Upload
lamdien
View
214
Download
0
Embed Size (px)
Citation preview
Proprietary Bearing Technology poised to
dominate the Chinese Aerospace marketTrans-Pacific Aerospace Company, Inc. (hereinafter referred to as “TPAC” or “the
Company”) is a development stage company that is well-positioned to leverage its
innovative and proprietary technology to forge business partnerships outside the United
States (U.S.) and use its local partners’ large manufacturing facilities and distribution
resources to derive the benefit of economies of scale available to them. Currently, the
Company is focused on the production of standard spherical bearings, rod-ends and
bushings (together known as Bearings) for the commercial aerospace industry. These
Bearings reduce friction, bear loads and aid flight-critical tasks such as aircraft flight controls
and landing gear. Over 3,000 of these spherical Bearings are used in commercial aircraft
each of which typically requires lubrication. Most of these lubrication points are difficult or at
times impossible to reach. The Company’s solution is a self-lubricating liner system that
was acquired from Harbin Aerospace Company (Harbin) in February 2010. This liner
system forms an integral component of TPAC’s finished parts and eliminates the need for
further lubrication of the Bearings, thus reducing maintenance costs.
The Company produces key Bearing components through their Chinese subsidiary, Godfrey
(China) Limited (Godfrey), which are then mated with US made self-lubricating linings and
race surfaces at the Company’s manufacturing facility; in China. The Company received
Society of Automotive Engineers (SAE) certification for its products from the Naval Air
Systems Command (NAVAIR), which made TPAC China’s first and only SAE certified
bearings producer. The Company now plans to commence manufacturing operations in the
second quarter of 2014.
In terms of future expansion, the Company’s strategy is to target countries where the
Company will be the sole domestic manufacturer or where the large makers of commercial
aircraft such as Boeing, Airbus, Embraer and Bombardier have significant offset obligations,
requiring them to co-produce structural airframe components with a domestic partner, or
procure domestic parts for incorporation or installation into items sold.1 To that end, the
Company has identified China and the Middle East as its initial target markets.
Currently, the Company owns 55% of Godfrey. It is in discussions with several of China’s
largest bearing manufacturers to serve as supply chain partners. TPAC is qualified to sell its
product to Original Equipment Manufacturers (OEMs), Airlines, and Maintenance and
Repair Organizations (MROs), and is currently focusing on pre-selling and filling the sales
pipeline. The Company is expected to start marketing, distribution, and sale of Bearings in
the second quarter of 2014.
TPAC’s innovative products, state of the art production facility, and business model which
leverages strong joint venture partners, will enable the Company to fully exploit the huge
growth potential of the Chinese commercial aviation market. Over time, we expect TPAC to
leverage these same assets and strategy in additional geographic locations to establish
itself as a global brand with local roots and carve out a share of the global bearing market,
which is expected to reach US$101 billion by 2018.iii
1Arrangements in which the buyer of the aircraft obligates the seller (OEMs) to provide the former with some business
that will help them offset the huge outflow of money under the contract for sale.
Price (US$): (March 25, 2014) 0.05
Beta: 0.53
Price/Book Ratio: NM
Debt/Equity Ratio: NM
Listed Exchange: OTCQB
*Company listed on the OTCBB and is compared to S&P
500. Source: Bloomberg.
Recent News
09/09/2013: TPAC announced that its China
subsidiary has passed all qualification testing
for SAE Aerospace Standard (AS) 81820
and has received formal written qualification
approval from the U.S. Navy, becoming the
first manufacturer in China qualified to
produce Bearings under this standard and
under SAE-AS81934. This has put the
Company on the Qualified Product Listing
(QPL) supplier list which will allow them to
pursue long term competitive contracts not
only for aircraft and sub-assemblies made in
China by Airbus and Boeing, but throughout
the world.i
04/11/2013: TPAC entered into separate
Securities Purchase Agreements with former
shareholders of Godfrey to increase its
ownership stake in Godfrey (China) Limited,
Hong Kong Corporation from 25% to 55%.ii
Shares in Issue
109.29M
Market Cap
US$5.46M
52 Week (High): US$0.12
52 Week (Low): US$0.02
Trans-Pacific Aerospace Co. Inc.
(Ticker: OTCQB:TPAC)
March 25, 2014
www.RBMILESTONE.com
www.RBMILESTONE.com
1,300
1,400
1,500
1,600
1,700
1,800
0.03
0.05
0.07
0.09
0.11
0.13
0.15
Ma
r-1
3
Apr-
13
Ma
y-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
De
c-1
3
Jan
-14
Fe
b-1
4
Ma
r-1
4
TPAC S&P 500
Equity Research and Market Intelligence
2
Investment Arguments
Rapidly Developing Chinese Market: China is expected to remain the largest market
for airplanes outside the U.S. It is expected that China will take delivery of 5,260 new
airplanes valued at US$670 billion by 2031. Additionally, China plans to spend a
quarter of a trillion dollars over next few years in order to build a robust aerospace
industry. This in turn will have a cascading effect on the spherical bearings market as
an estimated 3,000 bearings are used in every aircraft, which require regular
replacement. The country, in its 12th Five-Year Plan (2011-2015), has set building a
robust and competitive commercial aerospace sector as one of the country’s top seven
prioritiesiv.The immense potential of the Chinese market along with Government
support for the commercial aerospace industry significantly improves the prospects for
domestic component manufacturers like TPAC.
Innovative Business Model: TPAC possesses proprietary self-lubricating liner system
which is manufactured at its facility in the U.S., exported to China and then mated with
key Bearing components produced at the Company’s facility in China. The Company is
the only manufacturer of self-lubricating SAE-AS certified Bearings in China. TPAC has
an innovative business model that leverages the need for offset requirements in China
(35% of each aircraft’s purchase pricev) and the demand for a domestic supplier of
aerospace parts.
Impressive Customer Base: The Company intends to target OEMs including Boeing,
Airbus, Embraer; Airlines like Air China, China Southern, China Eastern; and MROs in
Guangzhou, Beijing, Xiamen, Shandong as potential customers. We believe that the
Company’s presence in China will help the Company gain access to this impressive
customer base, which includes some of the largest players of the industry.
