BEIJING, June 12, 2017 /PRNewswire/ --
Recon Technology, Ltd. (NASDAQ: RCON), ("Recon" or the
"Company"), a leading independent oilfield
services provider operating primarily in China, today announced that the Company's two
co-founders, Messers' Shenping
Yin (Chairman and Chief Executive Officer) and
Guangqiang Chen (Chief
Technology Officer and Director) released a Letter to Shareholders
updating current activities and outlining the remainder of 2017 in
conjunction with the holding of its 2016 Annual Meeting of
Stockholders on June 9, 2017 in
Beijing, China. The letter is
included in its entirety below and on the Company's website
at http://www.recon.cn/en/.
To Our Shareholders:
As Co-Founders of the Company, we felt that it was an
appropriate time to explain our current business model,
accomplishments to date, and specific trends and topics that are
important for investors to properly value Recon. Most
importantly, we want to outline our vision for Recon's future as a
fully integrated provider
of energy solutions throughout China.
Next month will mark the 8th anniversary of Recon's
IPO and listing on Nasdaq. At the time of our listing, we had a
singular vision: to marry distinct but related segments within the
oil and gas extraction process to fully integrate our market. We
started from providing specialty niche products, such as automation
systems, energy efficient furnaces, heat exchange equipment, and
extractors. From there we leveraged our strong relationships
with China's leading oil
producers, CNPC and Sinopec.
We were focused on the execution of a strategy where Recon
could out-perform smaller automation mining companies and
out-maneuver larger multi-nationals.
Simultaneously, we felt that a company such as Recon could
be nimble and take advantage of the digitization of the oil and gas
industry to help improve efficiency and safety.
Both of us came from different backgrounds, with Mr. Yin
having an IT, automation, and software engineering experience set,
and Mr. Chen having a deep-rooted expertise in the petroleum
extraction sector. We had worked together in the past and
shared a similar vision of the future of the oil and gas industry
in China.
In short, we believe there is a disconnect investors
understanding of our business model and the achievements we have
made to date and attractive opportunity ahead of Recon.
This letter should serve as a starting point for our
Company to outline what Recon's current business is, how you as
investors should evaluate our accomplishments, and what our goals
are for the remainder of 2017 and beyond.
The Evolution of
Recon's Current Business Model / The Oil and Gas Extraction Market
in China
To understand Recon, it is important to understand the
overall oil and gas market in China. China is the world's
largest importer of petroleum,
second-largest consumer of petroleum products, and fourth-largest
producer of petroleum. The oil industry in China is dominated by three state-owned
holding companies: China National Petroleum Corporation (CNPC),
China Petroleum and Chemical Corporation (Sinopec) and China
National Offshore Oil Corporation (CNOOC). A majority of on-shore oilfield
companies are subsidiaries or affiliations of CNPC and Sinopec, and
operate independently.
In previous decades, China's petroleum companies mined for
petroleum by leveraging the country's abundance of inexpensive
labor, rather than focusing on developing new
technologies. One of Recon's founding principles was that this
process needed to become more efficient and more automated. We
began to grow an entity where our automation products and services
allow these companies to reduce their labor requirements and
improve the productivity of oilfields.
We would work with our largest customers to improve
control over the extraction process, increase oil yield efficiency,
and improve the transportation of crude oil.
Now, Recon's revenues are derived from the sales and
provision of (1) oilfield automation products, (2) equipment for
oil and gas production and transportation, (3) waste water
treatment products, and (4) engineering services. Our products and
services involve most of the key procedures of the extraction and
production of oil and gas, and include automation systems,
equipment, tools and on-site technical services.
Recon sold products and services to lower the overall cost
of oil and gas extraction for our customers as they work to meet
China's continuous growing demand
for power. Our premise was that the need for traditional product
sales throughout all facets of the upstream process would be a
solid base from which to build.
Our sales are largely dependent on the oilfield drilling
scale, size of the well, the production, and the need for either
one or several iterations of our products, and automation would
serve to enhance the process as well.
As an example, in May 2017,
Recon delivered a 600KW furnace to Changqing Oilfield for an
oilfield metering station overseeing several wells with production
of about 20 barrels of oil equivalent (BOE) per well per
day. While it is difficult to ascertain the median well size in China, it was a sizable well for Recon. As part of
this solution, the Company also provided furnaces and automation
system installed in each well. And throughout the process we
supplied automation processes and expertise to help the site run
smoothly. This one project is an excellent case study of how
Recon can implement a total solution for its customer, while securing a
longer-term service business. The initial sale would integrate
all that we do and position us to provide
ongoing service for the life of that location.
Equipment and Integration of
Automation
The sale of equipment and then integrating automation and
ongoing service were to serve
as the two legs of Recon. Over the long-term, this creates a
stable revenue base that is less affected by the ebb and flow of commodity
pricing at the upstream portion of the extraction process. Our
resolutions make oil & gas production safer, more efficient,
and more compliant with changing industry regulations.
