nf energy

Analyst: Lisa Springer, CFAInitial Report

July 9th, 2009

NF Energy Saving Corp. (OTCBB: NFES) 1


July 9th, 2009

Company Overview MARKET DATA

SymbolExchangesCurrent PricePrice TargetRatingOutstanding SharesMarket Cap.Average 3M Volume

Source: Yahoo Finance, Analyst Estimates

NFESOTCBB

$0.92$1.90

Speculative Buy38.87 Million

$36.68 Million35,624

NF Energy Saving Corp. of America (NFES) is a China-based provider of integrated energy conservation solutions. The Company utilizes energy-saving equipment, technical services, and energy management re-engineering project operations to provide energy saving services to clients. Its services include energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks, and contractual energy management services for China’s electric power, petrochemical, coal, metallurgy, construction and municipal infrastructure development markets.

To date, the Company has signed 47 contracts representing a total value of $35.9 million and completed more than 300 energy-saving projects. In 2007, the Company was awarded contracts for the first three sections of the landmark South to North Water Redirection Engineering Project, originally conceived by Chairman Mao and planned for completion in 2050. This project will eventually divert 44.8 billion m3 of water annually to the population centers of the north through a 3,000 km pipeline network costing more than $62 billion. NFES’ work on this project was completed and passed inspection in 2008. That same year the Company was also awarded flow control equipment contracts for large water supply systems in seven cities in Liaoning Province. More recently, NFES announced record backlog orders totaling approximately $21.5 million to be completed in 2009. An additional nine contracts with a total value of $27.1 million are in final stages of negotiation, with many expected to close in 2009.

NFES has a Det Norske Veritas Management System Certificate that

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certifies its products are consistent with Management System Standard ISO9001:2000. The Company is also a Chinese Representative Firm of The World Bank/Global Environment Funds (GEF); a Member of the Chicago Climate Exchange (CCX); ranked among the top three in China’s Energy Savings & Pollution Reduction Industry; and is the director enterprise of the China Energy Saving Service Industry Council.

Business model capitalizing on proprietary flow control systems

NFES manufactures energy conservation equipment and provides energy efficient solutions, which include patented equipment, technical services, and energy management project capabilities to the Chinese market. It also manufactures and sells energy-saving flow control and wind cogeneration equipment and provides services that improve energy efficiency and reduce emissions. Its technology was awarded “Number One Energy Saving Value of China” by the Chinese Energy Conservation Association.

Huge market opportunity

Booming economic growth and rapid industrialization have spurred electricity demand in China. At year-end 2007, China’s total installed generating capacity was 713 gigawatts (GW), up 14% from the prior year-end. According to the International Energy Agency, China must add 1,300 GW of new electricity generating capacity, more than the current installed U.S. capacity, to meet its growing energy demands over the next several years.

Due to expansion of energy-intensive sectors such as steel, cement and chemicals, China’s energy consumption is growing faster than its domestic GDP, resulting in shortages of electricity and coal in more than 20 of the country’s 32 provinces. Energy recovery systems offer a cost-effective solution for rising energy demand. According to the U.S. Department of Energy and the Environmental Protection Agency, energy recovery systems could generate nearly 200 GW of new power in the U.S. alone.

In November 2008, China announced an economic stimulus package worth nearly $600 billion, which includes more government investment in infrastructure, tax deductions for exporters, and bigger subsidies for the poor and farmers. Within this stimulus package, $23 billion is allocated for energy-saving and emission reduction projects.

Significant cost savings through energy recovery systems

Energy recovery systems represent a large-scale, environmentally friendly and economically feasible form of power generation. Compared with alternative energy sources such as solar, wind or biomass, energy recovery systems are much more affordable and already capable of delivering power on the scale necessary for industrial processes. Energy recovery systems are even cost-competitive with conventional large-scale power sources such as coal, fossil fuels and nuclear power, but with the added benefit of reduced greenhouse gas emissions.

NFES’ flow control systems can reduce energy use by 20% and have been installed in projects across China, as well as internationally.