Competitive Advantage: Minebea Co., Ltd and RBC Bearings are the Company’s key
competitors as they also produce self-lubricating bearings. Neither Minebea nor RBC
manufactures aerospace spherical bearings in China. A domestic manufacturer such
as TPAC is protected by a 24% import tax and duty on imported parts, and additionally
OEMs must meet offset obligations on sales made to Chinese companies. Through its
improved manufacturing techniques, TPAC also has an advantage with significantly
reduced delivery times which may be as low as 16 weeks on average (shorter if
components are in stock) versus 52 weeks on average for typical competitors.
Strong Management Team & Board Members: TPAC’s management team is highly
proficient with significant experience in the aerospace and manufacturing industry.
Additionally, the team includes members on the board that have expertise in the field of
international procurement and production, business management, program
management, government compliance and cross border business development. Some
companies TPAC’s personnel have been associated with include, but are not limited to,
Airbus, Boeing, Embraer, Timken, AVIC and Northrop Grumman. This should therefore
put TPAC in a good position to execute a model of building a distribution chain and
expanding business operations in China.
3
Trans-Pacific Aerospace Company Inc.
Company Overview
Trans-Pacific Aerospace Company, Inc. is a development stage company engaged in
designing, manufacturing, and selling SAE-AS81820, 81934 and 81935 certified Bearings
for commercial aircraft. These Bearings reduce friction and bear loads and aid in
performing critical tasks related to a number of applications including aircraft flight controls
and landing gear operation. The Company has established a manufacturing facility in the
Scientific and Technology Center in Guangzhou, China through its subsidiary, Godfrey, to
manufacture aerospace quality standard Bearings2. The Company’s key proprietary
technology, self-lubricating liner system, is manufactured at a third party U.S. facility and
then sent to TPAC’s facility in Guangzhou, China for final assembly making sure the IP
stays protected. The high quality, U.S. made material is an important component of the
Company’s finished parts that are used in aircraft where lubrication is difficult or
impossible to perform.
Initially, the Company was incorporated in June 2007, as Gas Salvage Corp., an Oil and
Gas (O&G) company focused on exploring and evaluating undeveloped O&G prospects
and participating in drilling activities. Later in 2008, the Company changed its name to
Pinnacle Energy Corp. During the period, 2007-2009, the Company focused on acquiring
and developing O&G resources. However, pursuant to the acquisition of aircraft design
and manufacture business of Harbin in February 2010, the Company divested its O&G
properties and shifted its business focus to the designing of aircraft component parts.
Exhibit 1 : Milestonesvi
Year Events
2007 Incorporated in the State of Nevada as Gas Salvage Corp., with focus on exploration and
development of oil and gas
2008 Name changed to Pinnacle Energy Corp.
2010
Acquired aircraft component part design, engineering and manufacturing business of Harbin Aerospace Company, LLC
Pinnacle Energy Corp. name changed to Trans-Pacific Aerospace Company, Inc.
Acquired 25% ownership interest in Godfrey, a Hong Kong Corporation
Godfrey opened production facility in China (Zhongshan, Guangdong)
The Company successfully passed internal testing for liner bond integrity and peel strength, as per SAE standard. The Company also completed prototype manufacturing and testing of Bearings in Guangzhou, China.
2011 Bearings from the Company’s China subsidiary passed independent testing under SAE AS
81820 for 25,000 cycles at a 10,400 lb. load at ambient temperature
2012
U.S. Navy completed tests of Bearings produced by the Company’s subsidiary under SAE Aerospace Standard 81820
China subsidiary completed a series of Bearings that will give the Company additional SAE-AS81820 and SAE AS 81934 qualification upon approval by the U.S. Navy – the international qualifier.
2013
China subsidiary passed all qualification testing for SAE AS81820 and 81934 and received formal written qualification approval from the U.S. Navy (NAVAIR)
The Company enters an agreement to increase its stake in Godfrey from 25% to 55%
TPAC obtains full control of the Godfrey Board of Directors
Source: Company Website, Quarterly Report, April 2013 and News Release
Note: In 2010, the Company changed its focus from O&G exploration to the designing and engineering of
component parts for the commercial aerospace industry, wherein the Company laid emphasis on using its
proprietary aerospace bearing technologies to manufacture and sell component parts.
2Over 3,000 of these parts (worth approximately $500,000) are used in every aircraft and must be replaced regularly
Source: TPAC’s Summary Business Plan
4
Trans-Pacific Aerospace Company Inc.
Key Product
Plain Spherical Bearings
Description
The Company manufactures SAE-AS81820, 81934 and 81935 certified, self-lubricating
plain spherical Bearings composed of a ball3 and a race
4. These Bearings allow a slight
degree of angular rotation and a high degree of misalignment.5
The production of spherical Bearings occurs in 6 steps:
(1) Machining of ball and race
(2) Preparation of self-lubricating liners
(3) Assembly of race and liner
(4) Swaging of ball in race
(5) Final curing; and
(6) Final machining.
These steps take approximately 14 days to complete and employ a variety of tools,
equipment, and processes, some of which can be outsourced and/or performed at
different facilities.
Exhibit 2 : Self-lubricating Plain Spherical Bearings
Source: TPAC’s Summary Business Plan 2014
Proprietary Technology
The Company produces self-lubricating bearings using its proprietary liner system
manufactured at a third party U.S. facility and finally assembled at its facility in
Guangzhou, China.
The liner system is bonded to the race surfaces and forms a lubricating film on the mating
ball surface that is continually replaced throughout the life of the liner material. The
Company’s Bearings demonstrated performance beyond technical specifications under
rigorous testing and as such passed all the requisite qualifications requirements for SAE
AS 81820 and 81934. U.S. Naval Air Systems Command (NAVAIR), the agency
responsible for qualifying SAE aerospace parts, placed the Company on the Qualified
3Ball: A sphere with a hole bored through the center
4Race: A ring that surrounds the ball such that the end of the sphere extends out past the surface of the race
5Misalignment: The movement of surfaces mated to Bearings in different directions while still attached to each other
5
Trans-Pacific Aerospace Company Inc.
Product Listing as a supplier making TPAC the first and only manufacturer of SAE certified
Bearings in China. The Bearings conform to SAE AS specifications and can operate under
dynamic load at temperatures ranging between -65°F and 350°F while being exposed to
contaminants such as jet fuel, de-icing chemicals, water and oil.6
TPAC uses an exotic blend of aerospace quality raw materials 1) Stainless Steel: 15-5 ph,
17-4 ph, 13-8 ph, and 2) Carbon Steel: 440C; 4,130, 4,340 and 52,100 for the
manufacture of all its products. A proprietary production process coupled with its state-of-
the-art facilities is expected to result in a very high degree of precision, which in turn will
result in scrap rates being less than 1%, enabling the Company to deliver orders as little
as 16 weeks on average (shorter with components in stock) compared to 52 weeks
typically required by its competitors while maintaining gross profit margins of
approximately 67%.