During the recent downturn in oil and gas prices in
China over the past few years,
many oilfield customers of Recon's were repairing traditional
hardware products instead of new installation and deferring many of
these expenditures until it
would be profitable.
We continued to invest in R&D, currently owning
or having applied for
over 50 patents registered with the
State Intellectual Property Office. These patents cover Recon's
automated products and heating related equipment for the petroleum
industry, and provided the capitalization to improve at a time when
many of our competitors were struggling.
In addition, while our product sales were hurt, Recon's automation processes and
services continued to perform. We felt this was a validation
of our longer-term plans, and understood that during downturns in
the cycle we would not be as impacted as our other competitors in
China that were heavily weighted
toward traditional product sales.
As an investor, it is important to understand that when
Recon announces the sale of a products in a project the actual sale
and delivery of this hardware is only one component of the
long-term and continuing growth strategy.
What we
expect:
Since market pricing has started to turn, China is beginning to explore new opportunities, such as the Changqing
Oilfield, a major subsidiary of PetroChina and the largest
producing oilfield of China. Recon has announced several sales
as part of this project and has begun to see its revenue improve.
We recently announced our nine-month financial results, during which sales improved
nearly 20%. This trend is continuing.
In addition, we are seeing a more fruitful market for continuing
automation services and sales, and expect to see a consistent
growth rate of at least 10% regardless of commodity pricing,
based on projects we have either signed
contracts or anticipate bidding on successfully. We
have seen this remain true since inception and show no signs of
resistance in the current market.
Lastly, our series of automation systems and services are
not limited to sales within the oil and gas sector unilaterally, as
there are other markets throughout the energy industry that Recon
continues to monitor and bid on actively throughout
China. This includes coal and traditional power
plants. We are seeking entry into these markets, as Recon's
products are naturally adaptable to the most pressing need to
improve efficiency.
Expansion of Wastewater Market
There is an old Chinese proverb "In every crisis, there is
opportunity." In the United
States, many have a misconception that in Mandarin crisis
and opportunity have the same meaning. While that is inaccurate,
the concept still applies to the situation affecting Recon during
the downturn in oil and gas prices.
It was during this time that both of us (Mr. Yin and Mr.
Chen) fully recognized the need to diversify our revenues and
simultaneously began identifying a growing problem in the field of
wastewater.
The amount of wastewater, or polluted domestic use and
industrial water, produced in China is greater than that of the entire flow
of the Yellow River per annum. The treatment of this
wastewater is particularly important considering the growing
population and environmental concerns throughout China, and was an integral component of the
2012 5-year plan.
In the drilling and exporting of oil and gas products, the
treatment of wastewater was something that Recon experienced often
and felt that our Company was in a prime position to
help. Oily wastewater treatment is far more difficult than
general industrial wastewater and domestic sewage treatment. We
began investing in this business during the downturn, and began
developing new products for oilfield wastewater treatment. In
addition, our clients are usually located in remote areas and face
the grim challenge of ecological conservation, and thus adopt
higher emissions standards and strict requirements of their
suppliers. We have identified the market niche, know the customers,
and believe we can provide these
services more efficiently than our
competitors.
Over the next few months, our goal is to continue
to work with well-recognized
wastewater treatment companies to
apply these treatments to long standing customers in
refineries and oil fields throughout China, as well as to international projects of
our customers. We were very pleased to partner with
Beijing OriginWater Purification Engineering Technology Co.,
Ltd ("BOW Engineering"), China's
leading waste water treatment company, to provide customized
wastewater treatment solution to Golmud Petroleum Refinery for
their treatment upgrade program.
This agreement was expected to generate $0.9 million in revenues, which Recon will
share. This is a sizable agreement for our company in a
growing market that is relatively uncorrelated to our oil and gas
product and service business. Recon reported approximately
$6.4 million in revenues in all
fiscal 2016.
What we
expect:
Wastewater segment is a major growth driver for our
Company, carries a higher margin
and has tremendous growth value in the coming
quarters. We are hopeful to sign
several new projects either independently or by utilizing
partnerships as we expand our customer base. Depending on
the growth trajectory, we anticipate revenues from wastewater
treatment to begin to take a larger percentage of Recon's overall
business.
In addition to reviewing ancillary sources of income such
as wastewater, our company continues to gather data and work with
SOEs to identify areas throughout the entire upstream, midstream,
and downstream cycle where there are inefficiencies in China.
Improving Our Shareholder Relations
Globally
When we became public, the one area where we had very
little knowledge was that of the global, and specifically U.S.
Capital markets. We were one of many China-based companies that became public
during this time and we quickly learned through this process that
the primary sentiment from investors was that all China-based companies were "all the
same."
