China Power Equipment Reports Higher Revenues and Net Income

XI'AN, China, Nov. 15, 2010 /PRNewswire-Asia-FirstCall/ -- China Power Equipment, Inc. ("China Power Equipment" or "the Company", OTC Bulletin Board: 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 reported higher revenues and net income for the three months ended September 30, 2010.

Third quarter 2010 highlights

• Net revenues increased 9.6% to $8.65 million in the third quarter 2010
  from $7.89 million in the third quarter 2009.
• Gross profit increased 22.2% to $2.40 million in the third quarter 2010
  from $1.96 million in the third quarter 2009.
• Net income increased 17.8% to $1.66 million in the third quarter 2010
  from $1.41 million in the third quarter 2009.
• Basic earnings per share remained even at $0.09 per share in the third quarter 2010
  from $0.09 per share in the third quarter 2009 on 29.9% higher weighted average basic shares outstanding in the third quarter 2010 than in the third quarter 2009.
• Diluted earnings per share decreased 22.2% to $ 0.07 per share in the third quarter 2010
  from $0.09 per share in the third quarter 2009 on 59.4% higher weighted average diluted shares outstanding in the third quarter 2010 than in the third quarter 2009.

Mr. Yong Xing Song, Chairman of the Board of China Power Equipment, said, "Our first nine months of this year give us confidence that 2010 will be a very good year for both operating advances and financial performance at China Power Equipment.

"During the first nine months, we have added two independent directors, expanded by tripling capacity for transformer cores, gained the ability to attract and win larger production contracts for both cores and transformers, added a second amorphous alloy raw material source, experienced reductions in raw material pricing that are likely to further accelerate the use of our cores and transformers, achieved higher production tonnage in both cores and transformers, were granted three new patents in China, and have been planning our new production line for amorphous alloy transformers.

"Our increase in net revenues of 9.6% came mainly from higher tonnage of amorphous alloy cores and more high-capacity transformers sold, with some offset due to raw material price reductions, most of which we passed along in pricing to our customers.

"In the third quarter we saw a significant change in our cost of goods sold, with the primary supplier of amorphous alloy strip, our main raw material, reducing prices to encourage more rapid adoption of amorphous alloy transformers. We passed most of that cost reduction to our customers through lower average prices to customers. As a result, the average prices for our amorphous alloy cores were 10.6% lower in the third quarter 2010 than in last year's third quarter.

"Higher volume in our new plant in the third quarter gave us improved operating leverage that was the primary source of our higher gross profit margin that was 27.7% in the third quarter 2010, compared with 27.5% in second quarter 2010, 26.5% in the first quarter 2010, and 24.9% in the third quarter 2009, so the trend in our gross profit margin has been improving.

"With the higher gross profit margin and expenses under good control and consistent with our rapid rate of expansion, partly offset by higher taxes, our net income increased 17.8% to $1.66 million in the third quarter 2010 from the prior third quarter.

"Our basic earnings per share was even, third quarter 2010 compared with third quarter 2009, due to our weighted average basic shares outstanding being up about 30%. Our diluted earnings per share were down about 22% in the third quarter 2010 from the third quarter 2009, due to our weighted average diluted shares outstanding being up about 59% in this year's third quarter."

China Power Equipment's amorphous alloy cores in the third quarter were up 8.1% in revenues and up 24.4% in gross profit from the third quarter 2009. Amorphous alloy transformers in the quarter were up 13.9% in revenues and up 16.1% in gross profit from the third quarter 2009. The Company had no revenues from silicon steel cores and transformers in the third quarter 2010 because it has discontinued that product line to focus on amorphous alloy cores and transformers.

China Power is starting to see further strengthening in the robust growth trend it expects for energy-efficient amorphous alloy electric transformers. These energy efficient transformers are being demanded in China, based on the country's mandated policy and actions to increase energy efficiency and reduce emissions. The Company believes the dramatic upward trend in demand is very likely to continue for the next several years, assuming that China's energy and industrial policies continue to be favorable toward its products.

Mr. Song continued, "During the third quarter, two good events occurred. First, in July, we announced that we were offering several models of our transformer cores that could now be made using the amorphous alloy strip supplied by a new supplier, Beijing Advanced Technology & Science Materials Co., Ltd.

"We believe the cost for this domestic Chinese alloy is likely to make some amorphous alloy transformer models more competitively priced, compared with the traditional steel transformers. Given the government's emphasis on energy and environmental improvements, a lower unit price could further accelerate the adoption of some models of our energy-efficient amorphous alloy cores and transformers.

"Second, in July, we began regular production in our new amorphous alloy core manufacturing plant, which has been running very well, as planned. The new plant added an annual capacity of 5,000 metric tons for high quality transformer cores, bringing total capacity to 6,500 tons per year.

"In addition, earlier in the year, we were granted three new patents, one for a vacuum oiling device for amorphous transformers, one for a new type of amorphous alloy transformer, and one that involves the configuration of amorphous alloy transformer cores. That brings our patents to a total of six. We plan to continue our research, development, and engineering to be at the forefront of technology for transformers and cores, and their performance, production, and cost.