With final approval received from NAVAIR, it expects to commence manufacturing
operations in the second quarter of 2014.
Uses
Exhibit 3 : Use of Bearings
Source: TPAC’s Summary Business Plan 2014
Bearings permit angular rotation about a central point in two orthogonal directions within a
specified angular limit based on the bearing geometry. These Bearings allow misalignment
and function in a manner similar to the human elbow or knee joints. Over 3,000 of these
bearings worth approximately US$0.5 million are used in every aircraft on parts such as
doors, hatches, landing gear, slats, leading and trailing edges, horizontal and vertical
stabilizers, and some flight control surfaces. The bearings essentially allow the mating
surfaces to move in different directions while still being attached to each other.
6Dynamic loads are defined as light to heavy, uni-directional or alternating loads; intermittent to continuous
misalignment; and intermittent to continuous oscillation, Source: TPAC’s Summary Business Plan
6
Trans-Pacific Aerospace Company Inc.
Company Strategy and Business Model
The Company owns a proprietary technology which is not subject to export restrictions
established by the U.S. Department of Commerce or Commerce Control List. This permits
the Company to manufacture aerospace approved self-lubricating commercial aircraft
consumable component parts. The Company now aims to monetize its proprietary
technology. The Company is currently focusing on leveraging its product design and
engineering expertise with manufacturers in international markets and forming business
relations to gain access to their manufacturing facilities or distribution network. By
collaborating with foreign partners that have a strong local presence, the Company will
benefit from local economies of scale. This model is particularly well suited to emerging
nations such as China and the Middle East. The Company’s business model is to target
only those countries where the resulting Company entity is the sole domestic manufacturer
and where commercial aircraft manufacturers have offset obligations.7
Partnership Agreements vii
Godfrey - Manufacturing
On March 30, 2010, the Company acquired 25% ownership interest in Godfrey, a Hong
Kong corporation, in exchange for providing Godfrey with the technology for designing and
producing SAE-AS81820, SAE-AS81934 and SAE-AS 81935 Bearings. In September
2010, Godfrey established a manufacturing facility in the Scientific and Technology Center
in Guangzhou, China. In April 2013, Godfrey Guangzhou Aerospace Bearings, a wholly
owned subsidiary of Godfrey, received qualification approval for SAE AS81820 and
AS81934 from the U.S. Navy, confirming the facility as the first and only SAE qualified
manufacturing facility in China. The approval has provided the Guangzhou facility with a
position in the Qualified Product Listing (QPL) as a supplier.
In April 2013, the Company entered into a separate securities purchase agreement with
shareholders of Godfrey China, which gave the Company majority ownership interest in
Godfrey: from 25% to 55%.viii
Future Plans
The Company is negotiating with some of China’s largest bearing manufacturers and
expects to sign joint ventures and/or supply chain partnership agreements. TPAC is
planning to enter joint ventures on the terms that its foreign partners will provide the
manufacturing labor, the requisite raw materials as well as machinery and equipment. The
Company in turn will provide the manufacturing facility, the manufacturing know-how, the
blueprints for approximately 1,500 parts and the use of the proprietary self-lubricating liner
system.
Sales and Marketing Strategy
The Company intends to implement a strategic brand management initiative that will
position it as a global brand with local roots. The Company expects this brand building
exercise to support sales activities while building a strong sales pipeline. Additionally, the
Company also plans on reaching out to leading bearing distributors and the sub-assembly
industry among others. As part of its marketing strategy, the Company aims at the
following:
7Arrangements in which the buyer of the aircraft obligates the seller (OEMs) to provide the former with some
business that will help them offset the huge outflow of money under the contract for sale.
7
Trans-Pacific Aerospace Company Inc.
1) Participating in major air and aerospace trade shows
2) Participating in trade shows for Airlines and MRO’s
3) Undertaking trade publicity in order to create market buzz about the Company
4) Touring key markets when government sponsored expositions are being held
5) Sponsoring “best practice” seminars for airlines and MRO’s
6) Updating its website with “best practice” webcasts
7) Creating sales support material such as product DVD’s for its distributors
8) Launching a turnkey product financing program
The Company will target its initial marketing efforts at OEM’s, China based airlines and
MROs. The Company expects to commence the marketing, distribution and sale of
Godfrey’s initial line of Bearings in the second quarter of 2014.ix
Pricing Strategyx
The Company intends to price its products competitively with the market. As the sole local
source to China-based airlines and MROs, the purchasers will not need to pay the 24%
import taxes and duties on bearings brought into China, which will enable its customers to
effectively receive a 24% discount over what they are paying now, while the Company’s
prices remain competitive with the market. The combination of the strategy to price at
prevailing market rates and the exemption from import duties will enable the Company to
maintain a gross profit margin of 67% and will provide an incentive for Chinese companies
to purchase from TPAC.
Competitive Strategyxi xii
Minebea Co., Ltd and RBC Bearings, both of whom produce self-lubricating bearing are
TPAC’s primary competitors. Minebea Co., Ltd is a Japanese Multinational Corporation,
producing machinery components and electronic devices. It is the world’s largest
manufacturer of small ball bearings with a global market share of 60%. While Minebea
has plants in Shanghai and Zhuai, these facilities produce easy-to-make ball bearings, DC
motors etc., but do not have required capacity or technology to make self-lubricating
bearings in China. RBC Bearings is based in the USA and is involved in the manufacture
of various types of bearings and rod-ends for its defense and aerospace customers
commanding an estimated market share of 9%. RBC, on the other hand, has not disclosed
any plans to enter China.
The Company also plans to partner with existing aerospace companies in emerging
markets and utilize their manufacturing facilities and distribution networks. In order to
reduce their own capital requirements, the Company’s focus remains on providing design
and engineering expertise to the larger players. As the Company’s facility commences full
operations, it will be the only manufacturer of SAE-AS certified aircraft component parts in
China.
8
Trans-Pacific Aerospace Company Inc.
