Sometimes there is an event that goes virtually unnoticed by the investing community but that later, in hindsight, becomes the “canary in the coal mine”.
The canary, for investors, is the event that serves as an early warning of a change in direction for an economy, an asset class or a particular stock sector.
Jinpan International’s (JST) announcement on July 16 that it would cut full year guidance was a canary in the coal mine event for Chinese stocks.
It’s no secret that Chinese stocks are in a bear market and have been since Oct 21, 2009 when shares of Chinese companies traded on the U.S. exchanges started to “roll over”.
The Shanghai Composite Index, itself, hasn’t done much better, falling into bear market territory a few weeks ago, down about 25% in 2010.
Jinpan Is No Johnny-Come-Lately
Jinpan International is not one of the “glamour” Chinese stocks. It’s not Baidu or Sohu. So it’s not surprising that few took notice of its sales guidance revision last week.
Jinpan manufactures cast resin transformers for voltage distribution equipment in China and other countries. The company’s medium voltage transformers are used in large infrastructure projects such as factories and real estate developments and in municipal projects like airports and subway systems.
Jinpan is not a recent newbie on the Chinese scene. While technically a U.S. company held by a British Virgin Islands company, the company was founded in 1993 and has one set of its corporate offices in China. It has traded on the U.S. exchanges since 1998. It is still a small player, however, with a market cap of just 170 million.
The company also has rewarded shareholders since 2003, by paying a dividend which it paid through the global recession and recently raised 17% in 2010 from 2009.
A dividend is rare for Chinese companies on U.S. exchanges. You actually have to have some skin in the game to pay out some of your earnings to shareholders. The current yield is 1.30%.
Electricity and Wind Energy
The company’s focus is on China and the Chinese market makes up the majority of its sales. If governments and businesses are spending on infrastructure, especially energy and wind towers, Jinpan will benefit.
Demand for cast resin transformers is closely linked to electrical power usage in China. Chinese electrical power increased 6.2% in 2009 compared to 2008 which boosted the company’s bottom line last year.
However, 18% of its 2009 revenue was wind energy products, and the majority of these products were sold to Europe and North America, though the company was looking to expand its Chinese market in these products in 2010.
International Sales Slow in 2010
On July 16, Jinpan issued preliminary second quarter results which showed a 10% decrease in second quarter sales compared to 2009.
Given the lingering recessionary hangover in North America and with the Eurozone’s troubles, the revision isn’t surprising.
“While demand from domestic customers has been strong, orders in our international business have taken longer to materialize than originally anticipated,” said Mr. Zhiyuan Li, Chief Executive Officer.
“Although the framework supply agreements we signed with a primary OEM customer in early 2010 indicated increased demand for 2010, we do not believe that we will be able to realize the revenue from many of these orders in 2010 due to the delayed placement of orders by the OEM customer,” he added.
Domestically, sales are expected to increase 10% for the year but pricing is projected to fall 20% compared to last year due to depressed prices of silicon steel, a big component of cast resin transformers, which is allowing competitors to get more aggressive on pricing.
The company cut is full year sales guidance by the range of 10% to 15%. Net income is expected to decline in the range of 45% to 50% from 2009, mainly due to the delay in international orders and a change in Chinese tax laws.
Just One Company’s Troubles or a Sign of Things to Come?
Many of the Chinese companies that trade on the U.S. exchanges have seen explosive revenue growth over the past 5 years. Jinpan was no exception except in 2009 when it struggled compared to 2008.
As many of these companies mature, year over year comparisons will be more difficult. The Chinese government’s strategy to cool its economy will also impact growth.
For 10 months, however, stock investors have spoken with their feet and have sold off shares of Chinese stocks.
Jinpan fell 21% on July 16, the day it announced the revised sales guidance, and continues to decline.
You can see that the party ended for the stock last March but the declines have now accelerated with the revision to the sales guidance.
If Jinpan is the canary in the coal mine for Chinese stocks, be on the lookout for other earnings and sales guidance revisions from other Chinese companies in the next few weeks.
Jinpan is currently a Zacks #4 Rank (sell) stock.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.
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