Industry Outlook


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Strong intellectual properties portfolio

The Company owns a strong patent portfolio and technologies for highly energy-efficient, large-dimension pipeline flow control systems. The portfolio includes one new invention patent and 11 patents of new applications in valve manufacturing and energy savings. Another two patents are in the application stage. NFES has a professional R&D facility with 35 engineers and has established a long-term close cooperation with Northeast University in China, Shenyang Metal R&D Institute of China Science Academy, and Liaoning Provincial Energy-Saving Planning & Design Institute.

Better visibility and market position

The Company has successfully deployed large numbers of energy-efficient flow control systems across industries and is well recognized across China as a technology leader. In 2007, NFES was awarded contracts for the first three sections of the landmark South to North Water Redirection Engineering Project, which will divert water to the population centers of the north through a 3,000 km pipeline network. In 2008, the Company was also awarded flow control equipment contracts for large water supply systems in seven cities in Liaoning Province.

Despite the weak 2009 global economic outlook, NFES believes its sales will continue to grow since it has already secured orders for future periods and is well-positioned with the engineering skills necessary to design, build and install large energy recovery systems. In addition, the Company is pursuing sales opportunities in high-growth sectors such as wind power.

Robust revenue growth and profit margins

The Company’s revenue grew 53% in 2008 to $15.8 million; NFES generated 23% net margins and net profits of $3.7 million. Of the total, 69% of revenues were generated from the production and sales of energy-saving valves, intelligent valves and flow control equipment, while 31% were from energy efficiency consulting and retrofitting services.

Growing 2009 order backlog

In May 2009, NFES reported 47 signed contracts representing a total contract value of $35.9 million, of which $21.5 million (including value added tax of 17%) will be completed in 2009. An additional nine contracts valued at $27.1 million are being negotiated with several expected to close in 2009.

The strong contract pipeline positions NFES for double-digit sales growth over the medium-term, despite the challenging economy. In June 2009, NFES announced a new contract valued at $2.3 million to supply 500,000 energy efficient lighting lamps in Liaoning province. As a result, we expect the Company to report GAAP revenues ranging around $18.4 million in 2009 and $23 million in 2010.


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NFES manufactures energy conservation equipment and provides integrated, energy efficient solutions to the Chinese market. The Company operates its business through its wholly owned Chinese subsidiary, Liaoning Nengfa Weiye Energy Technology Co. Ltd. (Nefaga), which principally focuses on manufacturing energy-saving equipments and new energy facilities, contracting for energy-saving and pollution reduction turn-key projects, and operating Energy Management Contract (EMC) projects. It also manufactures and sells energy-saving flow control equipment. Nefaga has a 99% owned sales subsidiary, Liaoning Nengfa Weiye Tie Fa Sales Co. Ltd.

The Company’s business units operate in two reportable segments: valves manufacturing and energy savings related. The valves manufacturing business includes the production of energy-saving valves, intelligent valves and flow control equipment and the provision of valve improvement and engineering services. The energy savings-related business includes energy savings-related re-engineering and technical services and long-term construction projects. The Company’s energy-saving projects include: • Energy planning diagnosis and consultation services, municipal energy planning, and energy auditing for

industrial enterprises and buildings;• Energy reconstruction projects mainly for industrial enterprises and buildings; and• Sales of energy-related equipment.

As a contractor to EMC (Energy Management Contract) projects, NFES provides end-to-end services, which include energy saving potential analysis, energy saving project feasibility analysis, project design, financing, equipment purchasing, construction, energy conservation auditing and personnel training.

Another important benefit of the Company’s energy conservation systems is its ability to create monetary value for customers in the form of tradable carbon credits. A central feature of the Kyoto Protocol, adopted in 1997 and entered into force in 2005, is its requirement that countries limit or reduce their greenhouse gas emissions. To encourage greening in the private sector, carbon credits are issued for every ton of greenhouse gas emissions reduced. Every ton of carbon dioxide or its equivalent that is reduced through a CDM project generates a single Certified Emission Reduction (CER). Companies can sell their CERs on one of the world’s Carbon Credit exchanges. The CER trading mechanism provides a rapid payoff for companies that implement greenhouse gas emissions reduction programs and enables them to avoid €100 per ton penalties which began in 2008 and extend through 2012.