Industry Overview
Aerospace
The Aerospace industry produces military and commercial fixed wing aircraft, rotary-wing
aircraft, business and general aviation aircraft, gas turbine engines, unmanned aerial
vehicles and drones, space/launch vehicles and missiles covering a broad range of
sectors. According to the Global A&D Industry Financial Performance Study, June 2013
published by Deloitte, the global A&D industry revenue increased by 5.9% from US$653.7
billion in 2011 to US$692.5 billion in 2012.xiii
The Industry Structure
Operations are classified as commercial or military. The sector has two types of players,
OEM and related sub-tier contractors and those who are involved in Rework and their
related sub-tier contractors. The OEMs and Rework cater to both commercial as well as
military operations. The following chart shows the general structure of the Aerospace
Industry.xiv
Exhibit 4 : Aerospace Industry Structure
Source: NESHAP BID, USEPA/OAPS
Key players in the Aerospace industry include OEMs such as commercial aircraft
manufacturers Airbus, Boeing, Bombardier, and Embraer; while GE, Rolls Royce, and
United Technologies supply jet engines. In the Aerospace Industry, the entire production
process from parts to final assembly, as well as the customer base and the product
support infrastructure are global by nature. Over the past 40 years, large commercial
aircraft orders and deliveries have followed a cyclical pattern lasting approximately 10
years. Demand is driven by the state of the global economy, the price of air travel and
other related factors.
Commercial Aerospace to Fuel Growthxv
According to the Global A&D Industry Financial Performance Study, June 2013 published
by Deloitte, the global A&D industry revenue increased by 5.9% from US$653.7 billion in
2011 to US$692.5 billion in 2012.xvi
The report further states that the ‘Commercial
Aerospace’ segment is the primary contributor to increased revenue for the industry over
the last three years. The ‘Defense’ segment contribution to the global A&D industry
revenues has seen significant erosion mainly due to affordability challenges faced by
countries around the globe on the back of a continued slowdown in global economic
activity.
Military
Aerospace
Industry
Rework
OEM
Rework
OEM
Commercial
9
Trans-Pacific Aerospace Company Inc.
The chart below depicts the contribution made by the commercial aerospace and defense
segments over the last 3 years:
Exhibit 5 : Contribution by Segment to Global A&D Industry Revenuexvii
Source: Boeing Current Market Outlook2012-2031xviii
Aerospace Industry in Chinaxix
Over the next few years, China aims to spend a quarter of a trillion dollars in order to
develop its domestic aerospace industry with the country currently accounting for two-
thirds of all airports under construction globally.xx
With an expected delivery of 5,260 new
airplanes valued at US$670 billion by 2031, China is clearly poised to be the largest
market for airplanes outside the U.S.xxi
According to a PWC report, the global commercial aircraft fleet is expected to nearly
double to 40,000 units by 2030 with emerging market demand forecasted to grow at
double the pace of the developed market demand. Most of the growth is expected to occur
in Asia, Latin America, Middle East, China, and India. In particular, China states in its 12th
Five-Year Plan (2011-2015) that building a robust and competitive commercial aerospace
sector is one of the country’s top seven priorities.xxii
The report also indicates a change in
the country’s aerospace strategy in the coming years from being a buyer of western
technologies to a domestic developer of aerospace technologies. The country is now
channeling its human and capital resources into the aerospace industry in order to achieve
its long-term goal of building and developing commercial aircraft instead of just being a
supplier to leading aerospace companies like Boeing, Airbus, and the others.
Exhibit 6 : China Aircraft Fleet by Sizexxiii
Source: Boeing Current Market Outlook_2012-2031
39.4% 41.9% 45.9%
60.6% 58.1% 54.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012
Commercial Aerospace Defense
1,490
4,220 280
1,310
140
450
0
1,000
2,000
3,000
4,000
5,000
6,000
2011 Fleet 2031 Fleet
5,980
1,910
Total
Total
Other
Other Twin Aisle
Twin Aisle
Single Aisle
Single Aisle
10
Trans-Pacific Aerospace Company Inc.
The Bearing Industryxxiv
The Global bearing industry, a multi-billion dollar market, is highly fragmented in nature.
Manufacturers of commercial and military aerospace equipment, automotive and
commercial truck manufacturers, agricultural machinery manufacturers, industrial
equipment and machinery manufacturers and construction, mining and specialized
equipment manufacturers are the major buyers of bearings. According to a report by
Global Industry Analysts, Inc., the global bearings market is forecasted to reach US$101
billion by 2018, aided primarily by a strong recovery in aerospace, automotive and
industrial machinery industries as well as a supportive capital investment climate.xxv
The different types of standard bearings include journal bearings, spherical bearings,
rolling element bearings and rod-ends (“Bearings”) all of which are manufactured by the
Company. Within the standard bearings group, approximately 3,000 Bearings are used on
every aircraft. Annual sales of these Bearings for commercial aircraft are estimated to
increase to US$1.5 billion in 2014, and subsequently grow at a compounded annual
growth rate (CAGR) of 5.4% to 1.8 billion in 2018xxvi
. A new World Bearings study from
The Freedonia Group indicates that although the automotive and machinery markets will
remain the largest segments through 2016, their overall share will decline as sales of
bearings used in aerospace and other applications will increase at slightly faster rate.xxvii
Major players in the industry include EnPro Industries Inc., Federal-Mogul Corporation,
JTEKT Corporation, NSK Ltd., NTN Corp., igus, LM-Tabell Inc., Minebea Co., Ltd., Misumi
USA Inc., RBC France SAS, RBC Bearings USA, Schaeffler Technologies, SKF Group,
The Timken Company, and Spyraflo Inc.
Primary Drivers of Bearing Demandxxviii xxix
The demand for bearings is largely dynamic and depends mainly on global Gross
Domestic Product (GDP) trends due to their extensive use in the capital goods,
engineering, and automotive sectors. In the Defense Market, the demand for bearings
hinges on the spending patterns of countries on new equipment and the extent of
utilization of existing equipment to support the demand for replacement bearings. Within
the Aerospace Market, traffic growth of carriers and the aging of existing commercial fleet
determine the demand for bearings.
