Jinpan International: Increasing Transformer Demand Should Drive Growth

With growth in China infrastructure driving demand for electrical transformers, and quality certifications driving expansion in US markets, Singular Research is initiating coverage on Jinpan International (JST) ($30.25) with a BUY rating. Key excerpts follow:

Investment Thesis 

Installed electricity capacity in China grew 18.8% in 2007 after growing 25% in 2006. The government has earmarked $65 billion for investment in the medium voltage network system, which is the market served by JST.

• Strong demand for cast resin transformers in China is driving revenues. The Ministry of Machinery requires that any medium voltage transformer for a building with public access must be a cast resin transformer.
• Cast resin transformers have significantly lower maintenance costs than oil-based transformers.
• New line reactor and switchgear products leverage the company’s technology and expand the revenue base.
• JST is expanding by exporting transformers and line reactors to the US for wind and solar projects along with standard electrical grid demands.

Risks 

• Competition in China is from state owned businesses that have higher operating costs. This may change if China privatizes these businesses.
• GDP growth in China and growth in electricity demand may soften.
• The company is exposed to changes in raw material prices, such as steel and copper, which it may not be able to pass on to its customers.

Jinpan International

The company designs and manufactures cast resin transformers, electrical grid substations, and line reactors used in the distribution of electricity in the electrical grid system.

Business Overview

Jinpan International designs and manufacturers cast resin transformers that are integral to an electrical grid distribution system. The company’s product line also includes substations, switchgear and line reactors, all of which are components of the electrical grid system. Transformers contributed 87% of revenues in 2007, and other products contributed 13%.

Transformers are required to step-up and step-down voltages in transmitting electrical energy. Large transformers are used at electricity generating facilities to increase the voltage and decrease current for distribution. Step-down transformers are used throughout the electrical grid system to lower voltage from long distance transmission lines for local electricity use. In the process of transforming high voltage to low voltage, energy is lost which produces heat, and requires step-down transformers to integrate a cooling system to remain operational. The most widely used step-down transformers circulate oil through its coils to disperse heat. Cast resin transformers made by JST use an epoxy coating on the coils in the transformer that can withstand very high temperatures, and release the heat into the air. Jinpan focuses on the medium size step-down transformer used in the middle and towards the periphery or the electrical grid system. These transformers are typically located at factories, buildings, apartments, stadiums and other structures.

The market for transformers is driven by growth of the electrical grid system, growth in infrastructure building which requires additional electricity distribution, and replacement of old transformers. The estimated medium voltage transformer market in China was $600 million in 2007 and growing 17% annually. According to the China Market Review, the 11th “5-Year Plan” for economic development, issued in 2007, calls for $110 billion investment in the expansion and reconstruction of the Chinese electrical power network, with $65 billion earmarked for investing in the medium voltage network system. This is the key market addressed by JST products.

Additionally, the Chinese have required the use of cast resin transformers for new installations at sites with public access. The company also exports to the US, where the total transformer market is approximately $1 billion while the cast resin medium voltage market is approximately $150 million.

Comments

[Lawrence J....:]

In an article about projected growth in a company, is a chart of the company's past and projected sales and income too much to expect?

2008 Jul 15 08:12 AM

[X-15:]

remarkl ; Jinpan information below. Trades on the American Exchange 8 million shares outstanding. Jinpan website is also below.



eta 4.30
Dividend & Yield 0.24 (0.85%)
Earnings/Share 2.16
Forward P/E 10.70
Market Cap. 232.83 Mil
P/E 13.00
Return on Equity 24.75
Total Shares Out. 8.19 Mil


www.jstusa.net/
Phone: [phone] Fax: [phone]

2008 Jul 16 01:34 AM