We believe in many
ways we took our investor base for granted, with the belief that if
we continued to build a good
operating business, then investors would recognize our
efforts. This was not the case and instead, we now understand we must prove our business
model again, by rebuilding trust with investors as
we show that not all U.S.
listed Chinese companies are the same. We believe that we have
operated our business in a transparent and forthright manner, but
fully recognize that Recon needs to be better at explaining its
future plans and communicating with its U.S. investor
base.
We still believe that the market is the right one for our
Company, because Recon is so unique. There are very few places
for the U.S. investor to participate directly in the growth of the
oil and gas sector in China, which
shows no signs of demand depreciation because of continued
industrialization and population growth.
But there is a lot of work to do. We hope this letter will
serve as an example of our intension to provide better
communication and transparency to our shareholders with regards to
Recon's business plan in coming months. We hope to publish another
such letter at the end of the year citing what goals were achieved,
and plans for the months ahead.
Second, we need to completely overhaul our Company's
accessibility to investors through our website. We understand that
our website did not provide sufficient
information about our company to retail or institutional
investors interested in our
Company. We have admittedly
neglected this over time and will relaunch a more robust site in the next 1-2
months.
Finally, we are very open to meetings and discussions with
investors. Our management team will make a commitment to host
more roadshows and investors meetings in both US and China over the next few months.
Financial Improvements
Both of us would like to personally thank our financial
team, led by our Chief Financial officer, Ms. Jia Liu, for
their efforts in producing our financials in a timely and
transparent manner. We believe that properly communicating
financial trends is essential to reporting how signed contracts and
agreements affect our business.
Our revenues for the nine months of fiscal 2017 have
improved by 20% to $6.4 million,
which does not include any revenue from our recently signed
wastewater agreement. We anticipate revenues growing by 30% for the
current fiscal year.
Our gross margin improved by 21.3 percentage points to
35.2%, largely due to continued revenues from automation projects
and investments in our wastewater business. In addition, we are
growing our service business by over 155%, which carries a much
higher margin.
We are still not operating at a profitable rate, but our
net loss continued to narrow considerably in the nine-month period
and we are now in a position where our revenue increase and margin
increase are far outpacing our operating spending. We
believe the lingering effects of the downturn are behind
Recon.
From a balance sheet perspective, we have navigated the
downturn without any long-term effects to our capital
structure. We continue to improve our collections, and hold no
long-term debt of any kind.
Conclusion
It has been a very interesting eight years. Our
investor relations counsel recently asked whether the two of us
would do it again. The short answer
is yes, although we believe we have
learned a great deal since our initial decision eight years
ago. We had extremely high expectations of both what
our Company could do and how Recon would be recognized throughout
the global investment community.
We felt that our vision of becoming a fully integrated
energy service provider in one of the world's largest oil and gas
markets would be recognized by all investors as an exciting
story. We still feel this way and just must be better at
explaining our vision to a market that likely has painted us with a
broad brush. Operating as a U.S. listed public company
certainly has not been the path of least resistance for Recon, but
ultimately, we believe that our best days remain ahead.
On behalf of our employees in China, and our loyal shareholders, we thank
you for your time.
Shenping Yin, Chairman and
Chief Executive Officer
Guangqiang Chen, Chief
Technology Officer and Director
About Recon Technology, Ltd. (NASDAQ:
RCON)
Recon Technology, Ltd. is China's first listed non-state owned oil and
gas field service company on NASDAQ. Recon supplies China's largest oil exploration companies,
Sinopec (NYSE: SNP) and CNPC, with advanced automated technologies,
efficient gathering and transportation equipment and reservoir
stimulation measure for increasing petroleum extraction levels,
reducing impurities and lowering production costs. Through the
years, RCON has taken leading positions on several segmented
markets of the oil and gas filed service industry.
RCON also has developed stable long-term cooperation
relationship with its major clients, and its products and service
are also well accepted by clients. For additional information
please visit: www.recon.cn .
Safe Harbor
This news release contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and
underlying assumptions and other statements that are other than
statements of historical facts. These statements are subject to
uncertainties and risks including, but not limited to, product and
service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government
regulation, and other risks contained in reports filed by the
company with the Securities and Exchange Commission. All such
forward-looking statements, whether written or oral, and whether
made by or on behalf of the company, are expressly qualified by the
cautionary statements and any other cautionary statements which may
accompany the forward-looking statements. In addition, the company
disclaims any obligation to update any forward-looking statements
to reflect events or circumstances after the date
hereof.
Company Contact
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Liu Jia, CFO
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Recon Technology, Ltd.
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+86 (10) 8494-5799
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info@recon.cn
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Investor Relations
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The Equity Group Inc.
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In China
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In the U.S.
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Katherine Yao, Senior Associate
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Adam Prior, Senior Vice President
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+86-10-6587-6435
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+1 (212) 836-9606
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kyao@equityny.com
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aprior@equityny.com
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SOURCE Recon Technology, Ltd.