China: To lead the next phase of Growthxxx xxxi
The Global Bearing Industry went through a difficult phase during the global financial crisis
of 2008 as major end users including the automotive, aerospace and industrial machinery
industries suffered major setbacks during the recessionary period. The emergence of the
sovereign debt crisis in Europe, sluggish recovery of growth in the U.S. and contraction in
the Japanese economy led to a further drop in demand during 2011-2012. A gradual
recovery in economic activity is expected to drive demand in the long term, while the short
term poses significant risks due to the increased financial pressures on several end users.
A recent report by Global Industry Analysts, Inc.xxxii
, states that manufacture of rail
equipment, electronic devices, aircrafts and motorcycles in the developing regions would
determine demand for bearings with the Asia-pacific region representing the largest and
fastest growing market for bearings. The report further states that China tops the list of the
fastest and largest growing bearings market in the Asia Pacific region. The bearings
industry in China is extremely fragmented with the main international bearing companies
covering about one third of the market and the remaining two-thirds covered by the local
manufacturers.
11
Trans-Pacific Aerospace Company Inc.
Some of the largest Chinese players include Wafangdian, Luoyang, Zhejiang Tianma
(TMB), Wanxiang Qianchao, and C&U. While high-paced industrialization and urbanization
have fuelled the demand for bearing from the automotive and industrial machinery
industries, the country’s massive investment in aviation markets has ensured a buoyant
aerospace market. Thus, any deceleration in Chinese growth would heavily impact the
global bearings market.
Growth Factorsxxxiii
Proprietary Technology
The key to the Company’s growth in China lies in its proprietary self-lubricating liner
system and manufacturing and design technologies. The self-lubricating liner is an integral
component of the Company’s finished parts used in an aircraft where lubrication is difficult
or impossible to perform. In practice, the liner system is bonded to race surfaces and
during use forms a lubricating film on the mating ball surface that is continually replaced
throughout the life of the liner material. This proprietary technology remains a primary
growth driver for the Company, providing it a significant competitive advantage since none
of the China-based manufacturers have been successful in making these parts or
producing a similar liner, thereby making TPAC the first and only manufacturer of SAE-
certified bearings in China.
Offset Requirements
One of TPAC’s primary business strategies includes targeting only those countries where
the three largest makers of commercial aircraft have significant offset obligations8. As per
the 35% offset requirements in China, OEMs such as Airbus and Boeing are obligated to
spend more than US$16 billion which would have to be fulfilled through the purchase of
locally-sourced materials. This opens a window of opportunity for TPAC as it could tap
some portion of this potential $16 billion worth of demand. This would not only ensure
exponential growth in revenues in the future due to the sustainability of orders from the
larger OEMs, but also eliminate a fair share of business risk that the Company would have
been exposed to in the absence of orders.
Strong Partnerships
Having a qualified manufacturing facility in China exposes the Company to leading OEMs
(e.g. Boeing, Airbus, Embraer), Airlines (e.g. Air China, China Southern and China
Eastern), and MROs in the cities of Beijing, Guangzhou, Xiamen, and Shandong. Apart
from AVIC, the Company is already negotiating with several of the largest bearing
manufacturers in China as potential joint venture or supply chain partners. An established
set of business relationships will thus enable the Company to capture valuable market
share from its competitors as it commences operations in the future.
8 Arrangements in which the buyer of the aircraft obligates the seller (OEMs) to provide the former with some business that will help them offset the huge outflow of money under the contract for sale.
12
Trans-Pacific Aerospace Company Inc.
SWOT
Strengths
Qualification Approvals. TPAC has recently received formal written qualification
approval for SAE AS81820 and 81934. This qualification approval that the Company
received made it the first and only qualified SAE-certified Bearing manufacturer in
China, paving the way for all Chinese and international airframe manufacturers, sub-
tier suppliers, MRO facilities, airlines and distributors to purchase aerospace
component parts from its facility in China. The qualifier, US Navy or NAVAIR, has
placed TPAC on the Qualified Product Listing as an official supplier of these bearings
allowing it to begin marketing and selling its products. Towards the end of 2014 the
Company plans to seek NAVAIR approval under SAE-AS81935, which should open
up additional sales opportunities.xxxiv
Import Tax Advantage. Imported component parts in China are subjected to 24%
import tax and duty. Since the Company has established a manufacturing facility in
China, China-based airlines and MROs can source Bearings from TPAC avoiding the
minimum 24% import duty, giving the Company a significant competitive
advantage.xxxv
Experienced Technical and Management Team. The Company’s management
team is highly proficient with significant experience in the aerospace and
manufacturing industries. Additionally, the team also includes board members with
significant expertise in the fields of international procurement and production,
business management, program management, government compliance, and cross-
border business development. Some companies in the aerospace industry that
management and board members have been associated with include, but are not
limited to Airbus, Boeing, Timken, Bombardier and Northrop Grumman.xxxvi
Weaknesses
Losses Resulting in Dilution of Shareholder Base. The Company has not
generated any commercial revenues, and has financed operations to date through
equity and debt offerings. The need to further finance operations in the future could
lead to a dilution of shareholders wealth.
Patent: Currently, the Company does not hold any patents for its proprietary
technology. TPAC’s technology is protected by trade secrets. Critical manufacturing
processes, including liner production, are conducted in the USA in order to prevent
the compromise of this trade secret. The Company management believes that while
bearing manufacturers in China have been attempting to build a self-lubricating liner
system for the past 20 years, they have not yet been successful. Not filing a patent for
its system and processes is quite common in this industry as there’s no information
that will eventually become public knowledge. However, competitors may, over time,
develop similar self-lubricating bearings.
Opportunities
Commercial Aerospace on the Priority List: According to Boeing estimates made
in 2012, China is expected to take delivery of 5,260 new airplanes valued at US$670
billion by 2031. This is consistent with China’s plans to spend a quarter of a trillion
dollars to build a robust aerospace industry, and would make it the largest market for
airplanes outside the U.S. In its 12th
Five-Year Plan (2011-2015), China has indicated
13
Trans-Pacific Aerospace Company Inc.
that building a robust and competitive commercial aerospace sector is one of the
country’s top seven priorities.xxxvii
The emergence of Aerospace as a national priority
in China is expected to result in increased government and private sector spending
which will provide substantial room for domestic component manufacturers to grow
and expand their operations.
