Our reporters recently went to the largest LED production base of Elec-tech (002005) in Wuhu to learn more about the production and sales of LED products of the company.

The previously announced orders of Elec-tech signed with US ShiningImage, Japan’s Twinbird and Thailand’s KANTHaWiChiT are the supply contracts of lighting products.

light workload and low pay

The production of the lighting sector is not good, according to several workers of the Wuhu base.

Yu Hao (an assumed name), who just finished his interview with the company, said both the packaging plant and the lighting plant intend to hire him, but the lighting plant offers lower pay.

“The interviewer showed me around the workshop of the lighting plant and I found that several production lines were out of work and some workers were doing cleaning there. The workshop director told me that they have no work to do but do cleaning,” said Yu Hao. He also inquired about some other plants under Elec-tech before and found that he can get only RMB 1700-1800 in the lighting plant, while he can get RMB 2000 plus in other plants.

According to a regular worker of the lighting plant, it’s a fact that the production doesn’t go fully loaded. “There are 6 production lines in the lighting plant, but we have no work to do now. We worked for only 10 plus days in July.”

An equipment supplier who has frequent contacts with Elec-tech told our reporters that he also found the workers in the lighting plant were quite easy with light workload.

An official of the Management Committee of Wuhu Economic Technology Development disclosed that he once went to the Wuhu base of Elec-tech for inspection and found that the plant didn’t go fully loaded.

The above-mentioned information wasn’t confirmed officially by Elec-tech.
 
According to the Q3 financial result of Elec-tech, a total of 80 MOCVDs have arrived Wuhu Elec-tech and Yangzhou Elec-tech, of which 38 were commissioned and went into operation, 5 were used for R&D and other MOCVDs were under the process of installation and commissioning.

The previously announced orders were mostly framework agreements.

With many questions and doubts, our reporters called Zhang Xinyu, Representative of Securities Affairs of Elec-tech, for many times on behalf of the investors after the release of the company’s semi-annual report. Here is the dialogue record.
 
Reporter: Didn’t your company receive any large LED orders in Q2?
Elec-tech: No. We would have announced it if we had any. There were no large orders in Q2. Some are in negotiating and no results have come out yet.

Reporter: Your company signed several large orders in Q1, but it seems that all of them didn’t go well.
Elec-tech: The market was out of our expectation. The consensus expectation says 2011 or 2012 is the first year of LED general lighting. But the expectation hasn’t been realized and the energy-saving lamps still dominate the supermarket.

Reporter: Then will this strike a blow on the confidence of customers and affect the purchase of customers?
Elec-tech: Maybe, most orders are just framework agreements.

Reporter: What does “framework”mean?
Elec-tech: It means a cooperation framework in general terms. The detailed price and quantity will be specified in the later orders. Different from the contract in Chinese concept, a framework agreement has no binding force and legal liabilities. It’s a common practice we adopt in overseas business. For example, we signed a big agreement valued USD 100mn with an overseas customer, but the detailed order will come out later according to the market conditions, so the quantity may decrease or the order may be postponed. If you force him to sign such a big order with terms of compensation, he will not sign it. Actually, there is risk warning at the beginning of every announcement. You shouldn’t just read the mainbody, you’d better take the risk warning into consideration.

Reporter: Your company signed a contract valued nearly RMB 400mn with Tianxuhengyuan, but the actual implementation was only RMB several millions in the first half. Why did your company sign such a big contract at that time?
Elec-tech: They predicted they could obtain the orders of so many cities in this year, but they failed to get some of them in later negotiations.

Reporter: So the order is an uncertain one?
Elec-tech: Yeah, because these are the government projects, they just find a supplier to settle the supply chain at first and they won’t sign a procurement contract in the real sense in case of the unsuccessful negotiations on the projects.
 
Reporter: So their business didn’t go well, right?
Elec-tech: The scale of the EMC business is smaller than they had expected. Maybe they failed to get some orders or there comes the rivals. The industry is very hot now. Since Guangdong announced the LED promotion plan, the competition becomes fiercer.

Reporter: We were very happy when we saw the contract announcements, but we didn’t expect your Q2 financial result was so poor. We are very depressed now. The duration of the contract have passed by half, right?
Elec-tech: True. It’s not exactly what we had expected.
 
Reporter: Do you mean that the contract cannot be carried out completely this year?
Elec-tech:I do not mean in the sense of failure to fully honor the contract in its entirety，I do mean, however, the partially carrying out of it.
 
Reporter: I find it strange that your company signed the contract with this company in Beijing, but it’s not a famous company in the industry. We didn’t hear about it before and we checked it that the company was just established last year.
Elec-tech: The company belongs to Air China Group which is a giant central enterprise and owns thousands of companies. You can’t learn about all of them. Besides, LED EMC companies emerged in recent years. The company gets orders from the city governments and then buys our fixtures to install. The company doesn’t produce LED fixtures itself.

Reporter: When you signed the contract, that company wasn’t a subsidiary under Air China Group, right? You signed the agreement in Feb., right?
Elec-tech: From the materials they supplied to us, the background of their shareholders is AVIC. Maybe they have negotiated for the large part, but they haven’t finished the final procedures.

Reporter: Does your company specify the terms of compensation in the contract?
Elec-tech: If the contract couldn’t be fulfilled completely, we can postpone it or sign another contract to replace it. It’s unrealistic to force the company to compensate you. After all, the company is our long-term partner.

Reporter: China Environmental Investment Holdings Limited is a listed company on HKEx. Your company has announced this large order in your major contract announcement of daily operations, but we didn’t find the order in the announcement of HKEx. Why?
Elec-tech: I don’t know.

Reporter: Do you have to announce the framework announcement?
Elec-tech: No. But if we didn’t announce them, the Stock Exchange would examine us.

Reporter: I made a calculation that your five contracts total RMB 1.075bn.
Elec-tech: You couldn’t count in that way. You didn’t pay attention to my risk warning.

Reporter: So there are big uncertainties in the contracts?
Elec-tech: Yeah, they are framework agreements. We have to wait for the real orders to confirm the detailed price and quantity. So you have to assess the contracts yourself. At present, the contracts didn’t go well, so you’d better lower the expectations.