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Company Visit China Software & IT Services
Creative Energy Solutions
(8109 HK, HK$0.88, NR)
Energy saving concept
Potential sizable contract from Beijing government. For Savin 2000 II, Creative will first target the Beijing
market in the first two years and then further extends its business to other northern cities in the PRC. There are
approximately 900 sets of district heating systems in Beijing, of which about 250 sets are run by the Government.
Since the launch of the solution, Creative has already completed the EMS installations in three different district
heating systems run by the Beijing Government. The company has been in close discussion with the government
and expects to be granted with the retrofit project on the remaining district heating systems. The company
expects to reach agreement with the government within the next one to two months.
The company plans to install its EMS in 120 to 130 sets of district heating systems in the next 12 months and
complete the rest in the year after. Based on an average contract size of RMB800,000 to RMB1m for each
installation, potential revenue contribution from this retrofit project with Beijing government is estimated to be
around RMB90m to RMB130m this year. The EMS projects for district heating systems in the PRC will be the
key growth driver for the company in the next two to three years.
Establishing presence in Hong Kong. While Creative will continue to focus on the PRC market, the company
has been addressing Hong Kong market for energy retrofit project opportunities. It has completed the design of
EMS solution for China Resources Building, the building where its Hong Kong office located. The company
expects to sign the contract in March or April if the operator of China Resources Building agrees on the price
and design.
Savin 2000 I achieved 60% energy saving. Savin 2000 I is a proprietary energy management and data analysis
system that allows commercial building operators to tract, monitor and adjust energy usage of the water pump
system of central air-conditioning systems. Through the application of the EMS solution, the buildings can
achieve significant cost savings on their energy consumption. The company has so far completed more than 100
energy retrofit projects for commercial buildings such as hotels, offices, hospitals, shopping malls, etc. Of the
projects they have completed, the energy savings achieved in the water pump system ranges from 40% to 75%
with an average of about 60%, which represent 15-25% energy savings on the air-conditioning system of the
buildings.
A price setter. With its leading position, the company is basically a price setter. The company generally charges
its customers based on the calculation of one-year cost savings that can be achieved by applying its EMS
solution. The price is not particularly high compared to the product life of 10-12 years for its EMS solution. To
adapt to the needs of different customers and to smooth out its revenue stream, the company provides flexible
terms of payment by charging its customers in four different ways as shown in Table 1. The majority of its past
projects was settled by method 1 and 2. Going forward, the company plans to promote shared-saving scheme
especially in Hong Kong to attract custo mers who wants to minimize their upfront payment.





Cor por at e Fl ash
Wed, 06 Mar 2002
Crystal Wu, CFA
(852) 2533 3713
crystalwu@softbank.com.hk
SBI E2-Capital Securities Corporate Flash
2
Table 1: different payment models
1.
30% of the total contract sum
65% upon project completion
Remaining 5% settled within one year

2.
30% deposit of the total contract sum
70% balance paid by installments on a
monthly basis
3. Saving for Leasing
Agree on a fixed contract sum
Customers pay all the actual savings in energy
costs on a monthly basis until the total contract
sum is paid in full
4. Shared-saving
The first 3-5 years pay a monthly fixed
fee
10% of the remaining payment will be
paid thereafter
Source: Company data

Competitive advantages . Competition is limited in the EMS solutions market in the PRC. The primary
competitors of Creative are independent producers of control equipment such as frequency converters in the PRC.
Since their products monitor only part of the customers system, they achieve much lower energy savings than
Creatives EMS solution. The energy efficiency services market is relatively new in the PRC. Because of the
high growth potential, we expect more newcomers to the market going forward. However, we believe the
company will continue to enjoy first mover advantage as it has already built a solid track record, established
business relationship with the government and cultivated a professional engineering team.
On track to beat FY02 forecast. The company reported 1H02 net profit of RMB22.8m and is on track to beat
its profit forecast of RMB45m for FY02 (30th June 2002), representing YoY growth of more than 170%. The
company is trading at about 8x FY02F earnings.
Margin contraction. Gross margin and operation margin for the year ended 30 June 01 was high at 75% and
53% respectively. As a result of the business expansion, we expect operating expense such as labor cost, sales
and administration expense to grow significantly which will likely lead to the margin contraction in the next few
years.

Background
Leading EMS solutions provider in the PRC. Creative Energy is the leading provider of Energy Management
System (EMS) solutions in the PRC. In Sep 99, the company launched its first EMS solution, Savin 2000 I
which serves to improve the energy efficiency of the central air-conditioning systems in existing buildings so
that its customers can save cost on energy consumption. Leverage on the similar technology and expertise, the
company launched its second EMS solution, Savin 2000 II in July 01 which mainly targets to reduce the energy
consumption for public district heating systems in the northern cities of the PRC. The company designs and
installs its tailor-made EMS solutions for its customers.
High potential for energy retrofit market in the PRC. The PRC is the worlds second largest energy consumer
after the U.S. However, its energy efficiency is relatively low and thus leaves room for improvement. While
energy consumption in buildings represents an essential part of the total energy consumption in the PRC,
approximately 30% to 40% of the total energy consumed in buildings in the PRC is related to its central
air-conditioning systems.