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Harbin Electric Delivers Record Quarterly Earnings Adjusted Net Income up 242% at $20.79 Million

HARBIN, China, May 10, 2010 /PRNewswire via COMTEX/ -- Harbin Electric, Inc.

("Harbin Electric" or the "Company", Nasdaq: HRBN), a leading developer and manufacturer of a wide array of electric motors in the People's Republic of China, today reported its financial results for the first quarter of 2010.

Financial Highlights -- Total revenues were $105.49 million, up 243% from $30.72 million in 1Q09 -- Operating income totaled $27.73 million, up 246% from $8.03 million in 1Q09 -- Adjusted net income attributable to controlling interest (excluding non-cash item due to change in fair value of warrant) was $20.79 million, up 242% from $6.08 million in 1Q09 -- GAAP earnings attributable to controlling interest were $0.66 per diluted share, compared with $0.39 in 1Q09 -- Adjusted earnings attributable to controlling interest (excluding non- cash item due to change in fair value of warrant) were $0.66 per diluted share, compared with $0.27 in 1Q09 Financial Summary: YoY % 1Q10 1Q09 Change Revenue $105,485,157 $30,724,893 243% Gross Profit $35,742,070 $10,923,778 227% Gross Profit Margin 33.9% 35.6% Operating Income $27,731,117 $8,025,592 246% Operating Margin 26.3% 26.1% Net Income Attributable to Controlling Interest $20,553,688 $8,654,334 137% Adjusted Net Income Attributable to Controlling Interest* $20,787,766 $6,080,913 242% Adjust Net Margin* 19.7% 19.8% Diluted EPS Attributable to Controlling Interest $0.66 $0.39 69% Adjusted Diluted EPS Attributable to Controlling Interest* $0.66 $0.27 144% * See Reconciliation of non-GAAP measure to GAAP net income. Also see "About Non-GAAP Financial Measures" toward the end of this release Revenues In the first quarter of 2010, total sales more than tripled to $105.49 million compared to $30.72 million in 1Q09, which was negatively impacted by the global financial crisis. The acquisition of Xi'an Tech Full Simo Electric Motor Co.

Ltd. ("Xi'an Simo") in October 2009 contributed $45.03 million. Excluding this acquisition, sales increased by 97% year over year. The higher sales were primarily driven by increased sales in all product lines resulting from strong economic recovery in China.

By product line, linear motor sales were up 60% driven by higher oil pumps sales (105 units in 1Q10 compared to 30 units in 1Q09) and sales from our linear motor propulsion systems developed for coal transportation trains ($5.5 million), which started to contribute in the fourth quarter of 2009. Sales of specialty micro motors were up 165% from 1Q09. Sales of industrial rotary motors increased from $10.8 million to $67.5 million including $45.03 million from Xi'an Simo.

Sales of rotary motors at our Weihai facility more than doubled.

International sales totaled $7.06 million, up 117% compared with $3.26 million in 1Q09, when the global economic downturn hit our international business severely. The international sales growth was driven by increased sales in our specialty micro motor and rotary motor products.

The following table presents the revenue contribution by percentage for each major product line in 1Q10 in comparison with 1Q09.

Percent of Total Revenues Product Line 1Q10 1Q09 Linear Motors and Related Systems 18.8% 40.3% Specialty Micro-Motors 15.4% 19.9% Rotary Motors 64.0% 35.3% Weihai 21.3% 35.3% Xi'an 42.7% NA Others 1.8% 4.5% Total 100% 100% International Sales 6.7% 10.6% Net Income Net income attributable to controlling interest in the quarter totaled $20.55 million ($0.66 per diluted share), up 137% from $8.65 million ($0.39 per diluted share) in 1Q09. Excluding non-cash charges due to the change in fair value of warrants related to the debt issued in 2006, adjusted net income attributable to controlling interest in the quarter totaled $20.79 million ($0.66 per diluted share), compared with $6.08 million ($0.27 per diluted share) a year ago. The higher net income was primarily driven by higher sales across all product lines, contributions from the acquisition of Xi'an Simo, and higher other income ($1.12 million in 1Q10 versus $0.54 million in 1Q09).

The following table presents the reconciliation of non-GAAP measure to GAAP net income for the quarter versus 1Q09.