NFES invests heavily in R&D and owns a portfolio of 12 patents. Another two patents are in the application stage. NFES has a professional R&D center staffed by 35 engineers and has long-term relationships with Northeast University in China, Shenyang Metal R&D Institute of China Science Academy, and Liaoning Provincial Energy-Saving Planning & Design Institute.

The Company has three sales subsidiaries in Shenzhen, Shanghai and Shenyang. According to management, NFES’s market share in thermal power devices is 20%-30% and its hydro power share is about 10%. Approximately 10% of its products are exported to India, Vietnam and other Asian developing economies. The Company’s customers are concentrated in the electricity generation (large-scale thermal power generation, hydroelectric power, nuclear power and wind power), oil supply, gas supply, water supply and heat supply industries. NFES also targets municipalities for its energy efficiency projects.

Business Model


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Corporate strategy

NFES plans to expand its technology consulting capabilities as well as its production of equipment and pipeline networks for municipal infrastructure. It also plans to develop comprehensive technology solutions for regional energy conservation and emission reduction, and allocate R&D dollars for the development and the manufacture of equipment and fittings for wind power plants. The Company also looks to establish partnerships with other companies in energy saving solutions and has already developed relationships with General Electric, Schneider Electric and Honeywell international.

NFES aims to become the largest, comprehensive energy-saving solution provider and alternative energy equipment manufacturer in China within three years by:

• Building a best-in-class portfolio of solutions, technologies and services related to energy saving;• Capitalizing on changing environmental regulations and increasing demand for clean energy alternatives

around the world;• Maintaining a focus on customer satisfaction, innovation, and corporate entrepreneurship;• Expanding its international presence to meet the demand for clean, low cost alternative sources of energy;• Developing a network of international partners with geographic expertise;• Increasing R&D efforts to expand into new industrial sectors;• Establish long-term strategic purchasing agreements with key suppliers; and• Generating stable, predictable, growing cash flows to the shareholders.

NFES is constructing a new manufacturing facility. The construction project consists of two phases; the first phase involves developing new manufacturing facilities for producing valve components and energy-saving equipments. This facility is expected to be complete in 2010. Total estimated construction costs of the first phase are $5 million.

Flow Control Equipment

Flow control equipment regulates the transportation of water, oil, heat and gas, and is the key factor in determining the efficiency in all pipeline systems.

NFES flow control systems reduce energy use by as much as 20% and have been installed in projects in China and internationally. Its technology was awarded “Number One Energy Saving Value of China” by the Chinese Energy Conservation Association.

Products and Services


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Wind Power Components

The Company produces 1.5 MegaWatt (MW) wind power generator accessories, including hubs, bedplates of the front engine room, bearing bases, and major axis. A new facility scheduled to come online in 2009-2010 will dramatically increase production capacity for wind power components.

Energy Saving Projects

Energy efficiency and emission reduction services target large factories, hospitals, school or other institutions desiring reduced energy use and lower emissions through energy auditing and efficiency planning.

The Company’s energy-saving and pollution reduction projects provide energy saving general contract service to China’s pillar industries (i.e. electric power, metallurgy, petrol & chemical, coal, architectural, automobile etc.) as well as regional and urban energy saving and pollution reduction integrated treatment. NFES’ Energy Management Contract operation model utilizes energy savings to pay for the investment and enables customers to implement energy saving projects that are paid for with future energy savings.

Source: Company presentation



July 9th, 2009


Coal Cogeneration Retrofit

About 95% of China’s industrial boilers are coal-fired. Most of these boilers and coal cogeneration systems achieve only 60% - 70% efficiency, compared to 90% internationally. The Company designs, manufactures and installs highly-customized waste heat energy recovery systems that recover up to 90% of the energy wasted by inefficient systems and reduce harmful emissions. NFES’ technology transforms these boilers into circulating, fluidized bed boilers, which can combust low quality coal and also achieve higher thermal efficiency. Residual ash residue can be used as building materials. Residual heat is reclaimed from the boiler and waste water.

Thermal Power

The Company has signed 30 contracts cumulatively valued at RMB751 million in 2009. Estimated gross margin is RMB26 million (35%).

