China Power Equipment (OTC BB:CPQQ)

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).
  
  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 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.
  
  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 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.

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. 

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).