1Q10 1Q09 Net Income Attributable to Controlling Interest $20,553,688 $8,654,334 Add back (Deduct): Change in fair value of warrant $234,078 ($2,573,421) Adjusted Net Income Attributable to Controlling Interest $20,787,766 $6,080,913 Diluted EPS Attributable to Controlling Interest $0.66 $0.39 Add back (Deduct): Change in fair value of warrant $0.00 ($0.12) Adjusted EPS Attributable to Controlling Interest $0.66 $0.27 Gross Profit Margin The following table presents the average gross profit margin by product line for 1Q10 in comparison with 1Q09.

Gross Profit Margin Product Line 1Q10 1Q09 Linear Motors and Related Systems 59.8% 54.1% Specialty Micro-Motors 38.2% 40.1% Rotary Motors Weihai 12.7% 10.1% Xi'an 31.1% NA Others 41.3% 49.3% Corporate Average 33.9% 35.6% The slight decline in overall gross margin was primarily due to a change in product mix, where the contribution of lower gross margin rotary motor business increased significantly. The percentage of total sales from the lower margin rotary motor business increased to 64% in 1Q10 from 35% in 1Q09, due to the acquisition of Xi'an Tech Full Simo. By product line, higher gross margin for linear motors is attributable to increased sales of oil pumps and sales of linear motor systems for coal transportation, which have higher gross margin relative to other types of linear motors. The gross margin for specialty micro-motors declined slightly primarily as a result of moving the production from Harbin to Shanghai, where manufacturing costs such as labor and fixed costs are relatively higher, particularly at the start-up stage. Increased sales and improved manufacturing efficiency contributed to higher gross margin at our Weihai facility.

Operating Income Operating income totaled $27.73 million, compared with $8.03 million in 1Q09, representing a 246% year over year growth. Higher operating income was mainly due to increased sales and the acquisition of Xi'an Simo. Total operating costs including selling, general and administrative ("SG&A") expenses and research & development (R&D) expenses totaled $8.01 million, compared with $2.90 million a year ago. The higher operating costs were mainly due to the addition of Xi'an Simo, higher expenses related to higher sales such as shipping and handling costs, higher depreciation expense, and higher costs associated with the production start-up at our Shanghai facility. As a percentage of total sales, the Company's total operating costs decreased from 9.4% to 7.6%. Operating margin was relatively stable at 26.3% and 26.1% in 1Q10 and 1Q09, respectively.

"Despite a long Chinese new-year holiday, we maintained the momentum from the fourth quarter 2009 and delivered another set of strong results, thanks to the hard work of our employees even during the traditional holiday season. While we are quite pleased to see the significant impact of our recent acquisition on all our revenues and profits, we are very satisfied with the progress made across all our existing business lines and in our international sales." said Mr. Yang, Chairman and Chief Executive Officer of Harbin Electric.

Outlook "We believe that our business diversification efforts are paying off. We exited the quarter seeing continued strength in demand, setting us up nicely for the seasonally stronger second quarter. We are also encouraged by signs of stronger global economic activity, particularly in our North American market," commented Mr. Yang.

"We understand that some of our investors are concerned that the recent Chinese government efforts to cool down the real estate market and combat inflation might impact our business negatively. However, we believe that our business is a key foundation of China's overall economic growth and supports a wide range of economic sectors from agriculture to industry and manufacturing. Thanks to our diversification strategy, we do not expect a slowdown in the real estate sector in China to negatively impact our business. We continue to be very focused on restructuring our newly acquired Xi'an Simo business and improving manufacturing efficiency in Weihai. Our first quarter results reflect some early achievements in a very short period of time. We expect to expand on these positive results in the coming quarters." Conference Call Details The Company will host a conference call to discuss the first quarter 2010 financial results at 8:30 a.m. EDT on Monday, May 10th, 2010. Tianfu Yang, Chairman and Chief Executive Officer, Zedong Xu, Chief Financial Officer, and Christy Shue, Executive Vice President, Finance will be on the call.

To participate in the conference call, please dial any of the following numbers: USA: 1-800-603-1779 International: 1-706-643-7429 North China: 10-800-713-0924 South China: 10-800-130-0748 The conference ID for the call is 72826274.

A replay of the call will be available beginning at 9:30a.m. EDT on May 10th, 2010.

To access the replay, please dial any of the following numbers: USA: 1-800-642-1687 International: 1-706-645-9291 Passcode is 72826274.

This conference call will be broadcast live over the Internet. To listen to the live webcast, please go to http://www.harbinelectric.com and click on "Harbin Electric Q1 2010 Financial Results Conference Call". The replay of the webcast will be available for 30 days and will be archived on the Investor Kits page of the website after 30 days.