NFES recently supplied flow control systems equipment valued at $2.7 million for phase III of the Guodian Zhejiang Beilun Power Plant, an important government project. Its valves are used in two 1,000MW ultra-supercritical coal-fired generating units, installed at the entrance and exit of water recovery condensers and recycle water cooling pipes to control the flow. The valves reduce energy consumption by 20%.

In June 2009, NFES delivered $0.75 million of energy-efficient flow control systems for Shanghai Huaneng’s USC Shidongkou No.2 plant. The flow control systems will be installed in July.

Hydro Power

The Company has signed eight contracts representing a total value of RMB33 million in 2009. Estimated gross margin is RMB12 million (36%).

NFES recently supplied flow control systems equipment valued at $1.7 million for phases I and II of China’s Central Route project and expects to deliver additional product as the project progresses.

Water Supply

The Company has signed three contracts cumulatively valued at RMB56 million in 2009. Estimated gross margin is RMB21 million (38%).

In 2007, NFES was awarded contracts for three sections of the “Redirect water from the rivers in the

Recent Projects

1. RMB 1 = USD 0.15 as of June 2009


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Industry Outlook

South to the North” Jingshi Section Water Supply Engineering Project. Work on the project was completed and passed inspection in 2008. Originally conceived by Chairman Mao and planned for completion in 2050, the project channels water from the country’s longest river, the Yangtze, to three rivers in the north; the Yellow, Huai and Hai, whose basins are running dry.

In 2008, the Company was awarded flow control equipment projects for the water supply systems of seven cities in Liaoning Province. This contract includes pipelines through the cities of Dandong, Fushun, Benxi, Shenyang, Anshan, Yingkou and Dalian. The total contract value is RMB60 million. The main pipelines from Dandong to Fushun and Benxi are nearly complete with contract value of RMB20 million. The other pipelines (contract value of RMB40 million) will be completed in 2010.

Nuclear Power

The Company is one of seven qualified manufacturers and one of two core manufacturers in this segment. In 2009, NFES was awarded three nuclear power projects to supply energy-saving high pressure valves, representing a total contract value of RMB39 million. Estimated gross margin is RMB19 million (49%). There are also additional nuclear power projects in the pipeline.

Energy demand

The pace of energy consumption growth is determined by economic and population growth in the world’s developing countries. With the United Nations predicting the world’s population will grow from 6.4 billion in 2004 to 8.1 billion by 2030, energy demand is also likely to increase substantially. Both population growth and increasing standards of living in developing countries will contribute to energy demand growth, expected to average 1.6% per year, or 53% between 2004 and 2030.

The current global economic downturn dampens world energy demand in the near-term, as manufacturing and consumer demand for goods and services slows. However, with economic recovery anticipated to begin within the next 12 to 24 months, most nations are expecting energy consumption growth to return to rates anticipated prior to the recession. Total world energy use is expected to rise from 472 quadrillion British thermal units (Btu) in 2006 to 552 quadrillion Btu in 2015 and then to 678 quadrillion Btu in 20302.

During the 20-year period 1980 through 2000, China’s GDP quadrupled while only doubling energy use. Rapid economic growth has resulted in rising demand for energy resources, particularly oil and gas. China’s energy consumption is projected to rise dramatically over the next two decades. Prospects for increased domestic energy production, however, appear to be more limited. The widening gap between China’s oil supply and demand and the projected gap between natural gas supply and demand indicate that China will be increasingly reliant on imported oil and gas and on improved efficiency of energy consumption.

2. http://theenergycollective.com/TheEnergyCollective/41736


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China’s power generation facilities overwhelmingly rely on coal, although the share of “clean” coal facilities is expected to rise over the next decade. China’s use of alternative and renewable energy is expanding rapidly; alter-native energy sources already contribute approximately 16% of total electricity generation and 7.5% of primary energy supply. In China, hydropower is the dominant renewable energy source, accounting for more than 95% of total electricity from renewable energy. By 2020, hydropower, nuclear and others are expected to gain more than 2% of the total power generation distribution mix, with nuclear power capacity share increasing by more than 1.5x.

