SmartHeat, Inc.
MAY 2008
www.smartheatinc.com
A US Public Company - OTCBB Stock Symbol: SMHT
-Heat Energy Saving Solutions Benefiting the
Environment-
This presentation contains "forward-looking statements" within the meaning of the “safe-harbor” provisions of the Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to differ materially from the results expressed or implied by such statements, including changes from anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products, and other factors. Accordingly, although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company has no obligation to update the forward-looking information contained in this presentation.
A Leader in China’s
Heat Energy Saving Industry
One of China’s market leaders in the heat energy saving industry – less coal
used, less pollution to the environment
Engages in the manufacture, research, and sale of Plate Heat Exchangers
(PHE) and compact PHE units as well as heat meters.
Rapid sales and earnings growth - average gross profit margins over 30%
2007 revenues of $13.3 million, net income of $2.1 million
2008 guidance: revenue of approximately $42 million, net income between
$7.4 million and $7.7 million
COMPACT
PHE UNIT
PHEs
Two high margin product lines: PHEs & PHE Units
1- China Heating Association
A leading authorized OEM provider for Sondex in China: Products
are sold under Sondex brand with design & service performed locally
Broad industry applications: over 50% are sold to the utilities,
petrochemical and chemical processing industries
Rapid market growth: Market growth of 30% expected through 20101
Capacity: 2,330 PHEs annually with available excess production
capabilities
Frequently utilized in China’s HVAC market
Internally developed R&D: Strong R&D capabilities led by company
founder/CEO
A major revenue driver: 79% of total revenues in 2007, gross margins
34%
•Capacity: 700 units annually with available excess production
capabilities
Advanced Heat Energy Saving
Products
Broad Product Applications
Industry applications:
Chemicals & Petrochemicals
Food & Beverage processing
Energy & Utilities
Steel
HVAC
Pulp & Paper
Textiles
Pharmaceutical
Energy saving benefits:
Improve energy efficiency by 20 to 36%1
Greater control of heat distribution and temperatures in both
industrial and residential applications
Cool equipment and reduce turbine or machine pressure
1- While both SmartHeat and International brands can increase energy efficiency by 20 to 36%
for PHEs and PHE Units, respectively, other brands and styles may result in lower savings.
A Rapidly Growing Industry
1 - ALFA LAVAL, 2006 Annual Report 2 - China Heating Association 3 - Management estimate
Global – a $12 billion industry
China – the world’s fastest growing market
Worldwide markets - $12 billion (2006), of which PHE Units account
for approximately $2.3 billion1
Global manufacturers include Alfa Laval, Sondex, Tranter SWEP,
Danfoss, Hisaka Works and GEA
2007 market for PHEs approximately $2.4 billion with annual growth
of 30% expected through 20102
2007 market for PHE Units approximately $139 million. Market is
expected to grow at a rate of 70% annually between 2008 and 20102
PHE market dominated by western producers [>50%] while compact
PHE units market is highly fragmented among many foreign and
domestic firms3
Favorable Market Environment
Government Policy
Macro Factors
Micro Factors
Economic & Societal
National
China sets new pollution
reduction standards 1
(March 2006)
20% gdp/person energy
consumption by 2010
10% industry expulsion
of pollutant particles by
2010
1 - PRC 11th 5-Year Plan; 2 - “What is co-heat generation?” May 10, 2007; 3 - China Nat’l Bureau of Statistics, 2007; 4 - World Bank, July,
2007; 5 - Shenzhen Daily Nov.23, 2006; 6 - MEPS International; 7 - - RFF Policy Briefing, Oct 19-20, 2006, “Consumer, Competitor,
or Collaborator?”
Power plants utilizing
PHEs with higher energy
efficiency supported
Continuing urbanization:3
Between 1990-2006 urban
population 275 million from
26% to 44%;
World Bank estimates that
between now and 2015 half of
the world’s new building
construction will take place in
China4
Increasing demand in
industries requiring PHEs:
Per-capita milk
consumption - tripled
between 2000-20055;
Steel - consumption grew at
an average rate of 10.2%
between 1989-20026
Power Plants – approx 1
new power station is built
every 10 days in China7
Worsening Air Quality
Int’l & domestic pressure to
improve air quality
Growing and broad distribution of customer base in almost all industries: less impacted by
economic cycles
Wholesale and company direct sales channels: 40% of sales to Distributors; 60%1 sales direct to
customers
Excellent after sale services: 12-18 month service warranties
70% of sales made between June and December
1 - Based on average of 2005-2007 sales
Extensive Sales Channels
Extensive Client Network
Over 250 clients - broad distribution of customer segmentation
Sample projects and clients:
Dalkia Heat & Power1 (Utility)
China Petroleum (Energy)
Sinopec (Energy)
China World Trade Center (Office Tower)
Motorola (Electronics)
Bridgestone Tires (Auto Parts)
Dayilong (Coca-Cola Bottling)
1 - Dalkia is the leading provider of energy services in Europe and active in multiple JV energy projects in China
Real Time Product Design
Systems
Just-in-Time Design & Production
Self-designed online Computer Assistance
Design (CAD) software integrated with real
time Enterprise Resources Planning (ERP)
system allows field salesmen to input
orders, obtain draft models, access quotes,
and confirm delivery dates in minutes
Enables inventory and production to
accurately schedule and reduces lead
production time to 5 days for PHEs and 10
days for Units
Opportunities
Leading Brand: compact PHE Units in China
Environmental Benefits: more efficient
utilization of coal
Strong business model: established reputation as
authorized SONDEX OEM
Low credit risk customers: municipal utilities
and large industrial firms, i.e., Veolia EDF,
Sinopec, China Petrol
Strong management: familiar with a range of
industries’ utilizing PHE technology
Extensive sales network: new and returning
customers.
