Hanwei announces financial results for the second quarter and first half of 2009



    TSX: HE

    VANCOUVER, Aug. 14 /CNW/ - Hanwei Energy Services Corp. ("Hanwei" or the
"Company") today announced its financial results for the three and six months
ended June 30, 2009. All currency amounts referred to in this news release are
in Canadian dollars unless stated otherwise.


    
    Summary of Financial Highlights:

    -------------------------------------------------------------------------
    In thousands of Canadian      For the three months   For the six months
     dollars except per share              ended                 ended
     data and number of shares
    -------------------------------------------------------------------------
                                    June 30,   June 30,   June 30,   June 30,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Sales                           $12,910    $18,858    $15,495    $24,799
    -------------------------------------------------------------------------
    Gross profit                      5,177      7,983      5,786      9,903
    -------------------------------------------------------------------------
    Operating income (loss)             811      4,131     (2,372)     3,483
    -------------------------------------------------------------------------
    Net Income (loss)                   158      2,911     (3,324)     2,198
    -------------------------------------------------------------------------
    Income per share - basic and
     fully diluted                     0.00       0.05      (0.05)      0.04
    -------------------------------------------------------------------------
    

    Revenues were $12.9 million for the three months ended June 30, 2009, a
decrease of $5.9 million or 32 percent compared to the same period in 2008.
Revenues were $15.5 million for the six months ended June 30, 2009, a decrease
of $9 million or 38 percent compared to the same period in 2008. The decreases
in the three and six month periods were caused primarily by reduced revenues
from the wind power business and offset by increased sales in the pipe
business. Net income for the three months ended June 30, 2009 was $0.2 million
compared to a net income of $2.9 million for the same period in 2008. Net loss
was $3.3 million for the six months ended June 30, 2009 compared to net income
of $2.2 million for the same period in 2008. The decrease in net income for
the three and six month periods were primarily driven by the timing of wind
power deliveries.
    The Company had basic and diluted earnings per share of nil for the three
months ended June 30, 2009 versus basic and diluted earnings per share of
$0.05 for same period in 2008. For the six month period, the Company had basic
and diluted loss per share of $0.05 versus basic and diluted earnings per
share of $0.04 for the comparable period in 2008. As at June 30, 2009, the
Company had approximately 60.8 million common shares outstanding, which
excludes the 8,051,746 shares issued under the earn-out provisions for the
acquisition of Daqing Deta Electric Co., Ltd. ("Deta").
    Working capital was $51.8 million as at June 30, 2009, a decrease of $6.3
million from $58.1 million as of December 31, 2008, primarily due to an
increase in accounts payable and short-term loans. Cash totalled $14.4 million
as at June 30, 2009, representing an increase of $2.5 million from December
31, 2008.

    Segmented Results

    FRP Pipe

    The pipe business grew by 15 percent and 18 percent respectively for the
three and six months ended June 30, 2009. Revenues from the pipe business were
$11.2 million for the three months ended June 30, 2009 and $13.2 million for
the six months ended June 30, 2009. The growth of the pipe business was
impacted by the economic downturn as oil fields delayed their projects. While
economic conditions and energy demand continue to improve in China, the
Company continues to anticipate that certain oil field development projects
will be delayed in 2009, which could lead to a decrease in the demand for its
FRP pipe products. As part of its FRP pipe business strategy, Hanwei has been
developing products and customers in other industries and expects to make
further progress in the second-half of 2009, partially offsetting the lower
demand for FRP oil pipe. Hanwei has been successful in diversifying its FRP
pipe business and reducing its reliance on a few large customers, by investing
in product development of larger diameter pipe and new joint methods and
expanding its international sales and marketing team.
    Currently, Hanwei has sufficient FRP pipe capacity at Daqing for 2009;
however, the Company will need to add capacity to have the flexibility to grow
the business in 2010. Hanwei is planning to increase capacity in China by
adding FRP pipe production lines to its new Tianjin facility. The Company
expects that the new lines could be added at a very low capital cost, and
within the 2009 capital expenditure budget since the infrastructure is already
in place.

