China Power Equip Inc (OTC:CPQQ)

XI'AN, China, March 29, 2014 /PRNewswire/ -- China Power Equipment, Inc. (OTCBB: CPQQ) ("China Power" or the "Company"), a manufacturer of a new generation of energy saving amorphous alloy transformer cores and transformers in China, today announced that it filed a certification on Form 15 with the Securities and Exchange Commission ("SEC") in order to suspend its reporting obligations under Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

The Board of Directors has approved this action as a cost reduction measure. Suspending and, ultimately, terminating the Company's SEC reporting obligations will allow it to reduce the substantial legal, accounting and other expenses associated with reporting compliance.

The Company is eligible to suspend its reporting obligations because it has fewer than 300 record holders of its common stock as of the date hereof in addition to its satisfaction of other eligibility criteria under Rule 12h-3 of the Exchange Act on the date of filing the Form 15.

As a matter of fact, due to the fact the Company is a section 15(d) company, the duty to file under Section 15(d) of the Exchange Act automatically suspends as to any fiscal year, other than the fiscal year within which a registration statement became effective if the Company has less than 300 shareholders of record at the beginning of such a year, which has been the case for the Company for at least the past three years.

Nevertheless, the Company chose to file the Form 15 to notify the public that immediately upon the filing of the Form 15, it no longer intends to continue to file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. Shares are anticipated being available for trading on the OTC Pink sheets, although there can be no assurances that any trading market for the Company's securities will exist, after the Company filed the Form 15.

Ms. Elaine Zhao, resigned from her Chief Financial Officer position with the Company, effective as of March 27, 2014, considering the reduced need from the Company for her expertise going forward.

Third Quarter 2013 Financial Results

• Total revenues decreased $1.55 million or 14.5% to $ 9.13 million, compared to the same period of 2012
• Earnings per share - diluted was $0.07 vs. last years third quarter of $0.09

"During the reporting quarter, we are pleased to see that we maintained good operating margin and net profit margin sequentially, compared to the last quarter, thanks to continuously efficient cost control measures, as well as a jump of more than 8 times in cash flow generation from operating activities following an efficient financial management," said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "The decrease of our net sales for the quarter was largely due to the delay of the execution of parts of the amorphous ally transformers orders with some oil fields."

"Driven by rising emphasis of energy saving initiatives by social awareness and the governments as well as fast increasing energy price, the demand for energy saving solutions is significantly growing, including both domestic and international markets. We will continue our focus on the specialty customer market for amorphous alloy transformers, and actively develop overseas energy saving market to help us continue to grow." concluded Mr. Song.

Second Quarter 2013 Financial Results:

• Total net revenues for the quarter decreased $0.61 million or 6.4% to $8.89 million during the quarter ended June 30, 2013, compared to the same period of 2012.
• Gross profit for the quarter was $2.21 million, decreased $0.29 million or 11.8% compared to the same period of 2012
• Net income for the second quarter ended June 30, 2013 was $1.39 million, a decrease of 18.1% versus the same period of 2012

"Beginning this year, we strengthened accounts receivable management, which led to the slightly lower net sales, but significant improvement of net cash flow from operating activities," said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "We also saw an encouraging trend with sequential net revenue and earnings growth in both of amorphous alloy cores and transformers businesses compared to the first quarter of the year. We optimistically expect steady growth in customer order activity as we progress through 2013."

"Currently, proactive fiscal policy in China is stimulating domestic demand for electrical distribution equipment from manufacturers. Majority of our customers, which are state-owned enterprises, are expected to gradually increase spending on infrastructure development. We expect stronger performance in the second half of 2013 as the level of infrastructure development picks up inChina. In addition, we also expect to initiate the development in international markets. We believe we are well positioned to capitalize on opportunities in the markets," concluded Mr. Song.

First Quarter 2013 Financial Results:

• Net revenues decreased 5.5% to $6.85 million year-over-year
• Net revenues from amorphous alloy transformer business increased 2.7% to 1.82 million year-over-year
• Gross margin for amorphous alloy transformer increased 2.7 percentage points to 23.6% year-over-year
• Net income increased 1.7% to $1.06 million with $0.04 in diluted EPS

"Although first fiscal quarter is typically our seasonably weakest of the year which affected the amount of revenues we were able to capture, we have observed a solid increase in the demand for energy-saving amorphous alloy transformers," said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment Inc. "The acceleration in the growth of demand from State Grids Corps and industrial users was especially encouraging as we stepped up our marketing and sales efforts and strengthened our leading position in markets in Northwestern China. The Chinese government is further encouraging the promotion and application of energy-saving products. As one of the leading companies that has large-scale production capacity and outstanding new models of amorphous alloy transformers in northwestern China, we expect to capitalize on these trends and to capture a good share of these markets," concluded Mr. Song.