Quality at competitive prices: equivalent to
imports at 15% lower prices, product lifespan
exceeds other domestic brands
Environmental Protection Policies:
-Coal accounts for 80% of CO2 emissions in
China today1
-Burning 1 ton of coal produces 2.5 tons of CO 21
-PHE technology can help China to reduce coal-
related emissions of CO2
Escalating energy prices:
Majority of power plants in China are fueled by
coal
Coal prices in Asia nearly tripled in the last year2
Construction & Urbanization:
-Urban population increased by 275 million
between 1990 and 20063
-4 billion square meters of new residential space
will be build by 2010 with at least 10% using
PHEs 4
Competitive Advantages
1 - Energy Information Administration 2 – global COAL 3–China National Bureau of Statistics, PRC 4 - China Heating Association
Competitive Advantages
Significant Environmental Benefits
- A Case Study-
Heating Method
Coal
Consumption
(metric tons)
Heat Produced
(Kcal)
CO2 Emitted
(tons)
Costs in Coal, USD
(excluding water and other
costs)
District
Heating System
Utilizing
SmartHeat's PHEs
550
1680-1870 KCal
1,944
$55,000
Small Boiler with
traditional
shell-and-tube PHE
1,496
1680-1870 KCal
5,293
$149,000
Estimated cost of heating 100,000 m2 (1,000 households) for
one month with coal priced at $100/ton
The use of SmartHeat PHEs within district heating systems reduces coal consumption and
related CO 2 emissions by approximately 2.7 times.
Source: Company Estimates
Note: Real costs may differ significantly depending on a number of variables.
Growth Strategies - Organic
Growth & Strategic Acquisitions
Organic growth:
new project development
anticipate rapid growth in the heat meter sector due to favorable new
government regulations that mandate broad applications of heat meters
Strategic Acquisitions:
- potential acquisitions of compatible plate heat exchanger company and a
heat meter company
New revenue source – on-going service & maintenance fees
- current sales create a potential for future aftermarket earnings as installed
PHEs and PHE Units age and have to undergo repairs and maintenance
- expects revenues from maintenance fees to increase to 20% of total
revenues by 2012
Zhijuan Guo CFO
Ms. Guo was appointed CFO of SmartHeat in 2002.
Before joining SmartHeat, Ms.Guo served as
Production Planning Director at Shenyang
Thermoelectric Co. and Auditing Director at Shenyang
Dongyu Group.
Strong Management Team
Wen Sha Sales Director
Mr. Sha joined SmartHeat as Area Sales Manager in
2005. Prior to that time he served as the General
Manager of Nanjing Hui Dun Ltd., and before that time
he was with APV Accessen in Shanghai, a leading
international PHE firm, as sales director.
Jun Wang CEO
Mr. Wang co-founded SmartHeat in 2002. Prior to that
time he served as a Sales Manager at ALFA LAVAL-
Shanghai, a Sales Manager of Honeywell in China, and
Deputy General Manager of Beijing HotNet Corporation, a
PHE components supplier.
Strong industry relationships coupled with technical knowledge have and will allow management
to expand SmartHeat’s markets and profitability
Financial Highlights
Since inception, SmartHeat’s management has continued to grow sales and profits through:
Expanding the product line to anticipate market needs
Shortening lead times
Implementing systems to increase efficiencies in production and
Acting as a full-service solution provider for clients PHE needs
Strong Sales and Earnings
Forecast
Investment Highlights
Energy saving technology with environmental friendly applications:
20-36% savings in energy costs
Reduces coal consumption and CO2 emissions by 63% - less fuel is burned to produce the
same amount of heat decreasing energy costs and pollution
One of China’s market leaders in PHE heat energy saving solutions
Largest market share in PHE Units domestically1
Rapid sales & earnings growth for 2008 and beyond
Average annual revenue growth 52% in past five years
Government policy and social trends portend unbridled future growth
New markets opening supported by stable OEM sales to provide steady cash flow
Strong management – founders/managers are largest company shareholders
Experienced management team consists of industry leaders and innovators
Company intends to apply for listing on the NASDAQ stock market
1- China Heating Association