A Key Player in China Infrastructure

04/06/2010 1:46 pm EST


Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor of China Stock Digest, looks for a double from one of the world's foremost makers of electrical transformers.

At a time when China is rapidly developing its infrastructure and increasing electricity consumption, Jinpan International Ltd. (Nasdaq: JST) is an important and expanding supplier of the energy tools China consumes. Jinpan International designs, manufactures, and sells cast resin transformers for voltage distribution equipment in China.

Its cast resin transformers allow high voltage transmissions of electricity to be distributed to various locations in lower, more usable voltages. These cast resin transformers are used to distribute electricity from electric transmission lines to specific points of electricity usage within various types of facilities, including residential, commercial, industrial, and other types of facilities.

The company manufactures medium voltage transformers (10-25 kV) used in large infrastructure projects like factories and real estate developments, and municipal projects such as airports and subway systems.

Jinpan says it has the most technologically sophisticated transformer manufacturing facilities in the world. The company’s primary facility is in Haikou, China, with an additional facility in Wuhan.

Jinpan’s manufacturing facilities are ahead of the competition in the many ways. In terms of scale, Jinpan has one of the largest manufacturing capacities to build transformers in the world. The Haikou facility has a capacity of 6 million kVA. The new Wuhan facility will add a capacity of 4 million kVA to the company’s production lines.

Vertical integration improves profit margins. The company manufactures virtually all parts and components used in its transformers. Jinpan says it offers transformers with a broad range of capacities and extremely flexible manufacturing facilities, allowing the firm to produce transformers exactly to customers’ specifications.

Jinpan has achieved remarkable technological sophistication. The company manufactures its products in a fully-automated, computer-driven facility using the most sophisticated equipment and processes.

The company’s shares became a “buy” after falling 9% on a report for the fourth quarter of 2009. Jinpan reported that net sales for the fourth quarter were $41.7 million, a 7.1% decrease from $44.9 million in the same period last year. The decrease in sales was in line with expectations and was a result of downward pressure on raw materials prices passed onto its customers in the form of lower unit prices.

Jinpan’s profit margins are on the upswing. Gross profit in the fourth quarter increased 27.3% year over year to $17.2 million from $13.5 million, and gross profit margin increased 11.1% year over year to 41.3% from 30.2%.

With expanding use of wind energy in China and beyond, demand for transformers in wind turbines is expected to increase. As we’ve reported previously, China’s internal consumption is rising by double digits after last year’s economic slump.

Jinpan has been added to our buy list with a 5% allocation at a buy-up-to price of $22.00 a share. The stock is currently trading at $21.00 a share as of the time of this alert. We have a target sell price of $45.00 a share and our profit protector price is $18.00. (Jinpan closed Monday at $20.94—Editor.)

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