Nf Energy Saving Corp (OTC BB:NFEC)

On July 28, 2009, the GeoTeam coded Nf Energy Saving Corp America (OTCBB:NFES) as a GeoSpecial at $1.10. The Nf Energy Saving Corp America story is easy to understand supported by industry fundamentals that should drive growth into the foreseeable future. We are particularly impressed with the information provided in the company's 10K filings which thoroughly address the various product/service lines as they relate to ever-changing industry dynamics.  It ultimately remains to be seen if Nf Energy will rise to the challenge posed by China's increased emphasis on clean/efficient energy solutions. We urge interested parties to peruse the company's filings and website to gain a taste of the opportunities present for Nf Energy Saving Corp America.

Understanding Nf Energy Saving Corp:  NF Energy Saving Corp of America is a China-based provider of integrated energy conservation solutions. 

Nf Energy's products address some fundamental deficiencies present in China's aging industrial infrastructure.  Seventy percent of the Company's sales revenues come from it's major customers involved with large-scale electricity generation and commodity supply, industry's that need efficient processes when producing and distributing their products and services. 

The country's energy saving goals can be solved by a Nf Energy's capabilities to address energy conservation and emissions through the modernization of industrial boilers and furnaces, steam thermal systems, motor drive systems, lighting lamps, wind power equipment components, heat recovery systems and flow control systems.  Each component of the Company's focus plays an integral part in contributing to a large picture of optimizing the output of various systems and supporting the idea of sustainable energy as China enters an industrial boom.  In breaking down Nf Energy as a company, it can be categorized into four major business directions, all of which provide the company market opportunity.

• Energy Saving Reconstruction Projects
• Production and sales of energy-saving valves, intelligent valves and flow control equipment
• Comprehensive energy conservation and emission reduction services for municipalities
• Equipment Manufacturing for Wind Power Plants

I Energy Saving Reconstruction Project

• Refurbishing of industrial energy producing systems
• Installation of new modern energy efficient systems
• Other initiatives to renew and recover various forms of energy

Industrial Boilers 

The source of heat for a boiler is combustion of any of several fuels, such as wood, coal, oil, or natural gas.  In the case of China, 95% of the total burners in the country are coal-fired.  Boilers have many applications. They can be used in stationary applications to provide heat, hot water, or steam for domestic use, or in generators and they can be used in mobile applications to provide steam for locomotion in applications such as trains, ships, and boats. Using a boiler is a way to transfer stored energy from the fuel source to the water in the boiler, and then finally to the point of end use. (Source:Wikipedia:boiler) Furnaces, explained later, are sometimes a component of boilers that supply the heat needed to maintain a constantly flowing process.

Problem - Boiler Inefficiency

• Due to the mechanism of operation, 60% of boilers in China are below current efficiency standards.
• The use of old and inefficient boiler equipment and associated components leads to small capacities and incompatible coal use. 
• The reliance of higher grade/expensive coal to operate boilers.
• Loss of potential energy due to inefficient systems.

Nf Energy Solutions to Boiler Inefficiency

• Retrofit old boilers with modern equipment and improve the efficiency of the boiler operating mechanism.
• Constructing new efficient boilers for its customers, further limiting energy loss.

Opportunity within the Boiler Market

• In light of boilers not meeting efficiency standards, the opportunity for Nf Energy is immense as companies race to meet code. 
• Companies that contract with Nf Energy Saving Corp to improve boiler operating systems will be able to refurbish old boilers or construct new boilers that will meet new standards. Added benefits to these companies will be increased margins through the use of cheaper coal, less energy loss and the ability to capture lost heat/energy that occurs in the combustion process.

Industrial Furnaces

China's industrial furnaces are mainly used in high energy consumption industries, accounting for 10% of China's total energy use.  An industrial furnace or direct-fired heater, is a piece of equipment used to provide heat for processes such as those used in the iron and steel, metallurgy, building materials, machinery manufacturing and chemical industries. Furnace designs vary with the intended function, heating duty, type of fuel and method of introducing combustion air. However, most process furnaces have common features. Source:(Wikipedia:furnace)

Problem - Archaic Furnace Design

• Equipped with backward technology
• Outdated equipment
• Experiencing serious waste of energy.

Nf Energy Solution to Archaic Furnace Design

• Use existing technology to reconstruct furnace structure, its heat source system, combustion system and control system.

Opportunity within the Furnace Market

• Half of the enterprises that utilize furnaces experience problems.