    Wind Power

    Revenues from the wind power business were $1.4 million for the three
months ended June 30, 2009, a decrease of $6.7 million compared to the same
period in 2008, and $1.9 million for the six months ended June 30, 2009, a
decrease of $10.6 million compared to the same period in 2008. Hanwei
delivered 18 blades for the three months ended June 30, 2009 compared to eight
turbines for the same period in 2008. For the six month period, Hanwei
delivered 24 blades compared to 12 turbines for the same period in 2008. This
decrease of wind power revenues is due to a timing difference in deliveries as
well as the lower dollar value of blades versus turbines. Deliveries for the
wind power business are driven by the customer's wind farm development
schedules and are expected to increase in the second half of 2009 based on the
customer's development schedule.
    Hanwei has secured the supply chain and funding to deliver 118 MW of wind
power equipment to Daqing Ruihao Energy Technology Co., Ltd. ("Ruihao") under
its agreement to supply 1,200 MW of wind power equipment products. The wind
power equipment is to be supplied to three subsidiaries of Ruihao, including
Daqing Longjiang Wind Power Co. Ltd. ("Longjiang"), with the majority of
deliveries expected in the second half of 2009 and in early 2010. Longjiang
owns and operates the wind farm in Du Meng County, Heilongjiang Province,
where it is installing the initial 40 wind turbines supplied and delivered by
Hanwei in fiscal 2008. Ruihao is developing two other wind farms in
Heilongjiang Province that will be supplied under the agreement with Hanwei.
    On April 22, 2009, Hanwei announced that it had signed a non-binding
letter of intent ("LOI") with the Baotou Development and Reform Commission and
with Beijing Kunding Xunlei New Energy Technology Ltd. to provide wind power
turbines and blades for a 400 MW wind farm located approximately 100
kilometers from Baotou, Inner Mongolia Autonomous Region of China. With this
LOI, Hanwei is in the early stages of securing its second major customer in
the wind power business; however, the Company has identified a number of
challenges to move the LOI to formal contracts and start delivering wind power
equipment, including the requirement for Hanwei to deliver 2 MW to 3 MW
turbines, a technology the Company currently does not have.
    On June 24, 2009, Hanwei announced that it had signed a second wind power
LOI in the Inner Mongolia Autonomous Region with the Xilinguole Prefecture
Administration Bureau, Inner Mongolia Autonomous Region of China ("Xilinguole
Bureau") contemplating the supply of wind power turbines and blades for up to
3,000 MW of wind resources located in the area administered by the Xilinguole
Bureau. Under the non-binding LOI, it is contemplated that the parties will
cooperate to develop a 3,000 MW wind resource under certain terms and
conditions including Hanwei establishing, on a best efforts basis, a wind
power subsidiary in Xilinguole to build a manufacturing facility in the region
with an initial capacity of at least 200 turbines and blade sets per annum
before the end of 2010. Under the terms of the agreement, Xilinguole Bureau
will facilitate all government approvals for the wind farm and manufacturing
facility and exclusively promote the use of wind power equipment manufactured
by Hanwei. Hanwei and the Xilinguole Bureau are currently engaged in
discussions to settle the terms for a binding agreement and the timeline for
construction of the wind power facility and delivery of the turbines and blade
sets. Hanwei does not expect the LOI or the binding agreement (if one is
concluded) to have a material impact on its funding needs for 2009 or its
financial performance for 2009. If Hanwei and the Xilinguole Bureau settle the
terms for a binding agreement, Hanwei will need to secure significant working
capital to support the construction of the new facility and the production of
turbines and blade sets.
    In addition to the LOI's, Hanwei is actively marketing its turbines and
blades in China. Hanwei sales and marketing efforts are primarily focused on
orders for delivery in 2010 and beyond. Hanwei's research and development team
are working to improve the current 1.5 MW turbines, focusing on the quality
and cost of the supply chain and improving performance under regional weather
conditions. Hanwei is working on a development plan for 2.0 MW and 2.5 MW
technologies, including the consideration of licensing or joint development
programs. The Company continues to recruit appropriate technical expertise to
strengthen its internal research and development capability.