Benefits of the Offset Agreements: As a part of the offset agreement, OEMS such
as Boeing and Airbus owe more than US$16 billion to China. These offset
agreements protect Chinese manufacturers as OEMS are obliged to purchase
domestic Chinese products in order to offset the huge outflow of money resulting from
the purchase of aircrafts and associated components. These agreements provide a
huge opportunity to local domestic manufacturers not only from a sales perspective
but also from the point of establishing valuable business relations with the large
players of the aerospace market for orders in the future.
Limited Domestic Competition: Minebea Co., Ltd and RBC Bearings, the
Company’s primary competitors, both manufacture self-lubricating bearings. While
Minebea has plants in Shanghai and Zhuai, these facilities essentially produce easy-
to-make ball bearings, DC motors, etc. It however, does not have the requisite
technology or capacity to make self-lubricating bearings in China. RBC, on the other
hand, does not have any plans to enter the Chinese market. Thus, limited competition
from the large players presented an open Chinese market for small players like Trans-
Pacific Aerospace to commence their operations and gradually capture valuable
market share in order to counter any kind of competition which might arise from other
local domestic manufacturers in the future.
Threats
Possibility of a Hard Landing in China: From an average annual Gross Domestic
Product (GDP) growth of 9.8% for the last three decades,xxxviii
the country’s economy
has seen decelerating growth for 13 consecutive quarters with the GDP growing at
7.5% Y-o-Y in the second quarter of the current yearxxxix
. With 50% of GDP coming
from gross fixed capital formation, rising corporate and private sector debt and huge
excess capacity are emerging signs of an imbalanced economy. As the country goes
through this transition phase, from being an investment-driven economy to a
consumption led one, any slowdown in investment would adversely affect the capital
intensive sectors of the economy. This poses a threat to the aerospace industry in the
country as aviation spending plans could get reduced in the future, with a
corresponding effect on domestic component manufacturers like TPAC.
14
Trans-Pacific Aerospace Company Inc.
Financial Performance
Exhibit 7 : Latest Income Statement (Consolidated)
In US$ '000, Ending October 31
FY2013 FY2012 Y-o-Y (%)
EXPENSES
Professional fees 94 140 (33%)
Consulting - 26 NM
Other general and administrative
1,688 1,312 29%
Total Operating Expenditure
1,782 1,478 21%
Impairment of Acquisition 528 - NM
Bad Debt Expense - 36 NM
Net Finance Cost 26 18 (44%)
Total Non-Operating Expenditure
554 54 926%
Loss Before Income Taxes (2,336) (1,533) NM
Income Tax 0.9 4 (78%)
Net Loss (2,337) (1,537) 52%
Basic and Diluted Profit (Loss) per Share
(0.03) (0.02) NM
Source: Company Filings
Results for Fiscal Year Ended October 31, 2013: The Company has not commenced
revenue producing operations to date; it has incurred a net loss from operations of
US$1.78 million during FY2013 and has an accumulated deficit of US$9.09 million since
inception (June 2007). During FY2013, the Company’s operating expenses primarily
consisting of professional fees, consulting fees, and other general and administrative
expenses which increased 21% Y-o-Y, primarily due to the issuance of common stock to
the board of directors and consultants. Net Loss rose to US$2.337 million in FY2013 from
US$1.537 million in FY2012.
Exhibit 8 : Latest Balance Sheet (Consolidated)
In US$ '000 31-Oct-13 31-Oct-12
Current assets 29 19
Non-current assets 8 5
TOTAL ASSETS 37 24
Current Liabilities 516 379
Non-current Liabilities - -
TOTAL LIABILITIES 516 379
Total Shareholder's Equity (479) (355)
TOTAL LIABILITIES & EQUITY 37 24
Source: Company Filings
Trans-Pacific had about US$0.03 million of cash on its balance sheet as on October 31,
2013, which increased by 52% on a Y-o-Y basis. Due to continuing losses from
operations, the Company has a working capital deficit of US$0.48 million. In order to fund
its expected marketing and distribution of the initial line of aircraft component products to
be manufactured by Godfrey and to fund its expected operating losses, the Company is
expected to require approximately US$2 million of additional working capital over the next
twelve months either through sale of equity or debt securities, or the formation of a joint
venture with a Chinese or international partner.
15
Trans-Pacific Aerospace Company Inc.
Key Risk Factors
Financial Risk. As a development stage company, TPAC has not yet established a
consistent source of revenues that are adequate to cover its operating costs and
facilitate the Company to continue as a going concern. Therefore, it may be
necessary for the Company to raise additional funds to cover operating losses.
Moreover, if the Company fails to obtain the required amount of capital, it may not be
able to meet its working capital requirements. Nevertheless, in the past, the Company
has proved its ability to raise adequate funds to mitigate this risk through private
placements.
Regulatory Risk. The Company operates in a sector that requires a substantial
number of regulatory product approvals and qualifications. The Company’s inability to
obtain or maintain regulatory qualifications or approvals for its products could be a
barrier to commercial sales. However, the Company’s China subsidiary Godfrey has
passed all qualification testing for SAE Aerospace Standard 81820, 81934 and 81935,
and has received formal written qualification approval from the U.S. Navy.
Patent Risk: Currently, the Company holds no patent rights for the technology used
in the designs and processes for its spherical Bearing products. Also, it is believed
that the other players in the market are aware of the technology used in the process
of producing spherical products. Some competitors in the market currently make
similar spherical Bearing products. However, in order to protect the proprietary rights,
the Company relies on the combination of confidentiality agreements and trade secret
law. TPAC believes its technology and processes will be protected moreso in this
manner than if it filed for a patent, which eventually becomes public knowledge. This
strategy is standard in this type of industry.
Competition and Margin Erosion Risk. The bearing industry is run by 7 qualified
players, one of which is TPAC. The barriers to entry are quite high; however, the other
6 players are well-established with better financial resources and the ability to
efficiently manage their costs. As a result of this competition, the Company may find it
difficult to increase prices of their products to recover the costs incurred during the
operating process and eventually eroding the Company’s margins and profitability.
16
Trans-Pacific Aerospace Company Inc.
Management Team & Board of Directorsxl
The management team has experts with significant experience in the aerospace spherical
bearing industry. The team consists of accomplished professionals with experience in
successfully handling procurement and supply chains, re-organizing manufacturing
operations & managing the deliveries time, and reducing working capital requirements.
Furthermore, the management team also includes members involved in cross-border
business development, providing the Company with the substantial support to manage
business relations in foreign countries. Some companies in the aerospace industry that
management and board members have been associated with include, but are not limited
to Airbus, Boeing, Timken, Bombardier and Northrop Grumman.