"We have been successful at creating and implementing our strategic and operating plans. I am pleased that our good financial performance is the result. I believe our outlook continues to be bright."

Revenues

Total net revenues increased $755,241 or 9.6% and $5,412,051 or 32.8% during the third quarter and nine months ended September 30, 2010, respectively, compared with the same periods of 2009. This was primarily due to higher tonnage of amorphous alloy cores and more high-capacity amorphous alloy transformers sold. To help fill customers' orders, we subcontracted the manufacturing of some cores and transformers to other companies in the first half of 2010 before our new plant began production in July 2010. The revenues from traditional silicon steel cores and transformers were zero in the quarter and nine months ended September 30, 2010 because we have focused on amorphous alloy cores and transformers as our major products and have exited all manufacturing, marketing, and distribution of steel cores and transformers.

During the third quarter and nine months ended September 30, 2010, the average prices per ton of amorphous alloy cores were 10.6% lower and 10.9% lower, respectively, compared with the same periods of 2009. The lower average prices of amorphous alloy cores were the result of the lower prices obtained for amorphous alloy strip, the primary raw material used to make amorphous alloy cores.

During the third quarter and nine months ended September 30, 2010, the average prices per unit of amorphous alloy transformers were 31.2% higher and 36.5% higher, respectively, compared with the same periods of 2009. The higher average prices of amorphous alloy transformers were primarily due to more expensive high-capacity transformers sold in our transformer product mix.

Cost of Goods Sold

Cost of goods sold increased $319,550 or 5.4% and $3,313,801 or 26.3% during the third quarter and nine months ended September 30, 2010, respectively, compared with the same periods of 2009. This was primarily due to higher tonnage of amorphous alloy cores and more high-capacity amorphous alloy transformers sold.

The increases in cost of goods sold were partly offset by lower prices for the primary raw material, amorphous alloy strip. For the third quarter and nine months ended September 30, 2010, the average prices of amorphous alloy strip decreased 12.8% and 16.5%, respectively, compared with the same periods of 2009. The world's main supplier of amorphous alloy strip has been setting its price for amorphous alloy strip lower in order to promote amorphous alloy transformers at more affordable prices.

Gross Profit

Gross profit increased $435,691 or 22.2% and $2,098,250 or 53.9% during the third quarter and nine months ended September 30, 2010, respectively, compared with the same periods of 2009. This was primarily due to higher sales revenues of amorphous alloy cores and transformers.

The gross profit margin (gross profit as a percent of total revenues) increased 2.8 percentage points to 27.7% in the third quarter 2010 from 24.9% in the third quarter 2009 and increased 3.7 percentage points to 27.3% in the nine months ended September 30, 2010 from 23.6% in the nine months ended September 30, 2009. This was primarily due to the lower prices for amorphous alloy strip in the quarter and nine months ended September 30, 2010 compared with the same periods of 2009.

Selling, General, and Administration Expenses        

Selling, general, and administrative expenses increased by $129,961 or 39.5% and $160,285 or 21.2% during the third quarter and nine months ended September 30, 2010, respectively, compared with the same periods of 2009. For the third quarter of 2010, higher selling, general, and administrative expenses was mainly due to an increase in administrative personnel expenses of $48,184 and an increase in professional fees of $35,809. For the first nine months of 2010, higher selling, general, and administrative expenses was mainly due to an increase in administrative employee expenses of $71,489, an increase in stock-based compensation of $41,702, an increase in local taxes of $27,445 resulting from higher revenues, and an increase in sales employee expenses of $25,710.

Selling, general, and administrative expenses as a percentage of revenue decreased for the first nine months of 2010 because most of the general and administrative expenses are fixed and do not increase in proportion to increases in revenues.

Gain on Investment

Gain on investment for the third quarter and nine months ended September 30, 2010 increased $24,044 or 272.4% and $30,984 or 51.5%, respectively, compared with the same periods of 2009. These increases were primarily due to higher earnings from our 20% equity method investment.

Other Income

Other income consists of mainly consulting fees for providing technical support to potential customers. In the third quarter and nine months ended September 30, 2010, we received nil and $176,338 in consulting fees, respectively. In the third quarter and nine months ended September 30, 2009, we received $20,465 and $371,346 in consulting fees, respectively.  

Income Taxes

The increases in the income taxes for the third quarter and nine months ended September 30, 2010 compared with the same periods of 2009 were mainly due to the higher net income before income taxes that resulted from higher revenues. Our Chinese operating company, Zhongxi, is subject to a 25% standard enterprise income tax in China. However, due to Zhongxi's high-tech enterprise status, the National Tax Bureau in Xi'an High-Tech Development Zone granted Zhongxi tax exemptions for the years ended December 31, 2005 and 2004, and a reduced tax rate of 15% for as long as Zhongxi meets the high-tech enterprise qualification.

