Nf Energy Exploits Multiple China Industry Trends (Part II)

| About: NF Energy (NFEC)

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II Production and Sales of Energy Flow Control Equipment

Complex Valves and flow control system equipment regulate the transportation of water, oil, heat and gas within the pipeline infrastructure network beneath the cities. The valves installed within the pipeline are integral to the system's proper function and are considered to be the most important component of the network. This has been the Company's main product line.

Problem- Inefficient Pipeline Systems

Inefficient pipeline systems can result in less than desirable commodity flows within the infrastructure network within what is referred to as the energy highway.

Nf Energy Solution

  • Nf Energy state-of-the-art flow control equipment will reduce energy consumption by 20%. Valve and flow control equipment is the key to energy efficiency and conservation in the pipeline transportation of commodities.

Flow Control Equipment Opportunity

  • Nf Energy can capitalize on its 10 years of solid reputation to maintain its leading market share position in related flow control markets.
  • Its technology was awarded "Number One Energy Saving Value of China" by the Chinese Energy Conservation Association.
  • Again, companies that wish to increase margins will value the 20% reduction in energy consumption through the application of NFES products.
  • It is widely used in the fields of electric power, water power, petroleum, natural gas and etc.
  • An insignificant amount or revenues is generated from outside China.

III Comprehensive Energy Conservation & Emission Reduction Services for Municipalities

The China State Council, in its 11th Five-Year Plan for 2005 to 2010, has set energy conservation and emission reduction targets to be achieved by local governments and industries. The Central government has set aside 7 billion RMB to support the top 10 key energy saving projects.

Problem - Standards Must Be Met

  • In the scramble to meet standards and share in 7 billion RMB to support the top 10 key energy saving projects, municipalities require project management help from reputable firms.

Nf Energy Solution

  • The Company's municipal comprehensive energy conservation and emission reduction projects focus on comprehensive energy conservation and emission reduction planning and project implementation for an entire city.
  • The goals of these plans are to reduce per unit energy consumption and green house gas emission.

Opportunity in Emission Reduction Services

  • NFES has embarked on developing project management initiatives and will offer this new service to municipalities in 2009.
  • Project management will serve as a new source of revenue.

IV Equipment Manufacturing for Wind Power Plants

Problem - Equipment Shortages

  • China's tremendous demand for wind power generation has led to a global shortage of wind power equipment components.

Nf Energy Solution

  • Those manufacturers that are well capitalized, have sufficient capacity, offer cutting-edge technology and are able to provide superior service should enjoy a tremendous growth in China.

Wind Power Opportunity

  • Government in its 11th Five Year Plan of 2006 emphasized the development of wind power among energy resource development. The backlog of orders will not be filled until 2012 and presents a predictable and growing source of potential revenue for NFES. At the present time, the demand greatly exceeds the supply in the wind power equipment components market.

As stated in Nf Energy's July 8, 2009 press release:

'We have seen tremendous customer demand for wind equipment since last year,' commented Mr. Li Gang, Chairman and CEO of NF Energy. 'NF Energy will speed up its development of wind power capacity to capitalize on this fast growing market. We have started construction of a new energy base in Tieling City of Liaoning province in Q1 of 2009, which will dramatically expand the Company's manufacturing capacity for wind power equipment to meet growing domestic demand.' Total wind power generating capacity in China is currently 12GW but the country, which is growing at the fastest rate among all the economies in the world, wants to raise it to 20GW by 2010. China expects to have an annual wind power growth rate of 20 percent. In May 2009, China increased its goal for wind power generation capacity by 2020 to 100GW, from the original 30GW that the Chinese government set in 2007. China is currently the fourth largest producer of wind energy in the world, after the United States, Germany and Spain and is aiming to have 40 percent of all its energy originate from renewable energy sources by 2050. According to the Global Wind Energy Council, China will become the biggest growth market for wind power generating capacity this year, ahead of the United States.'

In a nutshell, Nf Energy participates in an industry with favorable growth trends due to traditional demand/supply factors and government regulation. China's energy consumption is currently growing at 5 % a year, with the consumption of electricity slated to grow even more rapidly well into the future. Even if regulation is put aside, Nf Energy's products and services can give its client companies a competitive advantage while at the same time increase their profit margins. The Company's participation in the wind and green projects should give it an avenue of margin-friendly revenues. Additionally, the Company's long standing position in the valve technology market and its involvement with municipal projects that require continual oversight provides it with a reliable revenue stream.

NFES shares have risen sharply from $0.20 to its current levels. As many of our readers may know by now, the GeoTeam® prefers to construct valuation scenarios on a fully taxed basis. Doing so yields potential valuation scenarios that may still offer upside to NFES shares.

However, we feel that the dynamics of China's industrial efficiency goals along with Nf Energy's reputation and projected manufacturing capacity provide the company with an excellent chance to exceed street expectations and attain P/E multiples higher than we portrayed in our potential valuation scenarios. In fact, since May 28, 2009, when Nf Energy announced a 2009 revenue backlog figure of $21.5 million, the Company has already approximately booked an additional $11.0 million in contracts. At current margins this would equate to a pre-tax earnings per share figure of $0.21 ($0.13 fully taxed).

Harbinger analyst estimates:

  • Revenue estimate: $22.1 million,
  • Earnings per share: $0.127 (~ $0.08 fully taxed).

Current Catalyst Financial Resources estimates:

  • Revenue estimate: $27.6 million,
  • Earnings per share: $0.16 (~ $0.10 fully taxed).

Note: Nf Energy plans on affecting a reverse split in the near future.

Nf Energy liquidity needs:

We anticipate we will need additional working capital in 2009 and in the future to fund our company’s new business plans to help the company to establish a manufacturing base for new energy equipment, to develop comprehensive energy saving infrastructure projects for municipalities, and to maintain our lead position in flow control equipment manufacturing. We may decide to pursue additional investments or debt financing to obtain additional cash resources to fund our company’s new business and other future developments.

Nf Energy is also being placed on the GeoBargain on the Radar list.

The GeoTeam® will delve into the NFES story more diligently in the coming weeks.


Disclusure: Long NFES