Source: National Bureau of Statistics of China, China Electricity Council, State Grid Corp. of China, CEIC, Credit Suisse estimates

China Power Consumption Growth



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Over the long-term, China’s power demand is projected to grow 6.6% to 7.0% annually over the next 10 years. Significant new investments in installed capacity will be required to meet demand. By 2020, total installed generating capacity is forecast to reach 1,230 GW, which will include 290 GW from hydropower and 70 GW from nuclear and wind power. While China’s investments in hydropower, wind power and nuclear power are increasing, at present, investments in coal-fired power generation continue to rank first.

Energy conservation and emission reduction

According to the International Energy Agency, China must add 1,300 GW to its generating capacity to meet electricity demand, an amount exceeding all of the current installed capacity in the United States. Massive increases in electric generation capacity will also increase the amount of harmful emissions. China has already surpassed the U.S. as the world’s largest emitter of greenhouse gases, and the country faces enormous challenges related to pollution. Only 1% of China’s 560 million city dwellers breathe air considered safe by E.U. standards; environmental pollution has created industrial cities where people rarely see the sun; and birth defects in infants have soared nearly 40% since 2001. A 2005 report by Chinese environmental experts estimated that premature deaths attributable to air pollution in China are likely to reach 380,000 in 2010 and 550,000 in 2020.

China’s 11th Five-Year Plan (2005-2010) has set energy conservation and emission reduction targets for local governments and industries and will invest no less than RMB 1 trillion to reach these energy savings goals by 2010. The Chinese government will reward enterprises according to total savings produced by their energy-saving projects and the central government has set aside RMB 7 billion to support the top 10 key energy saving projects. Emissions reduction will be an important criteria in evaluating their success.

In November 2008, China announced an economic stimulus package worth nearly $600 billion (RMB4 trillion), which includes more government investment in infrastructure, tax deductions for exporters, and bigger subsidies for the poor and farmers. The Chinese environmental ministry has approved 365 projects related to the stimulus since last year and rejected or postponed 29 high-energy ones, such as petrochemical plants, steel factories and coal-powered power plants. A total of RMB 210 billion ($30.7 billion) of the stimulus money is earmarked for environmental protection projects and improving energy efficiency3.

Within the RMB4 trillion stimulus package, RMB150 billion will be allocated to energy saving and emission reduction. Production of energy saving equipment will be financed by treasury bonds and energy saving services will be financed by subsidies. For subsidies, there are three categories: 1) RMB200 per ton of standard coal saved; 2) rewards for top energy-saving and emission reduction projects; and 3) subsidy interest on energy saving and emission reduction projects.

Kyoto Protocol

The Kyoto Protocol was adopted for use in December 1997 and entered into force in February 2005. The central feature of the Kyoto Protocol is its requirement that countries limit or reduce their greenhouse gas emissions. To help countries meet their emission targets, negotiators of the Protocol included three market-based mechanisms – Emissions Trading, the Clean Development Mechanism (CDM) and Joint Implementation.

CDM accounts for 88% of the total value of the project-based market. A few countries dominate the CDM market – China, India and Brazil. Chinese projects are expected to reduce about 114 million tons of CO2 emissions

3. http://hosted.ap.org/dynamic/stories/A/AS_CHINA_ENVIRONMENT?SITE=NCASH&SECTION=HOME&TEMPLATE=DEFAULT


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annually, accounting for more than 50% worldwide of emissions reductions under the mechanism4. Most CER recipients in China sell their credits before receiving them. According to a World Bank report, China is still the destination of choice for buyers of credits, who are attracted by the country’s large size, economies of scale and favorable investment climate.

China continues to dominate the CDM market with a 61% share and set a relatively stable price floor for global supply of CERs. Primary market CER prices in China ranged between $12.25 and $16.85 in 2007, and prices edged up above $19.90 in early 2008. The total value of the primary CDM market was $7.4 billion in 2007, up 28% from 2006. The secondary market, which encompasses all subsequent transactions following the primary sale, swelled by more than 11 times to $5.5 billion last year. Secondary CERs averaged $25.07 per ton in 20085.

