Jinpan Int'l: A Small-Cap Chinese Infrastructure Play

Jinpan International designs, manufactures, and distributes cast resin transformers for voltage distribution equipment in China and other various countries around the world. Jinpan's cast resin transformers allow high voltage transmissions of electricity to be distributed to various locations at lower, more usable voltage levels.

This company is growing tremendously, but no one follows this stock. Take a look at some of the numbers first and then I will discuss a few other points of interest:

Total sales for the fourth quarter were USD $41.9 million, a 71.8% increase over the same period of the previous year. Gross profit in the fourth quarter was $15.7 million, a 131% increase over the same period in the previous year. Fourth quarter gross margin increased 960 basis points to 37.4% compared to 27.8% in the year ago period. Net income for the fourth quarter increased 120% to $6.7 million, or $0.83 per diluted share, versus $2.7 million, or $0.40 per diluted share, in the fourth quarter of 2006. For the full year 2007 net income increased 119.5% to $16.5 million, or $2.04 per diluted share, compared to $7.5 million, or $1.12 per diluted share in the prior year period.

Additionally, the Company's cash position at the end of 2007 increased 86% sequentially to $17.1 million.

For the full 2008 fiscal year, the Company currently anticipates revenues of approximately $155 million, which is a 30% increase over 2007 sales of $119.6 million. The Company anticipates net income of approximately $21.4 million, or approximately $2.64 per diluted share, which is a 30% increase compared to 2007 net income of $16.5 million, or $2.04 per diluted share.

Based on the $2.64 earnings estimate and the current stock price of around $30.5, Jinpan trades at a forward PE of 11.5. When looking at the PEG ratio (PE/growth rate) Jinpan trades at 0.38, which is extremely low, when 1.0 is considered fairly valued. If Jinpan were to trade at a 1.0 PEG ratio the stock would trade at almost $80 a share.

They have a new facility (in Wuhan) that is expected to be operational in the middle of the 2008 second quarter which, together with the expanded capacity of another facility (Hainan), will increase overall production capacity. It is expected that the Wuhan facility will increase the Company's annual capacity by 50%. This should allow for additional earnings expansion in the future, well in excess of the 30% revenue increase projected for 2008.

A few other items of interest include:

• Jinpan is involved in wind power. The Company said, "our reactor business for wind power is gaining favorable momentum as overall customer interest continues to increase" in the 2007 earnings press release. As wind power becomes more publicized, Jinpan could be picked up as a wind power play.
• Many people know about the snowstorms earlier this year in China. This caused significant damage to the power grid throughout China. According to this China Daily article, it looks like there should be plenty of business coming Jinpan's way due to the storms.
• They were also recently UL listed in 2007. A UL listing is considered by the industry to be necessary for entry into the North American market and will augment the company's capability to address this market. Basically, this means the whole North American market is now open to Jinpan. International sales increased 161% to $6.0 million in 2007 and I expect they will increase much more in 2008.
• The company has 8 million shares outstanding.
• The stock recently broke a one year high which had been significant resistance several times before.
• First Wilshire Securities Management, Inc. recently acquired a 6.8% stake in Jinpan.

Finally, here is a quote from the CEO:

We believe that 2008 will be another solid year for Jinpan as we continue to meet the growing needs of our customers, which include electric utilities, commercial developers and large contractors. We are focused on leveraging our market opportunities in China, further product customization at competitive prices and continued expansion of sales internationally. Global demand for efficient, reliable, customized power generation equipment continues to be strong and Jinpan is emerging as a major player in this high growth area. We are optimistic about our opportunities and believe Jinpan is well positioned for continued growth in the years to come.

Based on the above reasons, I think Jinpan is an under-followed stock with tremendous potential.

Disclosure: Author is long JST.

Comments

[Urbane Gori...:]

I'm curious how much of their business is tied up in China and how much is outside of China. What happens when the Olympic building fever subsides. In fact, I'm curious about China's growth after the Olympics in general. However, on the positive side, China is busy worldwide partnering up with developing nations, so if this company is hooked up to these opportunities, then even if China slows it's building boom, they could push their business as China ties up with other countries.

Thx jegan ;-)

2008 Apr 19 05:11 PM

[chinesepetti:]

I understand most guys here like to make some money out of China; so first you must know;
1. the biggest problem in China at the moment is it's grwoth is too fast as it pushes up the inflation.
2. That is why the PBOC has hiked the rates six times to slow the economy.
3. The conclusion is the slower growth in China either before or after Olympic is exactly China needs and will be great for Chinese long term sustainable growing economy.

At last, remember during the USA reccesion 2000 and 2003; China's economy still grew more than 10 % back then. So if you know nothing about history then I would say " go away and stop playing the market and leave your money under your bed".

2008 Apr 19 09:03 PM

[J.D:]

Chinesepetti, thanks for staying on topic.

What should China do if inflation accelerates as the economy slows? I'm not sure price controls are the answer as it looks likely they'll create new problems without solving the old ones.

2008 Apr 20 07:38 AM

[chinesepetti:]

Sure Price control will not kill the inflation; however for a country like China with 1.2 billion people it is extremely important to use price control as a temporary measure in order to stablise the situation so other policies (for example revalue the currency and give tax benefit for R&D investment for improving productivity) can follow. This is very like what The Fed Ben did with a drastic rate reduction and flooding the market with liquidity so the credit situation can be stablised.

If you guys read Ken Fisher; you will understand the most effective measure to overcome inflation is investing in advanced technology to lift productivity, it will take time and lots of capital. China might be lucky in that regard because the internet which makes techonology transfer much easier and cheaper around the world.