About Harbin Electric, Inc.

Harbin Electric, headquartered in Harbin, China, is a leading developer and manufacturer of a wide array of electric motors with a focus on innovative, customized and value-added products. Its major product lines include industrial rotary motors, linear motors, and specialty micro-motors. The Company's products are purchased by a broad range of domestic and international customers, including those involved in energy industry, factory automation, food processing, packaging, transportation, automobile, medical devices, machinery and tool manufacturing, chemical, petrochemical, as well as in the metallurgical and mining industries. With a recent acquisition of industrial rotary motor business, the Company operates four manufacturing facilities in China located in Xi'an, Weihai, Harbin and Shanghai.

Harbin Electric has built a strong research and development capability by recruiting talent worldwide and through collaborations with top scientific institutions. The Company owns numerous patents in China and has developed award-winning products for its customers. Relying on its own proprietary technology, the Company developed an energy efficient linear motor driving oil pump, the first of its kind in the world, for the largest oil filed in China.

Its self-developed linear motor propulsion system is powering China's first domestically made linear motor driving metro train. As China continues to grow its industrial base, Harbin Electric aspires to be a leader in the industrialization and technology transformation of the Chinese manufacturing sector. To learn more about Harbin Electric, visit http://www.harbinelectric.com Safe Harbor Statement The actual results of Harbin Electric, Inc. could differ materially from those described in this press release. Detailed information regarding factors that may cause actual results to differ materially from the results expressed or implied by statements in this press release may be found in the Company's periodic filings with the U.S. Securities and Exchange Commission, including the factors described in the section entitled "Risk Factors" in its annual report on Form 10-K for the year ended December 31, 2009. The Company does not undertake any obligation to update forward-looking statements contained in the press release.

This press release contains forward-looking information about the Company that is intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, and statements about industry trends and the Company's future performance, operations and products.

For investor and media inquiries, please contact: In China Harbin Electric, Inc.

Tel: +86-451-8611-6757 Email: MainlandIR@Tech-full.com In the U.S.

Christy Shue Harbin Electric, Inc.