Steam Thermal Systems

The main goal of steam thermal systems is to transfer heat resulting in the energy needed to drive a process.  The flow of heat from point to point in a thermal system is usually related to the temperatures at various locations within the system.    When the energy is extracted from the steam, the steam condenses into a low-temperature reservoir, where it can be reused as feed water to make more steam.

Problem - Inefficient Steam Thermal Systems

• Inefficient systems lead to energy leakage

Nf Energy Solution to Steam Thermal System Inefficiency

• Reconstruct thermal systems
• Eliminate leakage losses
• Recovery condensed water to be used as energy.

Opportunity with Steam Thermal Systems

• Companies can benefit from efficient steam trap designs and other components that help to make the systems more self sufficient.  Their bottom lines will be positively affected as a result of the containment of reusable resources.

Motor Drive Systems

A motor drive system is comprised of an electric motor and other parts of a mechanical system for operating a machine or machines.

Problem - Excessive Power Consumption

• China's motor drive system power consumption accounts for 2/3 of total electricity consumption of the country.

Nf Energy Solution

• Reconstruct an efficient  motor drive system with modern equipment.

Opportunity with Motor Drive Systems

• Companies will view the NFES solution as a way to consume less energy when powering machinery.

Green Lighting Project

Funded by the China State Economic and Trade Commission (SETC) and the Global Environment Facility, the China Green Lights Project began its expanded implementation in September 2001. The primary objective of the project is to, by 2010, reduce lighting energy use in China by ~10%.  This involves the optimization of power distribution and how it is used by the overall system.

Problem - Overload on Lighting

One of the fastest growing sectors of electricity growth is in lighting energy consumption.

• Annual growth in electrical consumption by lighting was 15% for much of the 1990s.
• Lighting currently accounts for approximately 12% of lighting energy use in China.

Nf Energy Solution

Given the predominant reliance on coal as a generation fuel, serious health and environmental problems can be reduced if the use of coal is curtailed by way of smart processes and higher quality products.

• The Company accommodates the project through the manufacture of energy efficient green light products, renewing the lighting power supply, rational distribution of lamps, improving the quality of power supply and on-demand control.

Green Lighting Project Opportunity

The project will set minimum efficiency standards for lighting products and designs.

• Those who supply the most efficient products will rise to the top.
• Companies can outsource product manufacturing to NFES.
• As the government continues to implement its green light project demand for related products should increase.
• Because the project is in its infancy, NFES can garner a favorable reputation as one of the original contributors if the project's goals are met.
• NFES is the only commercial distributor of energy efficient lighting lamps in Liaoning Province where the provincial government is targeting 2.5 million bulb installations for 2009.

Recovery of Residual Heat

Problem - Lost Energy

In the various industries that Nf Energy serves, residual heat is created during energy creation and can be considered a source of lost energy.

Nf Energy Solution

The company has developed reliable methods to recover and utilize residual heat from a variety of different sources.

Residual Heat Opportunity

• There is the potential for Nf Energy to generate contracts with companies that see the Company's recovery methods as a competitive advantage.

II Production and Sales of Energy Flow Control Equipment

Complex Valves and flow control system equipment regulate the transportation of water, oil, heat and gas within the pipeline infrastructure network beneath the cities.  The valves installed within the pipeline are integral to the system's proper function and are considered to be the most important component of the network. This has been the Company's main product line.

Problem-  Inefficient Pipeline Systems

Inefficient pipeline systems can result in less than desirable commodity flows within the infrastructure network within what is referred to as the energy highway.

Nf Energy Solution

• Nf Energy state-of-the-art flow control equipment will reduce energy consumption by 20%. Valve and flow control equipment is the key to energy efficiency and conservation in the pipeline transportation of commodities.

Flow Control Equipment Opportunity

• Nf Energy can capitalize on its 10 years of solid reputation to maintain its leading market share position in related flow control markets.
• Its technology was awarded "Number One Energy Saving Value of China" by the Chinese Energy Conservation Association.
• Again, companies that wish to increase margins will value the 20% reduction in energy consumption through the application of NFES products.
• It is widely used in the fields of electric power, water power, petroleum, natural gas and etc.
• An insignificant amount or revenues is generated from outside China.

III Comprehensive Energy Conservation & Emission Reduction Services for Municipalities

The China State Council, in its 11th Five-Year Plan for 2005 to 2010, has set energy conservation and emission reduction targets to be achieved by local governments and industries. The Central government has set aside 7 billion RMB to support the top 10 key energy saving projects.