    FGD

    The FGD business decreased by 72 percent and 66 percent respectively for
the three and six months ended June 30, 2009. Revenues from the FGD business
were $0.3 million and $0.4 million for the three and six months ended June 30,
2009 respectively. The FGD business is dependent on regulations in China that
require coal power companies to install sulphur dioxide scrubbers, but it is
expected that China's big five coal power companies will delay most new coal
plant construction in 2009 due to the reduced demand for new capacity in China
with the economic slow-down. These projects are expected to proceed in the
medium term and in the long-term as demand for new coal fired energy capacity
in China is expected to be very strong.
    The Company also expects orders for FGD products to increase in the
second half of the year as spray header sales are still expected to grow due
to the continuation of retrofitting FGD installations in 2009. The Company's
joint venture Hanwei Ershigs started its operations during the first quarter
of 2009 and is expected to expand its revenues in the third and fourth
quarters of 2009. The retrofit market includes the opportunity for chimney
liners, which are currently being protected from corrosion by cheaper less
reliable materials. In the USA, FRP dominates the market for chimney liners
because it delivers the best value. The Company understands that in over 30
years Ershigs has not had one failure. In China, some of the cheaper materials
used for chimney liners are failing after one or two years. The potential
revenue from retrofitting chimneys is significant and may be more than ten
times the size of the China market for spray headers. The Hanwei Ershigs JV is
working with industry and government agencies to promote the use of FRP,
including a joint study with the technology division of one of China's big
five power companies.
    "While seasonality has historically affected performance in the first and
second quarters, the first half of 2009 has been a particularly challenging
period for Hanwei," said Mr. Fulai Lang, President and CEO of Hanwei. "The
combination of economic conditions, project delays, and lower energy demand
has negatively impacted our operations and pushed a significant amount of
production and deliveries into the second half of the year. We have the
installed capacity to meet our growth targets and expect that the product and
customer diversification initiatives undertaken over the past months will
begin to gain traction in late 2009 and 2010 as the economic recovery
continues to take hold in China."

    Results from Operations

    For the three and six months ended June 30, 2009 and 2008, revenues from
each business segment as a percentage of total revenues were as follows:


    
    Segment revenues as % of Total

                                    Three months ended     Six months ended
                                    ------------------     ----------------
                                           June 30,              June 30,
                                           --------              --------
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Pipe                                87%        52%        85%        45%
    Wind Power Equipment                11%        43%        13%        51%
    FGD                                  2%         5%         2%         4%
    

    Gross Profit

    Gross profit was $5.2 million for the three months ended June 30, 2009
and $5.8 million for the six months ended June 30, 2009, representing a
decrease of 35 percent and 42 percent respectively compared to the same
periods in 2008. The decrease in gross profit was driven by reduced revenues
from the wind power business. Gross profit as a percentage of revenues was 40
percent for the three months ended June 30, 2009 and 37 percent for the six
months ended June 30, 2009 compared to 42 percent and 40 percent for the same
periods in 2008. Gross margin as a percentage of revenues remains relatively
consistent for all three business segments for the three and six months ended
June 30, 2009 compared to the same periods in 2008. This trend is expected to
continue for the remainder of the year.

    Expenses

    Sales and marketing expenses were $1.0 million or 8 percent of revenues
for the three months ended June 30, 2009 compared to $1.4 million or 7 percent
of revenues for the same period in 2008. Sales and marketing expenses were
$2.1 million or 13 percent of revenues for the six months ended June 30, 2009
compared to $2.1 million or 8 percent of revenues for the same period in 2008.
Sales and marketing expenses remained flat for the six month period ended June
30, 2009, compared to last year. However, sales and marketing expenses as a
percentage of revenues increased due to reduced level of revenues. For the 12
months ending December 31, 2009, sales and marketing expenses as a percentage
of revenues are expected to be lower or in line with that of 2008.
    Research and development ("R&D") expenses were $0.3 million or 2 percent
of revenues for the three months ended June 30, 2009 compared to $0.1 million
or 2 percent of revenues for the same period in 2008. Research and development
expenses were $0.5 million or 3 percent of revenues for the six months ended
June 30, 2009 compared to $0.3 million or 1 percent of revenues for the same
period in 2008. The increase in R&D expenses was driven by increased
activities in the pipe business for new large diameter products and the
application of wind power technologies. For the 12 months ending December 31,
2009, the Company will increase its investments in R&D to further expand its
product portfolio for large diameter pipes and to develop new technologies for
wind power turbines.
    General and administrative ("G&A") expenses were $3.0 million or 23
percent of revenues for the three months ended June 30, 2009 compared to $2.3
million or 12 percent of revenues for the same period in 2008. G&A expenses
were $5.6 million or 36 percent of revenues for the three months ended June
30, 2009 compared to $4.1 million or 17 percent of revenues for the same
period in 2008. The increase in G&A expenses compared to 2008 was mainly due
to new offices in Beijing and the growth in the wind power business. For the
twelve months ending December 31, 2009, management expects G&A expenses as a
percentage of revenues to decrease as the Company expands revenues across its
three business segments.