At last we I agree to talk about Petti if you guys back off talking down about China; I welcome any constructive criticism on China though! I love to help you guys to understan what is really going on in China so we could make some serious money out of this great historical opportunity.

2008 Apr 20 07:54 AM

[chinesepetti:]

I agree not to talk about petti.....

2008 Apr 20 07:55 AM

[retepog:]

The olympic event will be in Beijing and only contributes small part of the boom in China as a whole. It is booming all over china with growth of 10 % for so many years!! After the olympic event let's say it goes down. You think it will drag down the whole economy in China? Be realistic, Beijing only contributes probably less than 2-3% of the economy in China as a whole. any comment from anybody? I say buy now what is cheap in China!!!

2008 Apr 20 10:04 AM

[wpa30:]

Interesting story on Jinpan. any clues on how to trade it would be appreciated.

2008 Apr 20 10:19 AM

[Rick S.:]

It's traded on AMEX under the symbol JST. Buy it just like you would any American stock. Current P/E is ~15.

More generally: A number of Chinese companies have stock sold on american exchanges as ADRs. JPMorgan has a website--free access--which lists all Chinese companies with ADRs sold in the US.

2008 Apr 20 11:10 AM

[Urbane Gori...:]

Mr. chinesepetti..

I don't recall anyone "talking down" about China. In fact, lets face it, why would anyone be reading this article if they were not interested in China.

As to your comment about people reading this article wanting to make money off of China's growth.... Well is is 'Alpha' isn't it. That is why we 'are' reading the article.

I do think everyone on Alpha... (Heck, everyone everywhere..) knows that China is a growth story. And, I don't think anyone expects China's growth to stop. And to reply to some of the comments above; Yes, I do know that there is growth outside of Bejing..and growth will continue after the Olympics.

It is good to reflect on history, but history is not a guarantee.

I did check Morningstar yesterday (and it is very easy to look up ADRs on that site.. Just type in the name of the company in the search box.. ) and I did read up on it.. What I could. There is little information on the company there... It did profile it and presented the same info as above, but had no earnings growth or forecasts.

So.. As far as I can see, it produces transformers... Presumably growth would still occur as there is a big infra-structure push in China, what with the "Three Gorges Dam" and a growing middle class.. etc.. But I would not invest yet as I can't see what will happen in the near future. I feel it is prudent to wait till after the Olympics based on the question that I posed in my prior post. Furthermore, the government will be restricting manufacturing before and during the Olympics in an effort to reduce smog... (there was a prior post on Alpha regarding this matter.) Even if you feel this product has a great future, don't you think it might be prudent to buy "if" it drops during the Olympics, rather than now?? I do...

Thx jegan ;-)

2008 Apr 20 02:00 PM

[Bobwins:]

I haven't purchased JST but have a comment about China's growth. The exceptional growth of China is similar to the US growth in the 50's, 60's and 70's. Infrastructure buildout is a long term, continuous process that doesn't stop for short term economic events. The government in China is in control of planning the power grid, dams, freeways, utilities, sewers and water supply. They cannot stop and start these projects. If for nothing more than for employment and riot avoidance, the government will continue the planning, construction and implementation of massive infrastructure projects for their billion plus population. I am buying a basket of Chinese stocks aimed at those who provide services and products to the domestic Chinese economy, not the cheap labor Walmart products. The internal growth of China and it's internal consumption are the prize here.

JLT looks like it fits my target parameters but it isn't particularly cheap. Thanks for the good article. I will do some DD on JLT. It is certainly got growth in the infrastructure buildout categories. Bobwins

2008 Apr 20 02:30 PM

[Lynn:]

JEgans, another good web site is FT.com. They have info on foreign companies -- even small ones -- not found on Morningstar.

2008 Apr 20 06:08 PM

[stocktries:]

Thanks for the good article. Been a longer term holder on this one. Might wish to check out another, CSR. A great infrastructure China play and CEO just bought another $230K to go with his recent purchases of over $2M. Both companies great ones to own JST and CSR

2008 Apr 20 09:39 PM

[Mr. G:]

China has 4 times the population of the US and its GDP is only one tenth of the US. The growth potential is obvious.

2008 Apr 20 10:22 PM

[chinesepetti:]

GDP is USA is about 1% to negative 1% and the PE of blue chip DOW is still about 18; China GDP is more than 10% and the average PE of Shanghai blue chip composite(after 3 month decline) is about 19. Any school kids can tell me where the Value is!!! And do not forget this fast growth will be there for at least next 5 years.

2008 Apr 21 12:00 AM

[X-15:]

Good story-- i was goin to pull the trigger on JST at 24 then it spiked...i'm interested in eco-build out like water filter
& water treatment plant builder SMMKF and AAEHF.

2008 Apr 21 02:19 AM

[ASN:]

JST is in an extremely interesting space and appears, on the face of it, to be a well run company. Electricity demand in China and across Asia has grown steadily over the last 20 yrs and will continue to do so in the future. In particular, as state owned utilities across the region are pushed to improve their distribution networks and technical efficiencies, companies like JST will be presented with a growing market. So, my view is that the macro/industry growth story is good. There are two things holding me back, though. First, I don't have a good feel for the competitive pressures, other than the fact that JST has increased sales 47% YOY last qtr. Second, it's free cash flow generation has been spotty at best and was $8 MM in the red in 2007 as its Accts Recvble spiked 4-fold from the previous year. For any business to generate operating cash flow that is signficantly lower than net income is not a good sign. Any views? Thx.

2008 Aug 05 10:22 AM