The Inflection Point's  Instablog

Over the next 18 months, China will spend a bit more than 3.77 billion Yuan on infrastructure development, conservation efforts, and healthcare and education services.  China’s stimulus package stipulated that all the funds would be allocated by the end of 2010.  After spending 100 billion Yuan in Q4 ’08 and 130 billion Yuan in Q1 ’09, there are only 7 quarters left before the deadline to spend 94.25% of the stimulus package.  Whether or not the Chinese government will adhere to the plan’s deadline remains to be seen, however, it is clear spending is going to drastically ramp up over the next few quarters.

From the spending we’ve seen thus far, most of the funds have been flowing toward infrastructure related projects or industries, energy conservation, health and education and economic restructuring.  How can we monetize the recent and future spending efforts by the Chinese government?  Let’s take a look at a few Chinese companies that may benefit from the stimulus package.

SmartHeat (HEAT):  SmartHeat manufactures plate heat exchangers(PHEs), thermometer testing devices and heat usage calculators in China.  HEAT’s main product, PHEs, improve energy efficiency in heat systems by 20-36% over standard systems.  More importantly, the product reduces coal consumption and CO² by 63% when used in direct heating networks connected to cogeneration power plants, which are used to provide hot water and power for industrial sites and residential areas.

Over the past year, HEAT’s revenue and order growth have been explosive.  The company reported revenue of $6.21 million in Q109, which was a 102% year over year increase.  Additionally, HEAT received 5x more customer orders in Q109 than in Q108.  Analysts estimate the company’s revenues will balloon to $79 million in 2009, which represents a 147% increase over its 2008 revenue.  With high revenue growth and $31 billion of China’s stimulus plan allocated to clean energy, HEAT’s risk/reward profile is significantly tilted toward the former.

Jinpan International (JST): Jinpan designs and manufactures industrial electrical equipment and wind power application products.  The company’s main revenue generator is medium-voltage cast resin transformers used in large scale infrastructure projects.  According to reports, as much as 63% of China’s stimulus package will be used on infrastructure projects, including disaster relief efforts in Sichuan.  All of these projects will require some level of electrical build-out.  Additionally, Jinpan just expanded its manufacturing capacity by 50% to position itself for growth in key markets. 

Jinpan will also benefit from the Government’s increased spending on clean energy.  Jinpan’s wind power application segment currently generates around 20% of annual revenue.  The only negative aspect of JST’s wind power segment is that it remains concentrated with only one customer accounting for all of its revenue.

Guangshen Railway (GSH):  Things could really not have gone worse for Guangshen Railway in 2008.  Between a record fuel costs, a paralyzing snow storm and a cliff-like drop off in shipping demand, the company navigated a near perfect storm.  Although the chips were stacked against them, GSH managed to grow their revenue 11.23% year over year.  In 2009, GSH will look to increase its growth as the outlook appears to be much improved.  As we all know, and as this article has stated numerous times, China’s stimulus package is all about infrastructure.  With the majority of the stimulus plan’s capital flowing into infrastructure and other construction projects, someone is going to have to bear the responsibility to transport all the raw materials required for a build-out of this scale. 

When the company reported FY2008 and Q109 earnings on April, 29^th, GSH’s management seemed to hold many of the same sentiments expressed above.  The Company’s Chairman, He Yuhua, noted the promise the stimulus package and other projects such as the Pearl River Delta reform and other railroad projects.  With these projects, Mr. He noted, “the scope and transport capacity of railway networks will be constantly enlarged and the quality of railway transport will be greatly improved.”  However, he also urged some caution due to concerns about the global economy.  Due to the timing of those statements some of those concerns may be alleviated by the recent rebound in the global markets and consumer sentiment. 

As China spends nearly $500 billion over the next 18 months, government contracts will provide massive boosts to the winner’s balance sheets.  Companies in infrastructure related and clean energy sectors stand to receive the largest piece of the pie. 

Written by Andrew Florio, Analyst at JBH Capital

Disclosure: Long HEAT