Revenues

NFES generates product revenues from the sale of manufactured products relating to industrial valves components and wind-energy equipment. These sales were $2.1 million or 86.86% of total revenues for Q1 2009. Product revenues in Q1 2009 declined 6% year-over-year. The Company has several very large contracts which require a longer production period. Service revenues are derived from energy saving technical services generally billed on a time-cost plus basis. Revenue is recognized, net of business taxes, when service is rendered and accepted by the customer. Service revenues were $318,006 and $331,381, or 13.14% and 11.57% of total revenues for the three months ended March 31, 2009, and 2008, respectively.

4. http://cdm.ccchina.gov.cn/english/NewsInfo.asp?NewsId=30085. http://chinadaily.com.cn/bizchina/2008-05/08/content_6670878.htm

Source: http://cdm.unfccc.int/Statistics/Registration/AmountOfReductRegisteredProjPieChart.html

Average annual CERs from registered projects total 308,907,948 (as of 15.06.09)

Financial Analysis


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Project revenues are derived from energy saving re-engineering projects that require significant modification or customization or installation.. The Company applies the percentage-of-completion method to recognize project revenues. There were no project revenues in Q1 2009 compared to project revenues of $290,523, 10.14% of total revenues, in Q1 2008. The Company is currently conducting feasibility studies and negotiating several projects and anticipates reporting project revenues in the future.

NFES’ total revenues fell 16% to $2.4 million in Q1 2009 from $2.9 million in Q1 2008.

Cost of product revenues consists primarily of material costs, direct labor, depreciation and manufacturing overheads, which are directly attributable to the manufacture of products and the rendering of services. Total cost of revenues was $ 1.7 million and $2.1 million, or 71.92% and 73.63% of total revenues in Q1 2009 and Q1 2008, respectively. Total cost of revenues fell 17% year-over-year in Q1 2009 because of lower revenues.

Revenue, $Products Service Projects

Cost of revenues, $Cost of products Cost of service Cost of projects

Gross profit, $Products Service Projects Gross margin, %Products Service Projects

10,336,449 6,224,114 2,037,053 2,075,282

6,964,240 4,398,433 1,530,116 1,035,691

3,372,209 1,825,681

506,937 1,039,591

32.6%29.3%24.9%50.1%

15,834,944 11,632,269

3,330,113 872,562

11,436,787 8,383,388 2,421,109

632,290

4,398,157 3,248,881

909,004 240,272

27.8% 27.9%27.3%27.5%

53.2%86.9%63.5%

-58.0%

#VALUE!90.6%58.2%

-38.9%

30.4%78.0%79.3%

-76.9%

-4.8%-1.4%2.4%

-22.6%

2,864,957 2,243,053

331,381 290,523

2,109,437 1,660,147

209,520 239,770

755,520 582,906 121,861

50,753

26.4% 26.0%36.8%17.5%

2,419,832 2,101,826

318,006 -

1,740,370 1,565,874

174,496 -

679,462 535,952 143,510

-

28.1% 25.5%45.1%

-15.5%-6.3%-4.0%

-100.0%

-17.5%-5.7%

-16.7%-100.0%

-10.1%-8.1%17.8%

-100.0%

1.7%-0.5%8.4%n/m

2007 2008 % Chg % ChgQ1 2008 Q1 2009

Source: SEC Filings

Revenue and gross margins by segment


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Operating expenses were $194,018 and $180,114, or 8.02% and 6.29% of total revenues, in Q1 2009 and Q1 2008, respectively. This increase was primarily due to higher sales and marketing costs and general administrative costs. The Company incurred research and development expenses evaluating whether its existing manufacturing fa-cilities and valve production expertise could be used to produce equipment and fittings for wind power plants. The R&D effort enabled the Company to create a new line of business and tap growing demand for wind power equipment in China.

NFES recorded net income of $441,913 (18.26% net margin) in Q1 2009, down modestly from net income of $579,087 (20.21% net margin) in Q1 2008.

Liquidity

The Company has a strong balance sheet with positive net working capital and cash and equivalents exceeding $1.4 million as of March 31, 2009.