Mr. Bill McKay, CEO and Chairman of Board of Director
Mr. McKay has served as Chairman and Chief Executive Officer since February 2010. Mr.
McKay has 25 years’ experience in the aerospace/manufacturing industry, holding many
senior management positions including General Counsel, General Manager,
Manufacturing Manager, COO and CEO of both private and public companies. Mr. McKay
was founder and Chief Executive Officer of Harbin Aerospace Company, LLC, an aircraft
component part design, engineering and manufacturing company acquired by Trans-
Pacific Aerospace in 2010. Prior to forming Harbin, he was an aerospace industry
consultant involved in aerospace projects in China and other aspects of the industry (2008
to 2009). From 2006 to 2008, Mr. McKay served as Chief Operating Officer for Acromil
Corporation, an aerospace structural component manufacturing company. Within 3
months of commencing his tenure at Acromil, Mr. McKay turned the company around from
monthly losses of approximately $1 million to monthly profits in excess of $600,000.
During the same time period, he improved on-time deliveries from 0% to 90%. Prior to
Acromil, Mr. McKay served (from 1986 to 2006) in a variety of senior management roles
with Southwest Products Company, a specialized engineering consulting firm and
designer and manufacturer of plain spherical bearings used primarily in aerospace, naval
and sophisticated commercial applications. He started as General Counsel (1986), and
was promoted to Executive Vice President and General Manager (1987) and Chief
Executive Offices (1991). As part of the acquisition of Southwest Products Company by
Sunbase Asia, Inc., a Hong Kong-based aerospace company, Mr. McKay also took on the
role of President-CEO of Sunbase Asia. He received a B.A. in History (Magna Cum Laude
and Phi Beta Kappa) as well as a JD and an MBA from the University of Southern
California. He is a member of the California State Bar.
Mr. Greg Archer, Director
Mr. Archer has over 24 years of aerospace industry experience as an executive with
Northrop Grumman Corporation. From December 2002 through March 2010, he served as
director of procurement/global supply chain for the Aerospace Systems sector of Northrup
Grumman. Mr. Archer was responsible for the procurement of goods and services valued
in excess of one billion dollars and some thirty million parts across multiple programs and
platforms. In his role as the executive for procurement/global supply chain, he developed
and deployed a purchasing model that was responsive to program needs across the
sector. He was the Chief Procurement Officer for the sector and directed an organization
made up of professional buyers responsible for a wide range of products and services. In
addition to his procurement responsibilities, he was also responsible for commodity
engineering, managing and supplier of technical solutions across all programs leading an
organization made up of engineering professionals from the disciplines of manufacturing
engineering, industrial engineering and electrical engineering. Prior to his position as the
17
Trans-Pacific Aerospace Company Inc.
director of procurement, Mr. Archer held leadership positions in international procurement
and production, business management, subcontracts, program management and
government compliance. He spent several years supporting company litigation and dispute
resolution and was member of a company executive board of reviewers. He is a graduate
of California State Polytechnic State University at Pomona.
Mr. Kevin Gould, Director
Mr. Gould has over 25 year of management experience in aerospace, manufacturing, high
tech and law. Currently he is President of BendixKing, manufacturer of avionics for
General Aviation aircraft. Previously he served as President and CEO of Piper Aircraft,
Inc. During his tenure, Piper doubled its market share, outsourced its spare parts
distribution, beat its competition to market with the highly successful PiperSport,
overhauled and globalized its sales and distribution channel, initiated social networking
marketing programs, and re-launched development of its PiperJet aircraft. Earlier, Mr.
Gould served as VP of Operations at Piper where he was a member of the executive team
that turned around and sold the company. Prior to joining Piper, Mr. Gould was VP of
Operations at startup aircraft manufacturer Adam Aircraft where he set up production
operations for the company's carbon fiber piston and jet airplanes. Earlier he spent 12
years at Boeing in a variety of leadership roles including manufacturing, supply chain,
engineering, program management, finance and facilities expansion. Prior to that, Mr.
Gould spent three years as an attorney at a major Los Angeles law firm practicing
business and real estate law. He holds an MBA from Harvard University, an MS in
management from Stanford Graduate School of Business, a JD from University of
Southern California and a BA from Washington State University. He is an instrument rated
pilot.
Mr. Jason Arnold, Director xli
Mr. Arnold has over 25 years of experience in the aerospace manufacturing industry,
regularly conducting business with such companies as Airbus, Boeing, Lockheed Martin
and Northrop Grumman. At Arnold Engineering, he developed a growth strategy that
increased sales from $500k to over $30 million annually, providing customers with world
class machined and assembled aero structures for both the commercial and defense
markets. Mr. Arnold orchestrated the successful sale of Arnold Engineering in 2009 to a
Private Equity firm. He currently is an active Chairman for aircraft manufacturing
organization as well as a Trans- Pacific Board Member.
Mr. Clairmont Griffith, Director xlii
Clairmont Griffith, an aerospace devotee and specifically spherical bearings, is an
entrepreneur. He has been engaged with TPAC since early 2010, becoming a member of
TPAC's advisory board and now director. Mr. Griffith is also Director of Godfrey China
Aerospace. He currently has a minor investment interests in mining, and oil and gas
equipment. Mr. Griffith is a medical doctor and assistant professor who is a diplomat of the
American Board of Anesthesiology and National Board of Medical Examiners. He served
in various leadership roles including recent Chairman of Anesthesiology at Howard
University Hospital and becoming the first Chief of Perioperative Services there. Mr.
Griffith has also served as Chief of Obstetric Anesthesia, Vice Chairman of
Anesthesiology, Chief of Clinical Affairs, and Chief of Quality Assurance and Patient
Safety. While engaged in medical research and academics, Mr. Griffith has also been
team leader on numerous hospital committees and a member of numerous National
Medical Associations. Clairmont Griffith has received his BS in chemistry and a Medical
Degree from Howard University. He attributes his enlightened entrepreneurial vision to his
kids Alex, Quincy and Alison.
18
Trans-Pacific Aerospace Company Inc.
Disclaimer
Some of the information in this report relates to future events or future business and
financial performance. Such statements constitute forward-looking information within the
meaning of the Private Securities Litigation Act of 1995. Such statements can be only
estimations and the actual events or results may differ from those discussed due to,
among other things, the risks described Trans-Pacific Aerospace Company Inc. reports.
