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Misleading revenue recognition policy |
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Revenue recognition is similar to the ‘land deals’ of old, where companies would take a 5% deposit and book 100% of the sales price as ‘current income’ & ‘receivables’. Of course those companies all went bankrupt |
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Generates negative cash flows |
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"Our EMC model requires a significant amount of cash because we finance the equipment and installation costs of the GSHP systems at the outset of each project. Therefore, we experienced negative operating cash flow in each of the years ended December 31, 2007, 2008 and 2009 and the quarter ended March 31, 2010. We were able to fund our operations and cash requirements for our EMC projects primarily through debt and equity financings, and, to a lesser extent, payments from our customers in those years." |
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$70-$80mm only good for 12 months? |
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"We plan to use US$70.0 million to US$80.0 million of our proceeds to fund and expand our business under the EMC model. Based on the foregoing, we believe that the net proceeds from this offering, the anticipated payments from our customers and our existing cash balances will be sufficient to meet our capital requirements to fund our operations and planned expansion for at least the next 12 months" |
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Accounting weakness |
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"The foregoing material weaknesses had resulted in errors in recording and accounting for, among others, our revenue recognition on EMCs and EPC contracts, taxation (including current income tax and deferred income tax), certain financial instruments (convertible bonds, preferred shares and warrants) and certain long-lived assets" |
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OVERPRICED IPO |
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. The $819mm market cap at the price range mid-point of $9 appears to be hyper-inflated.
. Low-tech NRE is simply not worth $6.8mm per employee, which is arrived at by dividing the ‘expected’ market of $819mm by 120 employees.
. Entry barriers appear to be low. And large, established multinationals announced they are planning on entering the target market and competing with NRE, which appears to have a short term window of opportunity, but that short term window doesn’t justify an market cap of $819mm |
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. The company is seeking IPO risk capital to finance a low-tech business in a rapidly growing market, has no established history of successful manufacturing, and the ‘manufacturing’ process for them is most likely just a low-tech assembly operation.
. NRE recently vertically integrated from a distributor/installer business model to become manufacturer/installer in the December 2009 quarter, so there also is no real financial history based on the manufacturer/installer business model.
. Plus, the March quarter suffered a 30% sales decline, relative to the December quarter because of the Chinese New Year, according the NRE’s S-1 filing. The December quarter itself was 260% above the September quarter. Companies with ‘lumpy’ quarters often are not rewarded with high valuation multiples. |
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HVAC company |
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. NRE is just a installer and manufacturer of heating/ventilation/air conditioning equipment using old-fashioned Ground Source Heat Pump ‘technology’
. NRE has been ‘packaged’ by investment bankers to appear to be part of the ‘green revolution’
. Is focused primarily on retrofitting existing large buildings in China with less polluting heating & air conditioning systems
. The retrofit market is large & obvious, and multi-national companies such as Trane and Carrier have targeted, but not yet entered, the China market |
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OVERVIEW |
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. General contractor for Energy Management Contracts (EMC) focused on the manufacture, sale and installation of Ground Source Heat Pump heating/cooling systems
. NRE believes it is well positioned to offer its customers greater functionality in a cost-effective manner by using its own Ground Source Heat Pump (GSHP) modules |
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Ground Source Heat Pump (GSHP) |
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. An old ‘technology’ first used describe in 1852.
. Ground temperature is more stable than the air temperature. So the ground is typically warmer in the winter (for heat) cooler in the summer (for air conditioning).
. The system is installed deep enough that it utilizes constant ground temperature, often only 3-4 feet deep.
. Ground source heat pump is one of the best solutions to reduce environmental pollution in big cities of China |
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LOW ENTRY BARRIERS |
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NRE began operations in June 2007, initially solely using GSHP modules sourced from a European manufacturer. Then became a 'manufacturer' (read 'assembler') only in the Dec 2009 quarter |
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ESTIMATED BACKLOG: $58mm |
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BUSINESS |
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. Provides of fully-integrated clean energy management solutions in China utilizing ground source heat pump, or Ground Source Heat Pump (GSHP) technologies.
. Offers integrated energy management solutions for buildings primarily through energy management contracts, or EMCs, by designing, manufacturing and installing GSHP heating, ventilation, air-conditioning and hot water supply systems, or GSHP systems, as well as providing post-installation maintenance services typically over 10 to 20 years.