Executive VP, Finance & Investor Relations Tel: +1-631-312-8612 Email: cshue@HarbinElectric.com Kathy Li Christensen Investor Relations Tel: +1-212-618-1978 Email: kli@christensenir.com HARBIN ELECTRIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010 AND DECEMBER 31, 2009 ASSETS March 31, December 31, 2010 2009 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $77,817,097 $92,902,400 Restricted cash 3,004,892 3,522,009 Notes receivable 1,290,371 1,086,929 Accounts receivable, net 104,919,312 93,322,885 Inventories 75,590,773 74,913,877 Other receivables & prepaid expenses 4,783,373 5,828,453 Advances on inventory purchases 11,003,248 11,718,544 Total current assets 278,409,066 283,295,097 PLANT AND EQUIPMENT, net 155,494,122 156,364,548 OTHER ASSETS: Debt issuance costs, net 218,287 359,255 Advance on non-current assets 13,659,178 13,666,414 Goodwill 54,073,754 54,073,754 Other intangible assets, net of accumulated amortization 21,174,757 21,472,471 Other assets 1,351,103 1,722,693 Total other assets 90,477,079 91,294,587 Total assets $524,380,267 $530,954,232 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable - short term $3,499,033 $4,533,268 Accounts payable 48,963,748 47,099,135 Short term loans 45,648,772 44,439,629 Customer deposits 17,668,799 18,455,842 Accrued liabilities and other payables 10,661,137 12,329,394 Taxes payable 9,427,232 8,233,862 Amounts due to original shareholders 733,500 28,681,976 Current portion of notes payable, net 4,770,745 7,660,210 Current portion of long term bank loans 4,401,000 -- Total current liabilities 145,773,966 171,433,316 LONG TERM LIABILITIES: Long term bank loans -- 4,401,000 Warrant liability 4,857,636 4,623,558 Total liabilities 150,631,602 180,457,874 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common Stock, $0.00001 par value, 100,000,000 shares authorized, 31,067,471 and 31,067,471 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively 310 310 Paid-in-capital 218,349,044 218,094,374 Retained earnings 87,844,800 69,594,111 Statutory reserves 25,172,422 22,869,423 Accumulated other comprehensive income 18,729,093 18,638,299 Total shareholders' equity 350,095,669 329,196,517 NONCONTROLLING INTERESTS 23,652,996 21,299,841 Total liabilities and shareholders' equity $524,380,267 $530,954,232 HARBIN ELECTRIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited) 2010 2009 REVENUES $105,485,157 $30,724,893 COST OF SALES 69,743,087 19,801,115 GROSS PROFIT 35,742,070 10,923,778 RESEARCH AND DEVELOPMENT EXPENSE 594,195 393,282 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,416,758 2,504,904 INCOME FROM OPERATIONS 27,731,117 8,025,592 OTHER EXPENSE (INCOME), NET Other income, net (1,119,286) (539,379) Interest expense, net 1,646,923 1,441,384 Change in fair value of warrants 234,078 (2,573,421) Total other expense (income), net 761,715 (1,671,416) INCOME BEFORE PROVISION FOR INCOME TAXES 26,969,402 9,697,008 PROVISION FOR INCOME TAXES 4,063,361 1,042,674 NET INCOME BEFORE NONCONTROLLING INTEREST 22,906,041 8,654,334 LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST 2,352,353 -- NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST 20,553,688 8,654,334 OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment 91,596 (285,368) Foreign currency translation adjustment attributable to noncontrolling interest (802) -- Change in fair value of derivative instrument -- (2,529,076) COMPREHENSIVE INCOME $20,644,482 $5,839,890 EARNINGS PER SHARE Basic Weighted average number of shares 31,067,471 22,102,078 Earnings per share before noncontrolling interest $0.74 $0.39 Earnings per share attributable to controlling interest $0.66 $0.39 Earnings per share attributable to noncontrolling interest $0.08 $-- Diluted Weighted average number of shares 31,353,863 22,158,573 Earnings per share before noncontrolling interest $0.73 $0.39 Earnings per share attributable to controlling interest $0.66 $0.39 Earnings per share attributable to noncontrolling interest $0.07 $-- HARBIN ELECTRIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited) 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net income attributable to noncontrolling interest $2,352,353 $-- Net income attributable to controlling interest 20,553,688 8,654,334 Consolidated net income 22,906,041 8,654,334 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation 1,888,108 667,780 Amortization of intangible assets 365,848 292,927 Amortization of debt issuance costs 140,968 135,610 Amortization of debt discount 910,535 1,122,614 Provision for bad debt expense 45,384 -- Share-based compensation 254,669 341,362 Loss on derivative instrument -- 219,188 Loss on disposal of equipment 45,880 -- Change in fair value of warrants 234,078 (2,573,421) Change in operating assets and liabilities Notes receivable (104,501) 1,354,449 Accounts receivable (11,637,766) 10,111,075 Inventories (665,548) 3,250,970 Other receivables & prepaid expenses 1,044,592 (1,379,675) Advances on inventory purchases 699,662 98,070 Other assets 371,477 (37,918) Accounts payable 2,039,115 (298,129) Accrued liabilities and other payables (1,599,798) (1,613,002) Customer deposits (786,773) 1,865,532 Taxes payable 1,192,964 670,942 Net cash provided by operating activities 17,344,935 22,882,708 CASH FLOWS FROM INVESTING ACTIVITIES: Payment for advances on intangible assets -- (1,233,614) Payment for advances on equipment purchases 22,623 -- Purchase of intangible assets (68,236) (30,555) Purchase of plant and equipment (1,466,942) (175,791) Additions to construction-in- progress 121,648 (3,360,011) Proceeds from disposal of equipments 10,467 -- Payment to original shareholders for acquisition (27,938,951) -- Net cash used in investing activities (29,319,391) (4,799,971) CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in restricted cash 516,941 512,785 Payment on cross currency hedge -- (332,027) Payment on notes payable (3,800,000) (2,000,000) Increase of notes payable-short term 1,019,218 -- Payment on notes payable-short term (2,053,100) (1,025,570) Proceeds from short term loan-bank 3,372,950 -- Repayment of short term loan-bank (2,199,750) -- Proceeds from short term loan-other 35,531 -- Net cash used in financing activities (3,108,210) (2,844,812) EFFECTS OF EXCHANGE RATE CHANGE ON CASH (2,637) (79,407) (DECREASE) INCREASE IN CASH (15,085,303) 15,158,518 Cash and cash equivalents, beginning of period 92,902,400 48,412,263 Cash and cash equivalents, end of period $77,817,097 $63,570,781 SOURCE Harbin Electric, Inc.

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