization design.

Emission reduction is an important criterion in evaluating the performance of the leaders of local governments and large state owned enterprises in China. NF Energy has teamed up with leading multinational companies in this field such as General Electric (NYSE:GE), Schneider Electric (OTCPK:SBGSY), and Honeywell (NYSE:HON) to provide cutting edge comprehensive energy saving solutions to its clients.

Wind energy equipment will be a sizable component of revenue for the company going forward due to rapid growth in this industry. NF Energy’s current products include hubs, forward engine room foundations, bearing seats, and principal axles for 1.5MW wind systems while new wind power manufacturing production facilities expected to come online during 4Q09 will dramatically increase the company’s production capacity in this renewable energy segment.

On 11/30/06, Neng Fa affected a reverse merger with OTC listed Diagnostic Corporation of America, and changed the name to NF Energy Saving Corporation of America. In April 2008, the company raised $2 million in a private placement, and since its public listing, the company has lacked the necessary capabilities to communicate its story to public market investors. As a result, the company’s stock historically had no liquidity and traded at a trailing 12-month price to earnings (P/E) valuation of less than 1X despite its high level of profitability, rapid growth, and industry of great interest to public investors.

NF Energy has about 40 million shares of common stock outstanding with an EPS of $0.10 for 2008 and 2009 estimated EPS of $0.16. With the stock trading at $1.02/share intraday on 7/24/09, the market cap is about $41 million and the estimated P/E ratio for 2009 is 6.4X. Revenue for 2008 was $15.8 million and the estimate for 2009 is $27.7 million, representing top-line growth of about 75%. NF Energy ended 2008 with $2.25 million in cash/equivalents and $2.5 million in current liabilities and ended 1Q09 with a current ratio of 3.9, ROA of 16.2%, and ROE of 19.4%.

Disclosure: No positions