China Power Equipment Appears Undervalued
China Power Equipment, Inc. [[CPQQ.OB]] manufactures and distributes amorphous alloy cores and power transformers in China. These products constitute the main component of a new generation of energy saving electrical power transformers. The products also fit into government efforts to reduce greenhouse gas emissions and energy consumption.
Last quarter, China Power Equipment saw its revenues jump 163% to $5.89 million thanks to an increase in amorphous alloy core and transformer revenues. However, gross margins eroded 5% to 22% in the six month period due to higher raw material costs. Regardless, the company’s net income rose 320% to approximately $1.3 million versus the same period a year ago.
China Power Equipment’s balance sheet also remains healthy with $1.53 million in cash and a safe current ratio. According to its latest 10-Q filing with the SEC, the company expects that its existing cash will be sufficient to maintain operations for at least the next 12 months. However, the company has raised funds via preferred stock issuance in the past for expansion projects.
Going forward, China Power Equipment plans to increase its manufacturing and distribution of amorphous transformers and cores by at least 200% for 2010 versus 2009. They plan on accomplishing this feat by increasing production at existing facilities as well as potentially adding more production facilities during the first or second quarters of 2010.
Despite the positive outlook, there are some risk factors to consider with China Power Equipment. Short-term dilution issues from existing warrants and the potential need for additional manufacturing facilities to meet its 200% capacity goals could mean additional shares flooding the market. However, the additional capacity will also help grow revenues substantially.
In the end, China Power Equipment represents a compelling value play that long-term investors may want to take a closer look at going forward. While the stock may face some potential dilution, its strong growth rates and expansion plans could mean sharply higher revenues and net income in future quarters, given the strong demand for their products.
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com