• Net revenues decreased 2.1% to $9.49 million year-over-year
• Net income increased 1.6% to $1.70 million with $0.07 in diluted EPS

"Due to our marketing strategy, we passed most of our cost savings from a decline in the prices of the amorphous alloy strips onto the customers. Therefore, despite the higher sales volume in amorphous alloy cores, revenues for the quarter were lower year over year." said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "Revenues in the second quarter increased 30.8% compared to revenues in the first quarter which underscores our brand equity and the fact that our marketing and sales strategy are working.

First Quarter 2012 Highlights:

• Net revenues decreased 6.1% to $7.26 million year-over-year
• Net income decreased 7.6% to $1.04 million with $0.04 in diluted EPS

"While our first quarter is typically our seasonably weakest of the year, our revenues were also impacted by a decline in the average selling prices for our amorphous alloy cores and transformers," said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "This was principally due to a decline in the prices of the amorphous alloy strips, a savings which we partly passed on to our customers. Additionally, the sales ramp up at our transformer production facility is proceeding more slowly than anticipated as we are investing a significant amount of time in the recruitment and training of personnel at the facility and in our overall production preparation to ensure the highest standards of quality and reliability of our transformers and to make sure that our facility efficiently manages large orders.

"Improving capacity utilization of our amorphous alloy core production line has been a major objective for this year, increasing 9.8% year over year in the first quarter of 2012. Although revenue from amorphous alloy transformers decreased 5.6% in the first quarter of 2012 compared to the same period of 2011, we produced about 36% of all transformers in-house at our new production facility in the first quarter of 2012. Increased capacity utilization of amorphous alloy cores, improved gross margin on amorphous alloy cores and increased in-house amorphous alloy transformer production are positive developments that are consistent with our Company's long term objectives. Furthermore, our customers recognize the long term cost advantages of using amorphous alloy cores versus traditional steel cores as well as the environmental benefits and we expect continued demand for our energy saving products as China further upgrades its older electric grids and as it expands its energy infrastructure in western China," concluded Mr. Song.

Fourth Quarter 2011 Results

• Net revenues increased 19.6% to $9.3 million year-over-year
• Net income increased 49.5% to $1.4 million with $0.06 in diluted EPS

"I am pleased to report strong financial results for both our fourth quarter and full year 2011 which underscored the increased recognition for energy efficient electric products by China," said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "We continue to see strong demand for our energy saving products and we have further expanded our production levels and increased our market share. Continued strong demand in China for energy infrastructure components has allowed us to further increase our capacity utilization at our new step down transformer production facility which commenced commercial production in the third quarter of 2011. Our R&D team continues to innovate, develop and upgrade patents and use lower cost, high quality domestically-produced raw materials in our products, all of which should allow us to better service our existing client base, improve margins and allow us to gain more market share in the future."

Since the Company commenced commercial production at its new amorphous alloy step-down transformer line during the third quarter of 2011, it has further tested and refined its preparation and production processes, equipment, and quality controls to prepare for the mass production in the next stage. All these efforts were recognized by our reception of ISO 9001 2008 certification in 2012. Previously, the Company used third party manufacturers to make transformers. With the completion of this new facility, orders that were previously subcontracted will be gradually taken in-house. Meanwhile, the Company is actively seeking to participate in and undertake larger national grid projects and private end users' projects.

With the implementation of China's Twelfth Five-year Plan, we believe that the rural grid improvement plan, which is expected to be released as early as the first half of 2012, will effectively boost the market demand for energy-efficiency products. It is estimated that both the State Grid Corporation and South China Grid Corporation, the two large grid corporations in China, will invest at least $79 billion USD (500 billion RMB) into the rural grid upgrade project during China's current five year plan. As the leading professional amorphous alloy core and transformer manufacturer in northwestern China, China Power Equipment is well positioned to secure new orders from the Chinese government's planned renovation and upgrade of rural power grids in both the Central and Western regions of China.

Third Quarter 2011 Results

Second Quarter 2011 Results

"We had another excellent quarter as we benefited from increasing demand for energy-saving and environmentally friendly products in China. Increased sales of amorphous alloy cores confirm the underlying strength of the addressable market we serve," began Chairman Yong Xing Song of China Power Equipment. "The strong sales growth in the second quarter underscores our brand equity and the fact that our marketing and sales strategy is working well with leading transformer manufacturers. As our new production facility comes online this fall, we will have the ability to bid for larger products which will enable us to make further market share gains in the rapidly growing amorphous transformer segment."

XI'AN, China, June 28, 2011 /PRNewswire-Asia-FirstCall/ -- China Power Equipment, Inc. ("China Power" or "China Power Equipment" or the "Company," OTCBB: CPQQ), the designer, manufacturer, and distributor of a new generation of energy saving electric transformers and transformer cores in the People's Republic of China, today announced that Mr. Yongxing Song, Chairman and Chief Executive Officer of China Power Equipment purchased 123,500 shares of the Company's common stock in open market transactions.