    
    Operating Income (Earnings before Interest, Taxes, and
    Non-Controlling-Interest)
    

    The Company had an operating income of $0.8 million for the three months
ended June 30, 2009, representing a decrease of $3.3 million compared to an
operating income of $4.1 million for the three months ended June 30, 2008. The
Company had an operating loss of $2.4 million for the six months ended June
30, 2009 compared to an operating income of $3.5 million for the six months
ended June 30, 2008. The decrease in operating income was due to lower
revenues from the wind power business driven by the wind farm installation
schedules of the Company's wind power customer.

    Interest Expense

    Interest expense was $0.9 million and $1.7 million for the three and six
months ended June 30, 2009 compared to $0.3 million for the three and six
months ended June 30, 2008. The increase in interest expenses was due to an
increased utilization of debt facilities in 2009 which is consistent with the
Company's funding strategies. The Company expects interest costs to increase
for the twelve months ending December 31, 2009.

    Income Tax Recovery

    Income tax recovery was $0.02 million for the three months ended June 30,
2009 and $0.4 million for the six months ended June 30, 2009 compared to
income tax expenses of $0.8 million and $1.0 million respectively for the
three and six months ended June 30, 2008. The income tax recovery was driven
by the net income or loss of each operating subsidiary.

    Non-controlling Interest

    The non-controlling interest of 1 percent for Deta, arising from Hanwei's
acquisition of 99 percent of the equity interest of Deta in November 2008,
resulted in an immaterial amount for the three and six months ended June 30,
2009 compared to $0.2 million for the three and six months ended June 30, 2008
which resulted from a 9 percent minority interest of China National Petroleum
Corporation ("CNPC") in Harvest. Hanwei acquired the 9 percent minority
interest in Harvest from CNPC in November 2008.

    Cash Position

    As at June 30, 2009, the Company has cash and short-term investments of
$14.4 million. As of July 31, 2009, the Company has cash and short-term
investments of approximately $11.4 million. The Company's 2009 growth plan
requires working capital and investments totalling approximately RMB500
million ($85 million). This includes working capital to support the growth in
the pipe and wind power businesses, the development of wind power technology,
remaining payment for the acquisition of Deta, and the payment for the
acquisition of CNPC's 8.925 percent minority interest in Harvest. Management
plans to finance these working capital and investment needs with cash on hand,
cash from operations and debt facilities which have been arranged and are to
be arranged with Chinese banks and third parties. Management also believes
that it has the ability to access additional equity financing if needed even
though the cost of such financing could be very expensive with the current
financial market situation. However, if such debt facilities are not available
or such equity issuances are not available on the terms that are acceptable to
the Company, the Company may be required to curtail its intended initiatives
and transactions, which may result in incurring certain costs associated
therewith.

    Outlook

    As the Company's customers primarily operate in the energy sector in
China where growth is still anticipated, the Company continues to expect that
the impact on the demand for its products from the current economic downturn
will be manageable. Hanwei expects revenue growth of between 30 percent and 50
percent in 2009 compared with 2008. The wind power and pipe businesses are
expected to account for more than 90 percent of revenues in 2009, and net
margins are expected to improve due to improved gross margin, economies of
scale and lower tax rate for wind power, and EPS is expected to grow due to
revenue growth, improved net margin, and the completion of Hanwei's
acquisition of China National Petroleum Corporation's 8.925 percent minority
interest in Harvest (Hanwei's FRP pipe business) in November 2008. Hanwei
plans to fund its working capital requirements for the balance of 2009 with
cash on hand, cash flow from operations, and debt and limit shareholder
dilution by limiting the issuance of additional shares.
    On May 25, 2009, the Company announced that it has changed its fiscal
year-end from December 31 to March 31. For the transition year, the Company
will be required to provide audited financial statements for the fifteen-month
period from January 1, 2009 to March 31, 2010. A notice of change in year-end,
which sets out the length and ending dates of periods, including the
comparative periods, of the interim and annual financial statements required
for Hanwei's transaction year and its new financial year, has been filed on
SEDAR and is accessible at www.sedar.com.