Revenues Cost of revenues Gross profit Sales and marketing Research and development General and administrative Operating profit

Other income (expenses): Net income Foreign currency translation gain Comprehensive income Diluted EPS, $

10,336,449 6,964,240 3,372,209

36,092 370,633 912,014

2,053,470

15,236 2,068,706

487,143 2,555,849

0.06

15,834,944 11,436,787 4,398,157

169,082 111,030 641,776

3,476,269

176,541 3,652,810

731,070 4,383,880

0.1

53.2%64.2%30.4%

368.5%-70.0%-29.6%69.3%

1058.7%76.6%50.1%71.5%66.7%

2,864,9572,109,437

755,52013,35938,332

128,423575,406

3,982 579,087412,644991,731

0.02

2,419,8321,740,370

679,462 48,825

0145,193 485,444

18,016 441,913

13,638455,551

0.01

-15.5%-17.5%-10.1%265.5%

-100.0%13.1%

-15.6%

352.4%-23.7%-96.7%-54.1%-50.0%

2007 2008 % Chg % ChgQ1 2008 Q1 2009

Source: SEC Filings

Income Statement, $

Total current assets, includingCash and cash equivalents Plant and equipment, net Construction in progress Total assets Total current liabilities Total stockholders’ equity

13,329,8872,252,7712,393,287 2,328,839

18,052,013

2,504,504 15,547,509

14,675,482 1,441,394 2,322,312 2,788,081

19,785,875

3,782,815 16,003,060

31-Dec-08 31-Mar-09

Source: SEC Filings

Balance Sheet, $


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During Q1 2009, NFES used $351,166 in operations and $456,715 for investing purposes. The Company an-ticipates it will require additional working capital in 2009 and may issue additional equity or debt to obtain needed capital.

NFES’ revenues grew 53% in 2008 to $15.8 million and generated 23% net margins and net profits of $3.7 mil-lion. The majority of revenues were from production and sales of valves and flow control equipment, while 31% of revenues reflect energy efficiency consulting and retrofitting services.

As of May 2009, NFES had 47 signed contracts together worth $35.9 million. Of this amount, $21.5 million (including value added tax of 17%) will be completed in 2009. The robust pipeline positions NFES for double- digit revenue growth in 2009 and 2010.

Outlook and Valuation

Source: Analyst estimates

Revenue forecast, $ Mn

Revenues Cost of revenues Gross profit Sales and marketing Research and development General and administrative Operating Income Other income (expenses): Net income Diluted EPS, $

10.3 7.0 3.4 0.0 0.4 0.9 2.1 0.0 2.1

0.06

15.8 11.4 4.4 0.2 0.1 0.6 3.5 0.2 3.7

0.10

18.4 13.3

5.2 0.3 0.1 0.8 3.9 0.0 3.9

0.10

23.0 16.6

6.4 0.4 0.1 0.9 5.0 0.0 5.0

0.12

2007 2008 2009E 2010E

Source: Analyst estimates

Earnings forecast, $ Mn


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Based on management’s outlook and historical performance, as well as our understanding of NFES’ business model, we expect the Company to report diluted EPS of $0.10 in 2009 and $0.12 in 2010.

Valuation

We based our valuation on comparative analysis to other companies that provide waste heat recovery construc-tion and engineering services. There are a limited number of competitors and high barriers to entry.

The peer group companies currently trade at forward Price/Earnings multiples of only 13.9 times earnings, mainly due to the recession and relatively low oil prices, which make energy efficiency projects less attractive. Over the long run, however, we think strong demand for energy and scarcity of fossil fuels will drive fuel prices higher and spur investment in energy efficiency projects.

We believe NFES warrants a premium to the peer group because of its successful record of project completions, growing backlog and improving profitability.

We are initiating coverage of NFES with a Speculative Buy Rating and a $1.90 price target, based on a 16.0 times forward Price/Earnings multiple and our 2010 EPS estimate. We think NFES is attractively positioned in a high-growth market and has strong appreciation potential. However, we strongly advise prospective investors to consider the risk factors mentioned below before investing, since the Company has a limited track record and must overcome many challenges to achieve its growth goals.

