China Power Equipment (OTC BB:CPQQ)

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."

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."

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."

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."

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)