Harbin Electric Reports Record Third Quarter and 2008 Year to Date Results


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Total revenues were $39.66 million, up 114% from $18.50 million in the third quarter of 2007

Operating profit was $10.52 million, up 49% from $7.07 million in the third quarter of 2007

Net income was $7.75 million, 63% higher than $4.76 million in the third quarter of 2007

Diluted earnings per share were $0.34, compared to $0.26 for the corresponding quarter of 2007

HARBIN, China, November 10, 2008: Harbin Electric, Inc., (or the "Company", Nasdaq: HRBN), a leading developer and manufacturer of a wide range of electric motors, reported its financial results for the third quarter and year to date of 2008.

For the three months ended September 30, 2008, the Company generated net revenues of $39.66 million, more than doubled the total revenues of $18.50 million for the three months ended September 30, 2007. In July, the Company acquired Weihai Hengda Electric Motor (Group) Co. Ltd, ("Hengda"), an industrial rotary motor business. This is the first quarter that the Company's financial results included the newly acquired company. The revenue increase reflects approximately $14.81 million sales from this new business. Even excluding the acquisition, sales grew 34% year-over-year. Sales of automobile specialty micro-motors increased 38% from 2007. The tower-type oil pump was also a major contributor to the revenue growth due to an incremental 64 units of tower-type oil pump being delivered during the third quarter of 2008 while none during the corresponding quarter of last year. Product sales to markets outside China were 15.3% and 11.9% of total sales for the third quarter 2008 and 2007, respectively.

The following table shows the approximate percentage revenue contribution by each major product line and corresponding average gross profit margin for the three months ended September 30, 2008 and 2007. The decline of the overall gross profit margin year-over-year was primarily due to changes in product mix, particularly attributable to the lower gross margin of the rotary motor business and, to a lesser degree, the specialty micro-motor business.

With operating profit of $10.5 million, the Company achieved a 49% year-over-year increase for the quarter ended September 30, 2008 compared to $7.06 million for the three months ended September 30, 2007. The significant growth in operating profit was primarily attributable to higher sales from the automobile micro-motors business and tower-type oil pumps, as well as the new rotary motor business acquired in July 2008. Operating margin for the third quarter was 27%, compared to 38% from the same corresponding period of last year. The decline in operating margin was mainly due to lower margin business for the new industrial rotary motor business.

Selling, general and administrative expense ("SG&A") was $3.12 million for the quarter, compared to $1.70 million in the same quarter of 2007. The increase in SG&A was primarily a result of business expansion, increased sales activities, higher stock based compensation expense and other administration expenses, as well as expenses associated with the new business acquired in July 2008. Shipping and handling costs increased to $529,030 for the quarter ended September 30, 2008, from $178,243 for the same quarter in 2007 due to increased sales activities. Stock based compensation expense totaled $456,223 and $212,807 for the quarters ended September 30, 2008 and 2007, respectively, a 114% increase. However, as a percentage of total sales, the Company's total R&D and SG&A expenses declined to 7.9% in this quarter from 9.2% in the same quarter last year.

Net income for the quarter was $7.75 million, compared to $4.76 million for the 2007 third quarter, a 63% increase. Earnings per diluted share increased to $0.34 from $0.26 in the 2007 third quarter, with an additional 4.5 million weighted average number of shares, which resulted in some earnings dilution.

For the nine months ended September 30, 2008, the Company generated total revenues of $86.08 million compared to $46.12 million for the nine months ended September 30, 2007, an 87% increase, including $14.81 million sales from Hengda acquired in July 2008. Revenue from automobile specialty micro-motors business grew a remarkable 352%. The tower-type oil pump also contributed to revenue growth. The Company delivered a total of 183 units during the 2008 nine-month period, compared with none in 2007. Sales to markets outside China amounted to 15.1% of total revenues in the nine months ended September 30, 2008, compared with 11.5% in the nine months ended September 30, 2007.

The following table shows the approximate percentage revenue contribution by each major product line and its corresponding average gross profit margin for the 2008 and 2007 nine-month periods. The decline of the overall gross profit margin year-over-year was primarily due to changes in product mix.

Operating profit was $27.38 million in the nine months ended September 30, 2008, compared with $17.73 million in the nine-months ended September 30, 2007, representing 54% growth, attributable primarily to the automobile micro-motors business, tower-type oil pumps, and the rotary motor business acquired in July 2008. Operating margin declined to 32% in the nine-month period of 2008 from 38% in the same period of the prior year, mainly due to the addition of the lower margin rotary motor business.