Net Income and Earnings Per Share

For the third quarter 2010, net income was $1,662,890 compared with $1,411,326 in the third quarter 2009, an increase of $251,564 or 17.8%. For the nine months ended September 30, 2010, net income was $4,539,249 compared with $3,045,709 for the corresponding period of 2009, an increase of $1,493,540 or 49.0%. The increases in net income for the third quarter and nine months ended September 30, 2010 were mainly due to higher revenues and lower raw material prices that were partly offset by higher selling, general, and administrative expenses and higher income taxes.

Basic earnings per share in the third quarter 2010 was $0.09, even with $0.09 in the third quarter 2009 on 29.9% higher weighted average basic shares outstanding in the third quarter 2010 than in the third quarter 2009.

Basic earnings per share in the first nine months of 2010 was $0.26, up 30.0% from $0.20 in the same period of 2009 on 15.8% higher weighted average basic shares outstanding in the first nine months of 2010 than in the first nine months of 2009.

Diluted earnings per share in the third quarter 2010 was $0.07, down 22.2% from $0.09 in the third quarter 2009 on 59.4% higher weighted average basic shares outstanding in the third quarter 2010 than in the third quarter 2009.

Diluted earnings per share in the first nine months 2010 was $0.21, up 5.0% from $0.20 in the first nine months of 2009 on 45.4% higher weighted average diluted shares outstanding in the first nine months of 2010 than in the same period of 2009.

Basic weighted average common shares outstanding in the third quarter 2010 increased 29.9% to 19.37 million shares from 14.91 million shares in the third quarter 2009. Basic weighted average common shares outstanding in the first nine months of 2010 increased 15.8% to 17.27 million shares from 14.91 million shares in the first nine months of 2009.

Diluted weighted average common shares outstanding in the third quarter 2010 increased 59.4% to 23.77 million shares from 14.91 million shares in the third quarter 2009. Diluted weighted average common shares outstanding in the first nine months of 2010 increased 45.4% to 21.67 million shares from 14.91 million shares in the first nine months of 2009.

Liquidity and Capital Resources  

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 the production facilities for amorphous alloy cores and transformers. As of September 30, 2010, we are committed to construction contracts of approximately $1,114,264 in our new plant. The cash commitments remaining for 2010 for these contracts is approximately $541,116. Cash generated from operations and funds raised from issuing convertible preferred stock will be used to fulfill such commitments. We believe our existing cash will be sufficient to maintain our operations at the present level for at least the next 12 months.

The following table summarizes our liquidity and capital resources for the periods presented:

Working capital is defined as current assets minus current liabilities.

The following table shows the movements of our cash for the periods presented.

For the nine months ended September 30, 2010, net cash provided by operating activities was $4,440,408 and was primarily derived from net income of $4,539,249.

Net cash used in investing activities was $2,353,748 for the nine months ended September 30, 2010 and was primarily used for a deposit of $1,176,290 for the purchase of equipment for the new plant, capital expenditures of $973,398 for construction in progress of the new plant, and capital expenditures of $238,332 in equipment and automobile.

Net cash provided by financing activities was $4,456,883 for the nine months ended September 30, 2010 from the exercise of outstanding warrants originally issued with our Series A convertible preferred stock.

Financial statements follow.

About China Power Equipment, Inc.

China Power Equipment, Inc., is a U.S. corporation, which through its wholly-owned subsidiary, An Sen (Xi'an) Power Science & Technology Co., Ltd. and its affiliated operating company, Xi'an Amorphous Zhongxi Co., Ltd., designs, manufactures, and distributes amorphous alloy transformer cores and amorphous alloy core electricity transformers in the People's Republic of China. The Company currently manufactures 59 different products, primarily amorphous alloy cores and amorphous alloy core transformers.

Safe harbor statement

Certain statements in this release concerning our future growth prospects are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. These forward-looking statements can be identified by terminology such as "anticipates," "believes," "estimates," "expects," "future," "intends," "plans," "will," and similar statements.

The risks and uncertainties relating to these statements include, but are not limited to, risks and uncertainties regarding the success of the Company's investments, risks and uncertainties regarding fluctuations in earnings, its ability to sustain its previous levels of profitability including on account of its ability to manage growth, intense competition, wage increases in China, its ability to attract and retain highly skilled professionals, time and cost overruns on fixed-price, fixed-time frame contracts, client concentration, its ability to successfully complete and integrate potential acquisitions, withdrawal of governmental fiscal incentives, political instability and regional conflicts and legal restrictions on raising capital or acquiring companies outside China.

Additional risks that could affect the Company's future operating results are more fully described in its filings with U.S. Securities and Exchange Commission. These filings are available at www.sec.gov.

The Company may, from time to time, make additional written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in press releases and other written materials, and in oral statements made by its officers, directors, or employees to third parties. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on its behalf, except as required under law.

For more information about China Power Equipment please visit its website at www.chinapower-equipment.com.

SOURCE China Power Equipment, Inc.