    Hanwei will hold a conference call to discuss its financial results for
the three and six months ended June 30, 2009. Mr. Kim Oishi, Senior Vice
President of Finance and Business Development, and Mr. Yucai (Rick) Huang,
Chief Financial Officer, will host the call.

    
    Date:                    Friday, August 14, 2009

    Time:                    10:00 a.m., Eastern Time

    Dial in number:          1-877-627-6585 or 1-719-325-4746

    Taped Replay:            1-888-203-1112 or 1-719-457-0820 (available
                             for 14 days)

    Taped Replay Pass Code:  8078409

    Live Webcast Link:  http://viavid.net/dce.aspx?sid=000068F1

              FORWARD-LOOKING INFORMATION AND NON-GAAP MEASURES
    

    Certain information in this press release is forward-looking within the
meaning of certain securities laws, and is subject to important risks,
uncertainties and assumptions. This forward-looking information includes,
among other things, information with respect to the increase in the wind power
business deliveries and customer development schedules for the third and
fourth quarters of this year, the increase in capacity of pipe production
lines at the Tianjin facility and the capital cost of such new lines, the
recovery of the FGD business segment during the second half of this year, the
recovery of the Chinese economy, the trend in the gross margin as a percentage
of revenues for the remainder of this year, bank approval for draw-downs under
the Company's line of credit, management's estimates of capital requirements,
as well as information with respect to the Company's beliefs, plans,
expectations, anticipations, estimates and intentions. The words "may",
"could", "should", "would", "suspect", "outlook", "believe", "anticipate",
"estimate", "expect", "intend", "plan", "target" and similar words and
expressions are used to identify forward-looking information. The
forward-looking information in this press release describes the Company's
expectations as of the date of this press release. Material factors or risks
which could cause actual results or events to differ materially from a
conclusion in such forward-looking information include the risk that the wind
power business deliveries do not increase and customer development schedules
continue to be delayed for the third and fourth quarters of this year, the
risk that the FGD business segment does not recover during the second half of
this year, the risk that the Chinese economy does not recover as expected, the
risk that the trend of the gross margin as a percentage of revenues for the
remainder of this year does not continue as expected, the risk that revenues
does not grow, the risk that the Company may not receive bank approval for
draw-downs under its arrangements with the Chinese bank, as well as the risks
set out in the risk factors section of Hanwei's Annual Information Form dated
March 31, 2009, and the Company's press releases filed subsequent thereto, all
filed with Canadian securities regulators and available on SEDAR at
www.sedar.com.

    The Company has included in this press release figures based on, gross
profit, gross margin, working capital and orders received, which are non-GAAP
measures. Readers are cautioned that such measures are not recognized under
Canadian GAAP and should not be construed to be an indicator of performance or
liquidity or cash flows. The Company's method of calculating this measure may
differ from the method used by other entities and accordingly the Company's
measure may not be comparable to the measure used by other entities.

    THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS PRESS RELEASE PRESENTS
THE EXPECTATIONS OF THE COMPANY AS OF THE DATE OF THIS PRESS RELEASE AND,
ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE. READERS SHOULD NOT PLACE
UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS
INFORMATION AS OF ANY OTHER DATE. WHILE THE COMPANY MAY ELECT TO, THE COMPANY
DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME, EXCEPT
AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION.





For further information:

For further information: Kim Oishi, Senior Vice President, Finance and
Business Development, Telephone: (416) 804-9228, koishi@hanweienergy.com;
Yucai (Rick) Huang, Chief Financial Officer, Telephone: (604) 685-2239,
yhuang@hanweienergy.com; Kevin O'Connor, Investor Relations, Telephone: (416)
962-3300, ko@spinnakercmi.com

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HANWEI ENERGY SERVICES CORP.

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