The content of this report with respect to Trans-Pacific Aerospace Company Inc. has
been compiled primarily from consultations and, information provided by Trans-Pacific
Aerospace Company Inc. and information available to the public released by Trans-
Pacific Aerospace Company Inc. through news releases and SEC (if applicable) or other
actual government regulatory filings. Although RBMG may verify certain aspects of
information provided to it, Trans-Pacific Aerospace Company Inc. is solely responsible
for the accuracy of that information. Information as to other companies has been
prepared from publicly available information and has not been independently verified by
Trans-Pacific Aerospace Company Inc. or RBMG. Certain summaries of scientific or
other activities and outcomes have been condensed to aid the reader in gaining a
general understanding. For more complete information about Trans-Pacific Aerospace
Company Inc. the reader is directed to the Company's website at
http://www.tpacbearings.com/. RBMG is a corporate communications firm the operations
of which seek to increase investor awareness to the small cap community. RBMG
research analysts do not invest in or own shares of companies analyzed and reported on
by them. RBMG is not responsible for any claims or losses sustained by an investor
resulting from any of its reports, company profiles or in any other investor relations
materials disseminated by them. This report is published solely for information purposes
and is not to be construed as advice designed to meet the investment needs of any
particular investor or as an offer to sell or the solicitation of an offer to buy any security in
any state. Investing in the Stock Market is a high-risk endeavor, and past performance
does not guarantee future performance. This report is not to be copied, transmitted,
displayed, distributed (for compensation or otherwise), or altered in any way without
RBMG's prior written consent. RBMG is not compensated for the analytical research and
evaluation services that were performed in connection with the preparation of this report
for Trans-Pacific Aerospace Company Inc.; but RBMG has received stock compensation
(three million shares) in exchange for other segregated services.
We strongly urge all investors to conduct their own research before making any
investment decision.
19
Trans-Pacific Aerospace Company Inc.
Sources
ihttp://www.businesswire.com/news/home/20130311005410/en/Trans-Pacific-Aerospace-Company-Receives-SAE-AS81820-SAE iihttp://www.sec.gov/Archives/edgar/data/1422295/000101968713001281/transpacific_8k-040513.htm
iiihttp://www.prweb.com/releases/plain_bearings/ball_roller_bearings/prweb10436256.htm
ivhttp://www.pwc.com/en_US/us/industrial-products/assets/pwc-gaining-attitude-issue-4-sustain-growth.pdf
vTPAC’s Summary Business Plan 2014
vihttp://www.4-traders.com/TRANS-PACIFIC-AEROSPACE-C-6033330/news-history/
vii Company Annual Filing, Company Summary Business Plan
ixQuarterly Report, April 5, 2013
xTPAC’s Summary Business Plan 2014
xiTPAC’s Summary Business Plan 2014
xiiAnnual Report, October 31, 2012
xiii http://www.deloitte.com/assets/Dcom-
UnitedStates/Local%20Assets/Documents/AD/us_AD_wrap_up_infographic_6202013.pdf
xiv http://www.epa.gov/Compliance/resources/publications/assistance/sectors/notebooks/aersn.pdf
xv http://www.deloitte.com/assets/Dcom-
UnitedStates/Local%20Assets/Documents/AD/us_AD_wrap_up_infographic_6202013.pdf
xvi http://www.deloitte.com/assets/Dcom-
UnitedStates/Local%20Assets/Documents/AD/us_AD_wrap_up_infographic_6202013.pdf
xvii http://www.deloitte.com/assets/Dcom-
UnitedStates/Local%20Assets/Documents/AD/us_AD_wrap_up_infographic_6202013.pdf
xviiihttp://libraryonline.erau.edu/online-full-text/books-online/Boeing_Current_Market_Outlook_2012.pdf xix
http://www.pwc.com/en_US/us/industrial-products/assets/pwc-gaining-attitude-issue-4-sustain-growth.pdf
xxTPAC’s Summary Business Plan 2014
xxiTPAC’s Summary Business Plan 2014
xxiihttp://www.pwc.com/en_US/us/industrial-products/assets/pwc-gaining-attitude-issue-4-sustain-growth.pdf
xxiiihttp://libraryonline.erau.edu/online-full-text/books-online/Boeing_Current_Market_Outlook_2012.pdf
xxiv RBC bearings annual report for the fiscal year ended 30th March 2013
xxvhttp://www.prweb.com/releases/plain_bearings/ball_roller_bearings/prweb10436256.htm
xxviTPAC’s Summary Business Plan 2014
xxviihttp://www.prnewswire.com/news-releases/world-bearings-market-162562406.html
xxviiiRBC bearings annual report for the fiscal year ended March 30, 2013
xxixhttp://www.prweb.com/releases/plain_bearings/ball_roller_bearings/prweb10436256.htm
xxxhttp://www.prweb.com/releases/plain_bearings/ball_roller_bearings/prweb10436256.htm
xxxihttp://www.skf.com/group/investors/bearings-market
xxxii http://www.prweb.com/releases/plain_bearings/ball_roller_bearings/prweb10436256.htm
xxxiiiTPAC’s Summary Business Plan 2014
20
Trans-Pacific Aerospace Company Inc.
xxxivhttp://www.businesswire.com/news/home/20130909005569/en/Trans-Pacific-Aerospace-Company-Receives-
Additional-NAVAIR-Approvals
xxxvTPAC’s Summary Business Plan 2014
xxxviTPAC’s February 2014 Investor Presentation
xxxviihttp://www.pwc.com/en_US/us/industrial-products/assets/pwc-gaining-attitude-issue-4-sustain-growth.pdf
xxxviiihttp://www.china.org.cn/opinion/2013-08/07/content_29646629.htm
xxxixhttp://www.bbc.co.uk/news/business-23310975
xl Company Website, Annual Results Filing and Company Summary Business Plan
xlihttp://investing.businessweek.com/research/stocks/people/person.asp?personId=224657972&ticker=TPAC&previo
usCapId=39791544&previousTitle=TRANS-PACIFIC%20AEROSPACE%20CO%20I
xliihttp://investing.businessweek.com/research/stocks/people/person.asp?personId=224657979&ticker=TPAC&previo
usCapId=39791544&previousTitle=TRANS-PACIFIC%20AEROSPACE%20CO%20I