Mr. Yongxing Song, Chairman and Chief Executive Officer of China Power Equipment, said, "We are fully committed to maximizing value for shareholders, and will continue to invest to grow our business, in particular our new transformer production line. Our strong balance sheet and cash flow are providing the capital for this new production line, as well as substantial increases in working capital." He added, "More than ever, I believe in China Power's continued success."

Mr. Song bought shares on the open market on June 24, and June 27, 2011.

Rodman and Renshaw on CPQQ                             5/18/2011

Solid 1Q11 Results; Reiterating Market Outperform Rating and $3 Price Target.

China Power Equipment (CPQQ) reported a 1Q11 fully diluted EPS of $0.05, a penny above our expectations on better than expected amorphous transformer core sales, sequentially higher gross margin and careful cost management, partially offset by weaker transformer sales. Revenues increased by 34.4% YoY to $7.7 million, above our estimate of $6.4 million. Gross profit of $1.8 million represented a 20.3% YoY increase and a 23.8% gross margin, compared to $1.5 million or 26.5% margin in 1Q10 and $1.8 million or 23.2% gross margin in 4Q10. SG&A expenses excluding stock-based compensation increased 129.2% YoY from $0.19 million or 3.3% of total revenue to $0.44 million or 5.6% of total revenue. Net income adjusted for stock-based compensation declined by 5.6% YoY to $1.2 million, equivalent to $0.06 per basic and $0.05 per fully diluted share.

The company ended the quarter with $19.5 million in net cash ($1.01 per basic and $0.83 per fully diluted share). With the market capitalization at $17.6 million, the company is currently trading at below net cash value. On a per share basis, CPQQ is trading at 3.8x times our FY11 fully diluted EPS forecast of $0.24 versus FY11 industry averages of 17.6x for the US-listed peer group and 36.5x for the China-listed peer group. We believe the company continues to be uniquely positioned to capitalize on ongoing modernization and expansion of China’s electricity transmission and distribution infrastructure and the country’s continuous emphasis on grid efficiency. We reiterate our Market Outperform/Speculative Risk rating and a price target of $3. Our price target is predicated on the shares attaining a P/E level of 13x our FY11 fully diluted EPS estimate of $0.24

Discussion

• Segment Performance: 1Q11 sales of amorphous transformer cores increased 56.1% YoY to $5.9 million on higher volume partially offset by a 7.1% decline in average selling prices as the company lowered its prices to attract additional orders (Exhibit 1: Amorphous Transformer Cores Segment). Notably, the company achieved nearly 70% capacity utilization during the quarter despite a substantial increase in amorphous transformer cores capacity in 2H10. Sales of amorphous transformers decreased by 6.4% YoY to $1.9 million compared to $2.0 million in 1Q10 and 4Q10 despite a 9.7% increase in average selling prices due to a proportionately higher number of larger transformers sold during the quarter (Exhibit 2: Amorphous Transformer Segment).
  
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First Quarter 2011 Highlights

• Net revenues increased 34.4% to $7.7 million in the first quarter 2011 from $5.8 million in the first quarter 2010.
• Net revenues from the amorphous alloy cores business increased 56.1% to $5.9 million in first quarter 2011 from $3.7 million in the first quarter 2010.
• Gross profit increased 20.3% to $1.8 million in first quarter 2011 from $1.5 million in the first quarter 2010.
• Net income decreased 2.6% to $1.1 million in first quarter 2011 from $1.2 million in the first quarter 2010.
• Basic earnings per share decreased 25.0% to $0.06 per share in first quarter 2011 from $0.08 per share in the first quarter 2010 on 30.0% higher weighted average basic shares outstanding in the first quarter 2011 than in the first quarter 2010.
• Diluted earnings per share remained even at $0.05 per share in both the first quarter 2011 and first quarter 2010. Weighted average diluted shares outstanding in the first quarter 2011 were 4.1% higher than in the first quarter 2010.
• Earnings conference call and webcast will be held on May 17, 2011 at 7:00 a.m. EDT (New York).

Mr. Yong Xing Song, Chairman of the Board of China Power Equipment, said, "We had a very good quarter. Our marketing and sales strategy is working well and resulted in strong sales growth in the first quarter.

"Our sequential gross profit margin increased to 23.8% in the first quarter 2011 from 23.2% in the fourth quarter 2010. The higher sequential gross margin shows that our efforts at further controlling costs and enhancing efficiency are starting to achieve the good improvements we expected. In the next several quarters, we will work to increase our sales and profits through higher sales of amorphous alloy cores and amorphous alloy transformers, the installation of our new transformer line and its initial production and sales, higher production efficiency and capacity utilization, and by providing more value-added services and technical support to our customers who make transformers."

