China Power Equipment (OTC BB:CPQQ)

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.