Weldtech rides mainland energy conservation wave
Shanghai-based provider of conservation services for central air-conditioning systems steps up projects target amid helpful policies
Weldtech Technology, a Shanghai-based provider of energy conservation services for central air-conditioning systems, plans to spend more than HK$200 million this year and next year to complete 195 new projects.
The target of the firm, which is controlled by state-backed conglomerate Citic Group, is ambitious, compared with the 39 projects completed since Weldtech's first project in 2010. It reflects increasingly favourable policies from Beijing and local governments that force manufacturers and building owners to employ professionals to help them fulfil energy conservation targets imposed to help tackle worsening urban air pollution.
"The mainland government has much strengthened policy implementation on buildings' energy conservation in the past few years," Weldtech deputy chief executive Vincent Tang Sung-kin told the South China Morning Post. "Before, there had only been trial projects, but now we have energy-efficiency improvement and emission-reduction targets allocated to the local governments and companies."
To gain a listing and aid fundraising for its business plan, Weldtech's founders tried in 2011 to sell the firm to Hong Kong-listed mortgage provider Hong Kong Building and Loan Agency (HK Building) for HK$2.8 billion through a reverse takeover.
But as Weldtech was a start-up and had only five committed contracts at the time, it failed to persuade investors to buy at least HK$900 million of new HK Building shares, a precondition for the takeover. After the deal lapsed in March 2012, Citic International Assets Management, a 40 per cent-owned unit of Citic Group, bought 43.2 per cent of Weldtech.
In October, HK Building announced it would buy all of Weldtech for HK$2.48 billion, of which 92 per cent would be paid for by convertible bonds and a promissory note, with the rest in cash and new shares.
Weldtech's original shareholders have agreed to cut the acquisition price by HK$240 million if the firm fails to deliver a pre-tax profit of HK$120 million this year and by HK$320 million if it does not meet a target profit of HK$160 million next year. The acquisition price is 20.6 times the firm's profit target for this year, and 15.4 times next year's target.
HK Building said last month it had hired underwriters to help it sell 397 million new shares to raise HK$318 million to fund expansion of its business.
Tang said Weldtech plans to source most of its revenues from energy management contract (EMC) deals that command gross profit margins of 50 to 60 per cent, and less from buyout deals with a margin of 34 per cent, as in this case the clients buy the hardware and software outright. In EMC deals, Weldtech invests in the equipment and reaps a large part of the energy savings over a number of years.
Hong Kong-listed EMC service provider Technovator International had a gross profit margin of 37 per cent last year and trades at 12.6 times its forecast earnings this year.
Tang said many of Weldtech's rivals can achieve only 10 per cent in comprehensive energy efficiency improvements, compared with Weldtech's 25 to 50 per cent. The firm adds sensors to air-conditioning systems to obtain real-time data and uses it to optimise their energy efficiency.
He said Weldtech was confident of meeting the targets, based on its order pipeline, in which more than 40 projects are to be signed soon and 90 more are being negotiated.
The firm's clients include several major Hong Kong developers that own hotel and office buildings on the mainland, as well as manufacturers that use air-conditioning intensively, especially those in the semiconductor sector.
Weldtech recorded losses in the 24 months to March 31, 2012, and the first 10 months of last year owing to a lack of financing.