Rodman and Renshaw on CPQQ                 4/05/2011

China Power Equipment

CPQQ.OB: Price: $1.02; Market Cap (MM): $24.1
Market Outperform; Target Price: $3.00

Katya Voronchuk - Senior China Analyst (212-356-0517)


Second Consecutive Quarter of Missed Earnings, Lowering PT to $3.

China Power Equipment, Inc. (CPQQ) reported 4Q10 and FY10 results. 4Q10 revenues and adjusted net income came in at $7.8 million and $1.1 million versus our expectations of $7.9 million and $1.6 million, respectively. Consequently, full fiscal 2010 revenues and adjusted net income of $29.7 million and $5.7 million missed our already lowered estimates of $29.8 million and $6.2 million on lower than expected amorphous core selling prices and gross margins. Reported fully diluted GAAP and non-GAAP EPS of $0.25 and $0.26, respectively, came in a penny short of our $0.26 and $0.27 estimates. While we remain optimistic on the long-term outlook for amorphous transformers in China, in light of slower than anticipated ramp up in amorphous transformer core sales and a delay in the launch of amorphous transformer production lines at the new facility, we are lowering our FY11 revenue and net income projections to $35.1 million and $5.9 million and reducing our price target to $3.

Discussion

• Higher volume offset by lower average selling prices for amorphous transformer coresFull year sales of amorphous transformer cores increased 26.2% YoY to $20.5 million on higher volume partially offset by a 10.9% decline in the average sales prices due to a 15.4% decrease in the prices of amorphous alloy strip, the main raw material input. During the year, Hitachi, the company’s main supplier of amorphous alloy strip, reduced its prices to encourage faster adoption of amorphous alloy transformers in China. In addition, the company has started purchasing amorphous alloy strip from a domestic supplier, AT&M, at a relatively lower cost. Sales of amorphous transformers increased 21.6% YoY to $9.2 million on higher sales of more expensive higher capacity amorphous transformers commanding a 33.5% premium to the transformers sold in FY09. We remind that CPQQ manufacturers transformers of varying capacity (from 5KVA to 2,500 KVA) with the larger transformers selling at higher prices.
• 4Q10 Gross Margins DownFY10 gross profit increased 36.7% YoY to $2.1 million translating into a 239 basis points increase in gross profit margin from 23.9% in FY09 to 26.3% in FY10. Gross profit for amorphous alloy cores increased 41.6% YoY to $5.6 million corresponding to 27.3% gross margin, up from 24.3% in FY09. The amorphous transformer segment gross profit came in at $2.2 million, up 26.2% YoY. Gross margins for amorphous transformers increased only slightly from 23.2% in FY09 to 24.0% in FY10. For the 4Q10, the company reported the overall gross margin of 23.2% versus our estimate of 28.3%.The variance from our estimate was largely tied to a decline in amorphous core gross margin from 29.1% in 3Q10 to 22.9% in 4Q10. Gross margins for the amorphous transformers remained fairly constant. During the earnings call, management noted that it expects margins to improve as higher sales volumes lead to better absorption of fixed costs.
  
  
  Notice Regarding Privacy and Confidentiality:
  
  This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.
  
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Year End Results:

• Net revenues increased 24.3% to $29.7 million in 2010 from $23.9 million in 2009.
• Gross profit increased 36.7% to $7.8 million in 2010 from $5.7 million in 2009.
• Net income increased 30.2% to $5.5 million in 2010 from $4.2 million in 2009.
• Net income applicable to common shares was $5.5 million in 2010 compared with a loss of $4.8 million in 2009 that was due to a deemed dividend from beneficial conversion feature of preferred shares.
• Basic earnings per share increased 196.9% to $0.31 per share in 2010 from a loss of $0.32 per share in 2009 on 19.4% higher weighted average basic shares outstanding in 2010 than in 2009.
• Diluted earnings per share increased 178.1% to $ 0.25 per share in 2010 from a loss of $0.32 per share in 2009 on 48.5% higher weighted average diluted shares outstanding in 2010 than in 2009.

"Our financial year 2010 was also very good. Our higher net revenues, up 24.3%, came mainly from higher tonnage of amorphous alloy cores and high-capacity transformers sold, with somewhat lower pricing for cores, because we passed along most of our raw material cost reductions to our customers."

The Company has funded its operations and capital expenditures using cash generated from operations and funds raised from issuing convertible preferred stock. It will continue its investment in the development and enhancement of the production facilities for amorphous alloy cores and transformers. Cash generated from operations and funds raised from issuing convertible preferred stock will be used to fulfill such commitments.

