Harbin Electric Announces First Quarter 2009 Results

HARBIN, China, May 8, 2009: Harbin Electric, Inc. (or the "Company", Nasdaq: HRBN), a leading Chinese developer and manufacturer of a wide array of electric motors, today announced its financial results for the first quarter of 2009.

"Despite the weakest economic environment we have seen in decades, we continued to execute well and maintain bottom line growth," said Tianfu Yang, Chairman and Chief Executive Officer of Harbin Electric. "During the first quarter, we focused on cost control and margin improvement. We further strengthened our balance sheet by increasing our cash position to $63.57 million from $48.41 million at December 31, 2008 with intense focus on reducing accounts receivables and inventories. I am very pleased with our successful execution in areas under our control. We believe we are well positioned to take advantage of a turnaround in the Chinese economy under the government stimulus package."

Revenues increased 36.8% to $30.72 million from $22.46 million in 2008. Strong sales growth derived primarily from the industrial rotary motor business acquired in July 2008. Revenues for linear motor and its integrated application systems steadily increased 4.8% from the prior year driven by higher sales of tower-type oil pump and other linear motors. The Company delivered 60 units of the tower-type oil pump in the first quarter of 2009, compared to 39 units in the same period of 2008. Excluding acquisitions, organic revenues for the quarter were $19.87 million, reflecting weaker sales primarily in specialty micro-motors.

International sales totaled $3.26 million or 10.6% of total sales for the quarter, down 14.3% compared with international sales of $3.80 million in the first quarter of 2008, reflecting weaker export sales of specialty micro-motors.

The following table shows the revenue contribution by percentage for each major product line and the corresponding average gross profit margin for the first quarters of 2009 and 2008, respectively. The decline in overall gross profit margin was primarily due to changes in product mix and lower gross margin in the rotary motor business.

Operating profit of $8.03 million in the first quarter of 2009 decreased by 7.1% from $8.64 million in the first quarter of 2008. Operating margin declined to 26.1% from 38.5% for the same quarter of 2008, mainly due to lower gross margin in the industrial rotary motor business and higher research and development expenses as well as higher selling, general and administrative expenses ("SG&A"). The year-over-year increase in SG&A was primarily associated with the newly acquired company, the start-up of the Shanghai facility, higher shipping and handling costs, and higher depreciation expenses. As a percentage of total sales, the Company's total SG&A expenses declined to 8.2% from 9.0% in the same quarter last year.

Net income for the quarter totaled $8.65 million, compared to $5.35 million for the same quarter of last year, a 61.7% increase year-over-year. Net income for the quarter benefited from $2.57 million change in fair value of warrants due to the adoption of EITF 07-5 at January 1, 2009. Additionally, higher other income and lower interest expense including lower amortization expense of debt discount contributed to higher net income. Excluding the adjustment due to the adoption of the new accounting pronouncement, net income totaled $6.08 million for the quarter, a 13.6% increase over the prior year.

Earnings per diluted share increased 44.4% to $0.39 from $0.27 in the first quarter of 2008, with an additional 2.2 million weighted average number of shares. Excluding the accounting adjustment, earnings per share was flat.

Compared to the fourth quarter of 2008, total revenues declined 11.6% due to seasonality with a long holiday in January coupled with continued weakness in the global economy and, particularly, worsening conditions in the U.S. auto industry. However, net income excluding the accounting adjustment of $2.57 million held stable at $6.08 million versus $6.04 million in the fourth quarter of 2008, reflecting improved margins resulting from stringent cost control.

The following table shows revenue contribution by percentage for each major product line and the corresponding average gross profit margin in the first quarter of 2009 and the fourth quarter of 2008.

Mr. Yang commented, "With the first quarter behind us, we see strong signs of economic improvement in China, largely driven by the Chinese government stimulus package. Our customers and markets are primarily in China and we expect to benefit from this. We have started experiencing strong demand growth in our industrial rotary motor business as a result of the government stimulus package that focuses on infrastructure and agriculture development. We expect sales of industrial rotary motors in the next quarter to surpass that in the first quarter."

"We expect our legacy linear motors business to remain stable, with upside potential in a few areas. First, we would like to reaffirm our expectation to double the volume of tower-type oil pumps over the prior year. Second, we expect meaningful sales contribution in the second half of the year from linear motors for the mass transit systems. We have just delivered a few units to our customer and expect the testing of the first domestically made linear motor driven subway train to begin soon. Additionally, we continue to focus on developing new products and new markets and expect new products in our pipeline to reach market in the coming months."

Mr. Yang continued, "As for our specialty micro-motor business, we experienced a decrease in demand for our products during the first quarter of 2009 and a delay in the start-up of the Shanghai facility, due to the severe global economic downturn and the downturn in the U.S. auto industry. However, I strongly believe that these weak market conditions are only temporary. We have already started to see improvement in auto sales in China, from which we believe our business will benefit in the longer term. We continue to explore other markets outside the U.S. and expect to gain new markets and new customers in the future."

Mr. Yang concluded, "With strong signs that the Chinese economy is improving across the board, we believe that our Company is positioned very competitively to benefit from China's continued economic growth."

Conference Call Details

The Company will host a conference call to discuss the first quarter 2009 financial results at 8:30 a.m. EDT on Friday, May 8th, 2009. Tianfu Yang, Chairman and Chief Executive Officer, Zedong Xu, Chief Financial Officer, and Christy Shue, Executive Vice President will be on the call. The Company plans to release its first quarter 2009 financial results before the conference 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 97298235

A replay of the call will be available beginning at 9:30 a.m. EDT on May 8th, 2009 and will remain available through midnight on May 15th, 2009.

  To access the replay, please dial any of the following numbers:
  USA:            1-800-642-1687
  International:  +1-706-645-9291

  Passcode is 97298235.

This conference call will be broadcast live over the Internet. To listen to the live webcast, go to HARBIN and click on 'Harbin Electric Q1 2009 Financial Results 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.