. NRE believes its fully-integrated solutions typically can save 50% to 70% of energy consumption compared to conventional fuel- and electricity-based heating, ventilation, air conditioning and hot water systems, based on data from three EMC projects installed by NRE and which have been in operation for over a year. |
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Energy Management Contracts |
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. As of March 31, 2010, NRE had entered into 16 EMCs (Energy Management Contracts), covering gross floor areas, or GFAs, of 964,501 square meters. IPOdesktop estimates that the backlog is in the range of $58mm
. Cumulative installed GFAs as of March 31, 2010 -- representing the GFAs of the buildings where NRE had completed installation work and the prorated GFAs of the partially installed buildings -- were 410,278 square meters. |
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Sales of Equipment |
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. Historically, NRE derived revenues from sales of certain HVAC equipment to Shanghai Nobao Electric Appliance Co., Ltd., or Shanghai Nobao, an entity in which the chairman and chief executive officer, Mr. Kwok Ping Sun, held a management position prior to December 2007.
. Since January 2010, NRE has discontinued sales to Shanghai Nobao and does not expect to conduct any sales to Shanghai Nobao in the future.
. In the quarter ended March 31, 2010, also derived revenues from sales of certain HVAC equipment to a third party, which is unaffiliated with NRE. |
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COMPETITION |
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. The GSHP-related equipment market in China is highly fragmented and rapidly evolving. Although NRE believes that it is one of the few companies in China to utilize an EMC model to provide fully-integrated GSHP solutions as the core business, it competes with a variety of companies in the Chinese market.
. Main direct competitors in providing GSHP systems under the EPC model in China are Mammoth (China) Ltd., Tsinghua Tongfang Artificial Environment Co. and WFI (China) Ltd.
. Additionally, there are numerous small- and medium-sized Chinese companies that provide GSHP-related design and installation services to customers in China and compete with our business under the EPC model. . NRE believes that most of its competitors are focusing on the new building market, while NRE provides clean energy management solutions to both existing buildings already serviced by conventional HVAC systems as well as new buildings. |
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Future competitors |
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. Future entrants to the GSHP market that offer new technological solutions or alternatives that have a higher energy-savings rate than NRE;s systems.
. Trane,Carrier, Daikin and Haier, several of which have announced their intention to enter into the GSHP market. |
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Trane |
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A subsidiary of Ingersoll-Rand supplies heating, ventilation, and air conditioning systems to both the residential and commercial markets around the world. Trane specializes in designing massive commercial systems that heat and cool big buildings such as Beijing's World Trade Center and Toronto's Skydome. Its residential products are sold under the Trane and Standard Heating and Air Conditioning brands. Other products include chillers, air handlers and terminal devices, and thermostats. Trane also makes energy-efficient systems and filtered air systems that remove allergens and dust. The company sells its products through sales offices and dealers around the world. |
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Carrier |
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The world's largest maker of HVAC equipment and refrigeration systems for residential, commercial, industrial, and transportation needs. Through Carrier Transicold, it makes truck/trailer and container refrigeration equipment and provides transport air-conditioning systems for bus, rail, and marine customers. Carrier also provides aftermarket services and components for its products. The company is a subsidiary of diversified manufacturer United Technologies Corporation (UTC); it accounts for about a quarter of UTC's sales. Carrier operates around 60 manufacturing facilities and has dealers in more than 170 countries. |
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Daikin |
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Aa Japan-based manufacturing company that operates in three business segments. The Air Conditioning and Freezer segment manufactures and sells housing equipment, such as air conditioning, air purifiers and water boilers; commercial equipment, including package/spot air conditioning, water chilling units, turbo refrigerators and industrial dust collection equipment; marine equipment, such as marine container air conditioning, ship air conditioning and ship freezers, and electronic systems, encompassing database systems for research development and information technology (IT) network monitoring systems. The Chemical segment supplies fluorocarbon gases, fluorine resins, chemical products and chemical engineering machines. The Others segment is engaged in the manufacture and sale of hydraulic equipment and machinery for industrial and construction machinery use, cannonballs, domiciliary oxygen medical equipment and others. |
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GSHP LANDSCAPE IN CHINA |
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In general, since the specifications of the GSHP systems to be installed need to take into consideration the different design and construction features of new and existing buildings, they are typically designed to meet such different features. |
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According to the estimates by the Chinese GSHP Association, there are approximately 1,000 enterprises actively involved in China’s GSHP market. Approximately 200 of them manufacture heat pumps and other related equipment. Most of the remaining are GSHP system installation companies. |
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According to the Roland Berger Report, although there are a number of participants that address different parts of the value chain, there are few companies with fully vertically integrated business models, such as NRE |
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INTELLECTUAL PROPERTY |
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Relies exclusively on trade secrets and other similar protections to protect intellectual property. |
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EMPLOYEES |
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As of March 31, 2010, had 120 employees: 48 of them are based in Shanghai and 72 of them are based in Jiangxi |
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MARKET & DRIVERS |
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In recent years, the GSHP market in China has seen tremendous growth. The three principal drivers of growth in the GSHP market are: a large and growing building market, rising energy prices and favorable government policies |
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Retrofit market opportunity |
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. The huge existing floor space in China implies a significant growth opportunity for GSHPs retrofitting projects since traditional HVAC systems that were installed 10 to 15 years ago are about to reach the end of their designed life expectancy.