China Power Equipment believes its existing cash will be sufficient to maintain its operations at the present level for at least the next 12 months.

Year 2010 highlights

• Net revenues increased 24.3% to $29.7 million in 2010 from $23.9 million in 2009.
• Gross profit increased 36.7% to $7.8 million in 2010 from $5.7 million in 2009.
• Net income increased 30.2% to $5.5 million in 2010 from $4.2 million in 2009.
• Net income applicable to common shares was $5.5 million in 2010 compared with a loss of $4.8 million in 2009 that was due to a deemed dividend from beneficial conversion feature of preferred shares.
• Basic earnings per share increased 196.9% to $0.31 per share in 2010 from a loss of $0.32 per share in 2009 on 19.4% higher weighted average basic shares outstanding in 2010 than in 2009.
• Diluted earnings per share increased 178.1% to $0.25 per share in 2010 from a loss of $0.32 per share in 2009 on 48.5% higher weighted average diluted shares outstanding in 2010 than in 2009.
• Adjusted EPS was $0.25 vs. $0.28

GeoTeam Note:

• Fourth quarter 2010 vs. 2009 was $0.05 vs. $0.08 
• Analyst 2010 fourth quarter EPS estimate was $0.08

"Our growth outlook was further boosted when China's National Development and Reform Commission and government officials announced "guidance for demand side management" in November 2010 to accelerate the adoption of products and technologies that should dramatically improve the electricity grid's energy efficiency, reduce emissions, and increase the availability of electricity.

"Effective January 1, 2011, China's guidance establishes government specific energy-saving targets for electric grid companies and specifically encourages them to install energy-saving transformers. Supporting the policy guidance, the Chinese government is now providing a series of financial incentives, including surcharges on users, to encourage electric grid companies to adopt new methods to improve energy efficiency.

"We expect this new emphasis to further strengthen the robust growth trend we already expect for energy-efficient amorphous alloy electric transformers, and of course the cores that go in them.

"Although energy efficient transformers like ours are already encouraged in China's energy policy and plans, the boost from this new emphasis should accelerate demand even more. We believe the expected strong upward trend in demand is very likely to continue for several years, assuming that China's energy and industrial policies continue to be favorable toward products like ours.

"With the cash flow from our expanded production of cores, good future operating leverage in transformer cores, completion of our new transformer production line in 2011 and subsequent expected orders, and China's further push to improve energy efficiency sooner, we believe our future continues to look very bright."

Rodman and Renshaw on CPQQ                02/4/2011

China Power Equipment Appoints Mazars as its New Auditor 

China Power Equipment (CPQQ) announced that it has engaged Mazars CPA Limited as its new independent public accounting firm for the fiscal year ending December 31, 2010, effective immediately. Mazars replaces Acquavella, Chiarelli, Shuster, Berkower & Co., LLP (ACSB) which audited company’s financial statements for fiscal year 2009. The change in auditing firm was primarily dictated by the company’s desire to upgrade to a larger auditing firm and was not a result of any disagreements with ACSB.

Our Opinion: We view the appointment of Mazars as a positive step for the company. Mazars is one of the top 10 international accounting firms (in terms of global billings) with approximately 13,000 professionals in 61 countries. The company extends its international reach further via the membership of Praxity alliance which gives it access to a total of 33,500 professional in 84 countries. With recent reports of accounting deficiencies discovered in a few US-listed Chinese small-cap companies, we believe this auditor upgrade is timely and will help strengthen investors’ confidence in the company.

Cash Balance as of the End of 3Q10 Equals 64% of the Current Market Cap. As of the end of the last reported quarter, CPQQ had $15.6 million in net cash ($0.80 per basic and $0.63 per fully diluted share). Cash balance represents more than half of the company’s current market cap indicating a severely oversold stock. Moreover, CPQQ was cash flow positive for all but one of the past seven quarters.

Management Update In our recent discussion with the management, we confirmed that the company is on track with installing amorphous transformer production equipment at its new facility. Once completed, the expansion should more than double China Power Equipment’s current amorphous transformer production capacity. We expect additional capacity to come online at the end of 2Q11.

Overdone Sell-off Presents an Excellent Entry Point We believe the investors should take advantage of the recent sell-off in the company’s shares. CPQQ is currently trading at 5x our FY10 fully diluted EPS forecast of $0.27 and 3x our FY11 forecast of $0.41 versus FY10 and FY11 industry averages of 20x and 16x for the US-listed peer group and 36x and 27x for the China-listed peer group. We reiterate our Market Outperform/Speculative Risk rating and recommend investors take advantage of a pullback to accumulate positions. Out price target of $5 is based on the shares attaining a P/E level of 13x our FY11 EPS estimate.

