Rob Romero Believes That HRBN Is Firing On All Cylinders
According to an article on Seeking Alpha, one of the long ideas on which Rob Romero, a Portfolio Manager at Connective Capital Management LLC, has highest conviction is Harbin Electric (NASDAQ: HRBN). Headquartered in Harbin, China, HRBN is a leading developer and manufacturer of a wide array of electric motors. Harbin Electric’s major clients are companies belonging to the oil exploration, automotive, urban and coal railroad transportation and machinery tool manufacturing industries. The stock has drawn attention because it has impressive industry growth prospects, good management track record and attractive valuation. Moreover, the competitive landscape for HRBN is improving.
Rob Romero believes that the demand for electric motors for transportation, manufacturing, agriculture, energy exploration, and consumer applications is likely to rise with the industrialization and urbanization of the Chinese economy. The growth in the demand is estimated to be faster than China’s predicted GDP growth of 9%-10% for the next five years.
Meanwhile, the stimulus investment for the under-developed rural areas by the Chinese government will boost the demand for agricultural and industrial machinery that uses a lot of Harbin’s motor products. Rob also mentions that “Harbin’s unique expertise in higher-technology linear motors will help it gain share in industrial automation applications and advanced electric trains.”
Harbin, which is a leader in the linear motor market, faces little competition, as clients in this market usually stay committed to a company. The margins in this market are historically high (50%-60%).
Meanwhile, in the specialty micro motor segment, HRBN has formed a strong client relationship with Canada-based Magna. Magna is a major supplier for GM and Chrysler. With the consolidation and lays off occurring in the US automotive industry, Harbin is poised to benefit from outsourcing of parts manufacturing to China. The gross margins in this segment usually come to 38%-40%.
The rotary electric motor industry is more competitive. While the smaller motor market offers low margins (gross margin 10-11%), the large motor market, which HRBN entered through the acquisition of Xi’an in 2009, enjoys better margins (32%).
At current share price, HRBN is trading at roughly 10x 2010 P/E and 1.7x 2010 P/S, which is extremely attractive, as compared to those of other China-based auto parts suppliers such as Wonder Auto Technology (NASDAQ: WATG), Sorl Auto Parts (NASDAQ: SORL) and China Automotive Systems (NASDAQ: CAAS).
Some of the catalysts for HRBN’s stock are:
- Continued growth in auto sales in China and a recovery in the US auto market
- Volume shipment of linear motors for urban subway train and coal freight train applications
- Smooth execution of capacity expansion of Harbin’s rotary motor plants
- Cost reduction at recently acquired Xi’an
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