SmartHeat Inc. Watts Water Technologies Inc. Flowserve Corp. Energy Recovery Inc. Foster Wheeler AGChina Energy Recovery Inc.Median

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NFES

175 775

4,310349

3,14050

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7.2521.1676.94

6.9624.84

1.66

0.92

12.9519.5910.6136.6310.1033.8216.27

2.110.651.094.420.591.431.26

10.3616.7911.4324.8610.9416.2913.86

2.660.650.965.540.572.281.62

Company NamePrice

$ Market

Cap. $ MnP/E P/S Ticker

Symbol 2009E 2009E 2010E 2010E

Source: Yahoo Finance,


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Limited operating history

The unpredictable growth of the energy recovery market makes it difficult to evaluate NFES’ business pros-pects. The risks and difficulties that the Company faces include challenges in accurate financial planning and uncertainties resulting from having relatively limited information on which to evaluate its business strategies as compared to companies with longer operating histories.

Questions about the Company’s ability to manage growth

The Company is significantly expanding its business to meet increasing demand for energy recovery products and services and capture new market opportunities. As NFES grows, it must improve its operating and finan-cial systems, increase manufacturing capacity and output, and expand, train and manage a growing employee base. To fund growth, NFES must have sufficient liquidity and access to funding from external sources.

Need for additional capital

The Company may need to raise additional capital in the future. There is no guarantee that it will be able to obtain additional financing on favorable terms, if at all, especially in light of the lack of credit crunch. Lack of financial resources could slow growth plans. Additional financing may be debt, equity or a combination of debt and equity. If equity is used, it could result in significant dilution to NFES shareholders. Significant marketing and distribution risks

Marketing, distribution and sales expose the Company to a number of risks, including: increased costs asso-ciated with maintaining marketing efforts in various countries; marketing campaigns that are either ineffec-tive or negatively perceived in some countries or industry sectors; difficulty and cost relating to compliance with differing commercial and legal requirements in the international markets; inability to obtain, maintain or enforce intellectual property rights; and trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase product costs and make the Company’s offering less competi-tive in some countries. Fluctuations in exchange rates

The Company’s sales and expenses are denominated in Renminbi. Fluctuations in currency exchange rates could have a material adverse effect on NFES’ financial condition and results of operations.

Risk Factors


July 9th, 2009


Ms. Wang has a master’s degree in accounting. Since May 1996, she has been involved in the building of Liaoning EMC, which is one of three EMCs established by the World Bank. Ms. Wang serves as the CFO of Liaoning EMC. In August 2003, the World Bank recommended her as the premier expert to the Chinese EMC Association. Ms. Wang became a director and CFO of NFES in November 2006.

Lihua WangDirector & CFO

Since September 2001, Ms. Li has served as in-house counsel within the legal department of Liaoning Ne-ngfa Weiye Group. She is responsible for regulatory compliance and corporate governance. She has strong professional experience in the fields of human resources and management. Ms. Li became a director of the Company in November 2006.

Hong LiDirector and Officer of Law Department

Management Team

Mr. Gang Li served as the director of the Technology Innovation Department in Liaoning Province Plan-ning and Economy Commission, as well as the director of the Economic Operation Department in Liaoning Province Economic and Trade Commission. From April 1984 to July 1998, he participated in preparation of the Eighth and the Ninth Five-Year Plan regarding technological improvement in eight industries, in-cluding energy, transportation and other various metallurgical industries. Mr. Li has also helped organize and implement various projects relating to technological improvements and spanning 500 key products, 100 major projects, 100 enterprises and eight industries, including the famous “115 engineering project.” Mr. Li’s leadership in the “115 engineering project” and above-mentioned technological improvements was recognized with the Enterprise Technology Advancement Award by China’s National Technology Im-provement Commission. Mr. Li is also an accomplished author with several published papers and books. His book “An Introduction to Technological Improvement” was published by Xinhua Publishing House. In addition, Liaoning Provincial Government awarded his paper titled “Macro-indicator Review Systems in Enterprise Technology Improvement” the National Major Outcome prize and a second prize in the cat-egory of Technological Advancement.

Mr. Li founded the Liaoning Nengfa Weiye Group in 1999 and currently serves as president and chair-man. In addition, Mr. Li serves as the deputy director of the Liaoning Provincial Resource Saving and Comprehensive Application Association. He is also the deputy director of the China Energy Conservation Association and deputy director of the Energy Conservation Committee under the China Energy Research Association.

Gang LiChairman & CEO


July 9th, 2009


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Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant posi-tions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

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