. According to the Roland Berger Report, the potential addressable market for retrofitting using GSHP systems as of 2008 at current cost level was approximately US$20 billion.
. NRE views retrofit market to be its primary market, currently serviced by conventional HVAC (Heating Ventilation Air Conditioning) systems, as well as the new building market |
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China construction market. |
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. China is one of the world’s largest construction markets. By the end of 2008, the existing building floor space in urban China was approximately 18.3 billion square meters, 6.1 billion square meters of which were non-residential buildings.
. Total building floor area in urban China is expected to increase to 19.0 billion square meters in 2009 and 19.7 billion square meters in 2010, and further increase to 27.8 billion square meters in 2020. HVAC |
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Favorable Government Policies |
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The Chinese government has taken steps to reduce energy consumption to both improve environmental conditions and support sustainable economic growth. The GSHP industry has benefited from the laws, regulations and policies introduced by the central government and local governments under the 11th five-year plan aimed at stimulating the use of renewable energy. Government incentives, including incentives for energy auditing and promoting green technologies and products, are becoming increasingly common for heat pump projects. |
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Energy conservation incentives have been granted by both national and local governments. Examples of these laws and policies include without limitation, the December 2009 Amendment to the Renewable Energy Law of the PRC which requires power grid companies to procure power generated from renewable sources at the price determined by the price department of the State Council, the original Renewable Energy Law, the Decision About Strengthening Energy Saving Tasks From the State Council and the Tentative Measures on Administration of Special Fund on the Implementation of Construction with Renewable Energy. |
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Local governments have also offered subsidies and other support for energy efficient or environmentally friendly technologies, some of which were targeted at GSHPs. For example, the Shanghai Municipal Government promulgated the Measures for the Implementation of Special Support on Energy-saving Retrofitting Projects, which provides a credit of RMB300 (US$44.00) for every ton of standard coal saved for projects saving more than 500 tons of coal every year and RMB50 (US$7.30) per square meter for GSHP projects. In addition, Shenyang, a large city in northern China, issued a set of Implementation Guidelines for Full-scale Promotion and Application of the GSHP System in 2006, which prioritizes the installation of GSHP systems for heating in buildings, unless geological conditions do not allow. |
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POLLUTION |
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In countries like China or USA that are highly reliant on coal for electricity production, a heat pump may result in 1 or 2 tons more carbon dioxide emissions than a natural gas furnace. |
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http://en.wikipedia.org/wiki/Geothermal_heat_pump |
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CAPITAL COSTS |
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. Capital costs are known to benefit from economies of scale, particularly for open loop systems, so they are more cost-effective for larger commercial buildings and harsher climates.
. Can be 30% more than conventional HVAC and incremental investment payment can occur within 3 years, depending on local energy prices
. In general, capital costs may be offset by substantial subsidies from many governments, |
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GSHP HISTORY |
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The heat pump was described by Lord Kelvin in 1853 and developed by Peter Ritter von Rittinger in 1855. After experimenting with a freezer, Robert C. Webber built the first direct exchange ground-source heat pump in the late 1940s.[5] The first successful commercial project was installed in the Commonwealth Building (Portland, Oregon) in 1946, and has been designated a National Historic Mechanical Engineering Landmark by ASME.[6] |
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The technology became popular in Sweden in the 1970s, and has been growing slowly in worldwide acceptance since then. Open loop systems dominated the market until the development of polybutylene pipe in 1979 made closed loop systems economically viable.[6] As of 2004, there are over a million units installed worldwide providing 12 GW of thermal capacity.[4] Each year, about 80,000 units are installed in the USA and 27,000 in Sweden.[4] |
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http://en.wikipedia.org/wiki/Geothermal_heat_pump |
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USE OF IPO PROCEEDS |
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$148mm |
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• US$70.0 million to US$80.0 million to expand the business under the EMC model, which requires a significant amount of cash to finance the equipment, drilling and installation costs of the GSHP systems at the outset of each project;
• US$5.0 million to US$10.0 million to fund production capacity expansion of the manufacturing facilities; and
• remainder for general corporate purposes and for potential acquisitions |