Risks (1) Supplier concentration (2) Increasing competition and entry of traditional transformer manufacturers into the production of amorphous transformers (3) Intellectual property loss (4) Slowing infrastructure spending (5) Liquidity.


Notice Regarding Privacy and Confidentiality: 


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

On January 31, 2011, China Power Equipment, Inc. dismissed its principal independent accountant, Acquavella, Chiarelli, Shuster, Berkower & Co., LLP. The decision to dismiss ACSB as the Company's principal independent accountant was approved by the Audit Committee of the Company's Board of Directors on January 31, 2011.  ACSB’s report on the Company's financial statements for the fiscal year ended December 31, 2009 contained no adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

On January 31, 2011, the Company engaged Mazars CPA Limited as its new principal independent accountants, effective immediately upon the dismissal of ACSB.

Rodman & Renshaw on CPQQ

Curbing our Enthusiasm – Down to $5 PT.

Investment Summary 

China Power Equipment reported 3Q10 revenues and net income of $8.6 million and $1.7 million versus our estimates of $10.7 million and $2.3 million, respectively. The variance from our estimates was largely tied to a larger than anticipated decline in average selling prices combined with a slower ramp up in production at the new facility and higher SG&A expenses. Given the ongoing upgrading and expansion of China’s electricity transmission and distribution infrastructure and increasing emphasis on grid efficiency, we believe the company’s longer-term growth prospects remain solid. We are, however, treading more carefully into the 4Q10 and 1Q11 given the seasonal slowdown in transformer sales during the winter months. Consequently, we are lowering our 4Q10 and FY11 forecasts and revising our price target downwards to $5.

Discussion 

Higher volume offset by lower average selling prices for amorphous transformer cores Sales of amorphous alloy cores and amorphous transformers increased by 8.1% YoY and 13.9% YoY to $6.2 million and $2.4 million, respectively. Higher amorphous alloy transformer core sales volumes were partially offset by a 10.6% YoY decline in average selling prices due to lower input costs. At the end of 2Q10 the company began purchasing domestically manufactured amorphous alloy ribbon, the main raw material for the amorphous alloy transformers cores, resulting in significant cost savings (~amorphous alloy strip costs declined by 12.8% during the 3Q10) that were passed on to the company’s clients. In our model we had previously assumed a more gradual decline in average selling prices. On the other hand, the average selling prices for amorphous transformers improved 31.2% YoY due to proportionately larger percentage of higher capacity units sold during the 3Q10 compared to 3Q09. We remind that China Power Equipment manufacturers transformers of varying capacity (from 5KVA to 2,500 KVA) with the larger transformers commanding a higher price. Therefore, the increase in average selling prices of amorphous transformers is not indicative of stronger pricing power but a shift in the demand toward larger transformers. Overall, lower selling prices for amorphous transformer cores and, consequently, for amorphous transformers, should reduce the amorphous transformer pricing premium over traditional transformers, reducing the payback time and making amorphous transformers an even more attractive alternative to traditional transformers. 

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw take on CPQQ

Investment Thesis 

We are initiating coverage on China Power Equipment, Inc. (CPQQ.OB) with a Market Outperform/Speculative Risk rating and a price target of $6. China Power Equipment is an emerging market leader in a nascent amorphous transformer sector in China. The company’s energy-saving power distribution transformers and transformer cores improve power grid efficiency by significantly reducing electricity losses. As an early stage entrant into amorphous transformer space, the company has witnessed rapid revenue growth in recent years. Given its brand equity and manufacturing expertise, established distribution channels, increased capacity and strong management team, we believe China Power Equipment is ideally positioned on a number of levels to take advantage of strong demand for amorphous transformers in China arising from growing electricity consumption, government support for energy-saving distribution transformers, continuing build-up and modernization of the power transmission and distribution networks and multiple government initiatives to promote energy-saving technologies including recently issued minimum energy efficiency standards for distribution transformers. The company presents a unique opportunity for investors looking to get exposure to China’s booming electricity infrastructure and grid efficiency space at a highly attractive valuation. 

Valuation 

CPQQ.OB is currently trading at 6x our FY10 fully diluted EPS estimate of $0.32 and 4x our FY11 fully diluted EPS estimate of $0.46. If we take into account company’s cash per diluted share of $0.55 ($0.70 per basic share) at the end of 2Q10, the stock is currently trading at 4.5x and 3x our FY10 and FY11 our fully diluted ESP forecast, respectively. These multiples are well below current FY10 and FY11 industry averages of 18x and 15x for the US-listed peer group and 38x and 27x for the China-listed peer group. The company’s closest comparables – Advanced Technology & Materials or AT&M (000969, Not Rated) and Shanghai Zhixin Electric Co (600517, Not Rated) trade at 35x and 24x FY11 projected EPS, respectively. We believe the stock is significantly undervalued compared to its peer group. Given robust demand for amorphous transformers in China and company’s uniquely competitive position, we believe it should be trading much closer to the industry average. We derive our 12-months target price of $6 by applying a 13x multiple to our FY11 estimate of $0.46. 