Problem - Standards Must Be Met

• In the scramble to meet standards and share in 7 billion RMB to support the top 10 key energy saving projects, municipalities require project management help from reputable firms.

Nf Energy Solution

• The Company's municipal comprehensive energy conservation and emission reduction projects focus on comprehensive energy conservation and emission reduction planning and project implementation for an entire city.
• The goals of these plans are to reduce per unit energy consumption and green house gas emission.

Opportunity in Emission Reduction Services

• NFES has embarked on developing project management initiatives and will offer this new service to municipalities in 2009.
• Project management will serve as a new source of revenue.

IV Equipment Manufacturing for Wind Power Plants

Problem - Equipment Shortages

• China's tremendous demand for wind power generation has led to a global shortage of wind power equipment components.

Nf Energy Solution

• Those manufacturers that are well capitalized, have sufficient capacity, offer cutting-edge technology and are able to provide superior service should enjoy a tremendous growth in China.

Wind Power Opportunity

• Government in its 11th Five Year Plan of 2006 emphasized the development of wind power among energy resource development. The backlog of orders will not be filled until 2012 and presents a predictable and growing source of potential revenue for NFES. At the present time, the demand greatly exceeds the supply in the wind power equipment components market.

As stated in Nf Energy's July 8, 2009 press release:

'We have seen tremendous customer demand for wind equipment since last year,' commented Mr. Li Gang, Chairman and CEO of NF Energy. 'NF Energy will speed up its development of wind power capacity to capitalize on this fast growing market. We have started construction of a new energy base in Tieling City of Liaoning province in Q1 of 2009, which will dramatically expand the Company's manufacturing capacity for wind power equipment to meet growing domestic demand.' Total wind power generating capacity in China is currently 12GW but the country, which is growing at the fastest rate among all the economies in the world, wants to raise it to 20GW by 2010. China expects to have an annual wind power growth rate of 20 percent. In May 2009, China increased its goal for wind power generation capacity by 2020 to 100GW, from the original 30GW that the Chinese government set in 2007. China is currently the fourth largest producer of wind energy in the world, after the United States, Germany and Spain and is aiming to have 40 percent of all its energy originate from renewable energy sources by 2050. According to the Global Wind Energy Council, China will become the biggest growth market for wind power generating capacity this year, ahead of the United States.'

In a nutshell, Nf Energy participates in an industry with favorable growth trends due to traditional demand/supply factors and government regulation. China's energy consumption is currently growing at 5 % a year, with the consumption of electricity slated to grow even more rapidly well into the future.  Even if regulation is put aside, Nf Energy's products and services can give its client companies a competitive advantage while at the same time increase their profit margins. The Company's participation in the wind and green projects should give it an avenue of margin-friendly revenues. Additionally, the Company's long standing  position in the valve technology market and its involvement with municipal projects that require continual oversight provides it with  a reliable revenue stream.

NFES shares have risen sharply from $0.20 to its current levels. As many of our readers may know by now, the GeoTeam® prefers to construct valuation scenarios on a fully taxed basis. Doing so yields potential valuation scenarios that may still offer upside to NFES shares.

However, we feel that the dynamics of China's industrial efficiency goals along with Nf Energy's reputation and projected manufacturing capacity provides the company with an excellent chance to exceed street expectations and attain P/E multiples higher than we portrayed in our potential valuation scenarios.  In fact, since May 28, 2009, when Nf Energy announced a 2009 revenue backlog figure of $21.5 million, the Company has already approximately booked an additional $11.0 million in contracts.  At current margins this would equate to a pre-tax earnings per share figure of $0.21 ($0.13 fully taxed). 

Harbinger analyst estimates: 
Revenue estimate:  $22.1 million,
Earnings per share:  $0.127 (~ $0.08 fully taxed).

Current Catalyst Financial Resources estimates:
Revenue estimate:  $27.6 million,
Earnings per share:  $0.16 (~ $0.10 fully taxed).

Note: Nf Energy plans on affecting a reverse split in the near future.

Nf Energy liquidity needs:

"We anticipate we will need additional working capital in 2009 and in the future to fund our company’s new business plans to help the company to establish a manufacturing base for new energy equipment, to develop comprehensive energy saving infrastructure projects for municipalities, and to maintain our lead position in flow control equipment manufacturing. We may decide to pursue additional investments or debt financing to obtain additional cash resources to fund our company’s new business and other future developments."

Nf Energy is also being placed on the GeoBargain on the Radar list.  

The GeoTeam® will delve into the NFES story more diligently in the coming weeks.

Source: GeoInvesting.com