SG&A was $8.19 million for the nine-months ended September 30, 2008, compared to $4.66 million in the same period of 2007. The year-over-year increase in SG&A was primarily a result of business expansion, increased sales activities, higher stock based compensation expense and other administration expenses, as well as expenses associated with the new rotary motor business. Shipping and handling costs more than doubled to $962,917 for the nine-months ended September 30, 2008 from $402,990 for the same period in 2007, due to increased sales activities. Stock based compensation totaled $1.37 million and $0.71 million for the nine-months ended September 30, 2008 and 2007, respectively, a 93% increase. However, as a percentage of total sales, the Company's total SG&A expenses decreased to 9.5% in this nine-month period comparing to 10.1% in the same period last year.

Net income for the nine-month period in 2008 was $19.34 million compared to $12.72 million for the nine-month period in 2007, representing a year-over-year increase of 52%. Earnings per diluted share increased to $0.92 in the nine months ended September 30, 2008 from $0.70 in the nine-months ended September 30, 2007, with an additional 2.8 million weighted average number of shares, which resulted in some earnings dilution.

"I am very pleased that we delivered another solid quarter," said Mr. Tianfu Yang, Harbin Electric's Chairman and Chief Executive Officer. "Against a very challenging global economic environment, our continued growth in revenues and earnings reflects the strengths of our core businesses and our ability to successfully execute our business strategy."

"The integration of Weihai Hengda Electric Motors is going smoothly and in the first quarter since we acquired this business it contributed approximately $15 million in sales, in line with our expectations. We expect gross margin to improve somewhat given that raw material costs have been moderating recently. While we are currently focusing on production and working hard to achieve our growth target, longer term we will introduce new technology, bring product quality to international standards, and gradually evolve towards specialty and high efficient motors able to compete in international markets. We are in discussions with a Chinese electric motor research institute to form a technology alliance to achieve this product transformation."

Looking forward, Mr. Yang said, "We believe that a weaker global economy creates opportunities for us, particularly for our automobile specialty micro-motor business. We expect that auto makers and parts suppliers experiencing a significant slow down in demand will want to partner with suppliers that can provide high-quality value-added products at lower cost. We are confident that our technologically advanced, high-quality, lower-cost micro-motors strongly position us to gain market share as current discussions with multiple parties on multiple projects lead us to believe. Our Shanghai facility has moved into full scale equipment testing and we remain on target to start trial production in December and meet our commitment to our major North America customer."

Mr. Yang continued, "The Chinese government has recently announced a series of measures aimed at driving domestic demand and consumption, including further development of infrastructure nationwide and accelerated development of the rural areas, in order to maintain solid GDP growth. We expect our industrial rotary motor business to benefit as some of our motors are used in agricultural machinery and tools. The government has also announced plans to invest heavily over the next few years in the mass transit infrastructure. We are the only domestic manufacturer of the linear motor driving-system officially approved by the government. We expect to begin production of this system during the second or third quarter of 2009, with an initial target of 80 sets supplying 10 groups of trains in 2009."

"Finally, our new product for the oil industry, the tower-type oil pump which delivers significant energy savings has already gained market acceptance. Because of its undeniable advantages over existing technology, we see great sales potential with the possibility of doubling sales volumes next year subject to order confirmations."

In conclusion, Mr. Yang said, "I have full confidence that our company is well positioned to face the challenging global economic conditions and transform these challenges into opportunities. We remain committed to the 2010 growth target that we previously established for the Company"

Third Quarter 2008 Earnings Call and Webcast

The Company will host a conference call to discuss the third quarter financial results at 8:30 a.m. ET on Monday, November 10, 2008. Tianfu Yang, Chairman and Chief Executive Officer, Zedong Xu, Chief Financial Officer, and Christy Shue, Executive Vice President will be on the call.

To participate in the conference call, please dial any of the following numbers:

  USA: 1-800-603-1779
  International: +1-706-643-7429
  North China: 10-800-713-0924
  South China: 10-800-130-0748
  The conference ID for the call is 71191627.

A replay of the call will be available beginning at 9:30 a.m. ET on November 10, 2008 and will remain available through midnight on November 17, 2008.

  To access the replay, please dial any of the following numbers:

  USA: 1-800-642-1687
  International: +1-706-645-9291
  Passcode is 71191627.

This conference call will be broadcast live over the Internet. To listen to the live webcast, go to http://www.harbinelectric.com/ and click on "Harbin Electric Q3 2008 Earnings Conference Call". The replay of the webcast will be available for 30 days and will be archived on the Investor Kits page of the website after 30 days.

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