Risks 

(1) Supplier concentration (2) Increasing competition and entry of traditional transformer manufacturers into the production of amorphous transformers (3) Intellectual property loss (4) Slowing infrastructure spending (5) Liquidity. 

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Brean Murray Carret has initiated coverage on China Power Equipment with a buy rating and a price target of $6.00.  As we suspected in our note on May 12, 2010 , dilution will be an issue in 2010. 2010 EPS is expected to be flat compared with $0.28 reported in 2009.  Growth is expected to resume in 2011 when EPS is expected to reach $0.48.

Due to lack of near-term EPS growth we will remove CPQQ from the GeoSpecial list.  We will revisit once EPS growth resumes as we still think the company could approach $4.20 if investors start pricing in the 2011 expectations. Re-Coding as GeoSpecial on the Radar. Long term investors will likely still favor this story.

Added to the GeoSpecial list on September 3, 2009 @ $1.43

Peak performance: $4.58 on January 12, 2010

Current Price: $2.78

Dilution for China Hybrids will be a recurrent theme in 2010, which is why we have adjusted our near-term strategy to increase our exposure to U.S. stocks and emphasize the Chinese firms that will not see a short-term disruption in EPS growth. 

Just like a handful of other Chinese firms CPQQ did not provide a fourth quarter table or any non-GAAP EPS figures. This is our best effort at calculated fully taxed adjusted numbers.

The quarter turned out to be in line with its last two quarters. Going forward we have to be mindful of dilution as it appears CPQQ has yet to include 5 million in the money warrants and 4 million convertible preferred in its diluted share count. With out direction, we are not sure how management can overcome this dilution in the short-term. 

We do know that make goods exist calling for the company to grow 2010 net income by about 55% to $7.0 million. Depending on how the company accounts for its dilution, this net income growth still does not cover the potential 60% increase in shares.

However, using the treasury method for calculating shares will not be near as limiting.

We have sent the company several emails on this issue and are awaiting a response.
 

China Power Equipment recently announced that it has upgraded to "Top Auditing Firm Mazars."

In the body of CPQQ's PR, we learn that the company upgraded specifically from ACSB to Mazars CPA Limited, a Hong Kong affiliate of Mazars.  A cursory look at other names that Mazars CPA Limited audits raises questions as to whether this was much of an "upgrade." 

If CPQQ wanted to upgrade, why would they upgrade to *this* auditor?  And why would they upgrade now, right in the middle of audit season?  One possibility is that they were having problems passing their current audit with ACSB.  The company claims that is not the case.

We have funded our operations and capital expenditures using cash generated from operations and funds raised from issuing convertible preferred stock. We will continue our investment in the development and enhancement of our production facilities for amorphous alloy cores and transformers. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at the present level for at least the next 12 months.

Source: 2009 10K

Note: This is similar verbiage CPQQ made during 2009, yet they still raised capital in December 2009.

Although restrictions are in place, put forth by investors in a recent private placement, that could limit financing activities:

 The Company may not effect any financing involving issuance of convertible securities with a conversion price based on the trading prices of the Company’s stock after the issuance of such securities or subject to reset provisions depending on a future event; or issuance of securities in transactions granting to purchasers the right to receive additional shares based upon future transactions of the Company on terms more favorable than those granted to such purchaser in such offering, which restrictions shall be valid for the period which is the lesser of 18 months from the Closing Date or until the date when the Buyers hold less than 20% of the Shares.

 Source: 8K (December 4,  2009)

In connection with the a private placement on November 30, 2009, the Company also entered into a Make Good Escrow Agreement where the Company committed to place 2,080,000 shares of Common Stock into escrow to be delivered to the Buyers if the Company fails to achieve the income targets:

• Fiscal year 2009: $4,500,000
• Fiscal year 2010: $7,000,000

The number of shares should be equal to the percentage of variation between the actual net income and the target net income, provided that no additional shares shall be delivered to the Buyers if such variation is 10% or less.

Source: 8K (December 4,  2009)

Mr. Song continued, "I believe our results in 2009 represent a very good performance in a very high growth year. With our good cash position, internal cash generation, modest debt leverage, and financing flexibility, we believe we have sufficient financial strength to continue to invest in new product development, capacity expansion, and working capital to support good sales growth in our amorphous alloy cores and amorphous alloy transformers."

Source: PR Newswire (March 31, 2010)

As a follow-up to the same line of thinking relayed in our November 2nd article, Hidden Clues Yield Opportunities, the GeoTeam® is speculating that one of our GeoSpecials, China Power Equipment, may continue its growth trend established in the 2009 second quarter.  We are basing this on a press release issued on October 5, 2009.  The Company announced it was in discussions with Advanced Technology & Materials Co., Ltd. to supply China Power Equipment with an amorphous alloy used to produce its new generation of energy saving transformers and transformer cores.

The key phrase in the press release was:

"The possible sourcing collaboration would not reduce the volume we buy from our current amorphous alloy supplier."

This may imply that demand for the company's products remains strong and is accelerating.

One of our GeoMembers has made a an insightful observation regarding the recent weakness in CPQQ shares. He has inferred that the recent price action could be the result of investors exercising their warrants. If this scenario is true it will be bring additional capital to the CPQQ, possibly minimizing future fund raising needs.

The GeoTeam® is coding China Power Equipment (OTCBB:CPQQ) as a Special Situation based on its break-out 2009 second quarter:

• China Power recently reported $0.09 ($0.07 fully taxed) in its 2009 second quarter. For all of 2008, the Company reported operating earnings per share of $0.13 ($0.10 fully taxed).
• Second quarter sales increased 164% to 5.9 million.
• The Company produces a new generation of energy saving transformers and transformer cores which fit into China's efforts to curtail greenhouse gas emissions and reduce energy consumption.
• China Power Plans to increase capacity

"Mr. Song went on to say, "China Power Equipment intends to increase its manufacturing and distribution of amorphous transformers and cores by at least 200 percent for 2010 over 2009. This will be accomplished by both increasing production at the Company's existing facilities as well as hopefully adding additional production facilities during the first or second quarters of 2010."Source: PR Newswire (September 1, 2009)

Relevant questions investors should consider regarding capacity expansion:

• What capacity is China Power Equipment currently operating at?
• How much money will the Company need to raise to fund its capacity expansion plans?
• How does the company plan to fund its capacity needs?
• Will a funding transaction result in short-term dilution?
• How long will it take China Power to generate revenues from new capacity?
• How long will it take the Company to exhaust its new capacity?

The GeoTeam® is somewhat concerned about potential short-term dilution issues. Warrants with a an exercise price of $1.00 per share are already in the money and will result in an additional $4.5 million outstanding shares. If the warrants are exercised, CPQQ will receive $4.5 million which should significantly help fund capacity expansion initiatives, possibly with no dilution. If the warrants are not exercised, China Power would have to tap the financial markets for funding which, together with its warrants, could result in a significant increase in its diluted shares count. Of course, it is quite possible that the stock is at a higher price six months from now which would result in less shares being issued to fund its needs. Debt financing would also be an alternative. In any event, it seems realistic to assume that a 200% increase in capacity should eventually lead to much higher revenues.

Based on the current revenue run rate and assuming CPQQ is near full capacity, the Company could end the year with revenues of $20 million.

Lets assume the following:

• 2009 revenues will reach $20 million. ($11 million for the last six months).
• Raw material costs will remain stable.
• Sales prices of products will remain stable.
• Current pre-tax margins will remain at 26%.
• Outstanding shares for the next six months will increase to 19.4 million (14.9M + 4.5M)
• Capacity expansion will be complete in first half of 2010.
• Company will raise $5 million by issuing 3.3 million shares to fund capacity expansion.
• 2010 Outstanding shares will increase to 22.7 million
• Revenues will eventually reach $60 million with new capacity. (200% increase)

These assumptions would translate into a 2009 tax-adjusted EPS figure of approximately $0.20 and an eventual EPS figure of $0.44 at full capacity.

Using a stable revenue run rate may be conservative as CPQQ has seen a sequential increase in revenues for the last several quarters. To calculate a more realistic revenue assumption we need at the very least need to know:

• What capacity is China Power currently operating at?
• Can the Company out source production if operating at full capacity?
• What are raw material cost trends?
• The GeoTeam® would like to gain a better understanding of the Company's ability to raise prices in response to raw material price increases.

Management commented, "Gross profit decreased $194,896 or 26% during the three months ended March 31, 2009, compared to the same period of 2008. This was primarily due to the increase in the average unit cost without a proportionate increase in average unit price as a result of the increase in the raw materials cost."(Source: First Qrtr 10Q)

If China Power does not have pricing flexibility, this situation must be mitigated via an increase in the volume of product sold,  which could be facilitated by an increase in capacity.

To derive a 2010 EPS estimate we need to know when capacity expansion will be completed and how much of this capacity will be utilized in 2010.

Why is CPQQ on the GeoSpecial list and not a GeoBargain?

We still require confirmation to confirm that the 2009 second quarter "break-out" quarter was not an aberration. With fully taxed earnings per share of $0.15, the stock is selling at a P/E of 10 and may offer some investors an attractive risk/reward opportunity. Please note that CPQQ shares have risen substantially over the past few weeks.