China Power Equipment Announces Second Quarter 2012 Financial Results

XI'AN, China, August 15, 2012 /PRNewswire-Asia-FirstCall/ -- China Power Equipment, Inc. ("China Power Equipment" or the "Company," OTCBB: CPQQ), a manufacturer of a new generation of energy saving amorphous alloy transformer cores and transformers in China, today announced its financial results for the second quarter ended June 30, 2012.

Second Quarter Highlights:

• Revenues decreased 2.1% to $9.49 million year over year
• Net income increased 1.6% to $1.70 million year over year with $0.07 in diluted EPS

"Due to our marketing strategy, we passed most of our cost savings from a decline in the prices of the amorphous alloy strips onto the customers. Therefore, despite the higher sales volume in amorphous alloy cores, revenues for the quarter were lower year over year." said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "Revenues in the second quarter increased 30.8% compared to revenues in the first quarter which underscores our brand equity and the fact that our marketing and sales strategy are working.

"In addition, our gross profit margin increased to 26.4% in the second quarter of 2012 from 24.8% in the same period last year. The higher gross profit margin shows that our efforts of controlling costs and enhancing efficiency are starting to achieve the good improvement we have been expecting.

"Despite revenues from amorphous alloy transformers decreasing 5.7% in the second quarter of 2012, compared to the same period of 2011, the number of the transformers we produced in-house at our new production facility increased 184% in the second quarter of 2012 compared to the first quarter of the same year. The increases in capacity utilization of amorphous alloy cores and transformers and the improvement of gross margin in amorphous alloy cores are positive developments that are consistent with our Company's long term objectives. Furthermore, the demand for energy-saving and environmentally friendly products is expected to increase continuously as China further upgrades its electric grids and continues to expand its energy infrastructure in western China," concluded Mr. Song.

Total net revenues for the quarter decreased $207,191 or 2.1% to $9.49 million, compared to the same period of 2011, primarily attributable to the lower average selling prices of amorphous alloy cores and transformers and the lower sales volume of amorphous alloy transformers, partly offset by higher tonnage of amorphous alloy cores sold. As the amorphous alloy technologies mature, producers can afford to price amorphous alloy transformers more competitively so as to encourage their increased adoption and usage by end users. Net revenues generated by sales of amorphous alloy cores decreased 0.8% to $6.95 million for the quarter, representing 73.2% of sales. Net revenues generated by sales of amorphous alloy transformers were $2.54 million, representing 26.8% of sales, a decrease of 5.7% from the second quarter of 2011.

Gross profit for the quarter was $2.51 million, representing an increase of approximately 4.3% compared to the same period of 2011, primarily attributable to a lower cost of goods sold associated with amorphous alloy cores. Consolidated gross profit margin for the quarter increased 1.6 percentage points to 26.4% from 24.8% in the second quarter of 2011, mainly attributable to a decrease in primary raw material prices.

Selling, general and administrative ("SG&A") expenses totaled $0.50 million for the three months ended June 30, 2012, an increase of approximately 20.5% from the same period in 2011, primarily attributable to an increase in administrative personnel expenses, resulting from higher director and officer insurance and higher salaries and related employee benefit. Net income from operation increased approximately 0.99% year-over-year to $2.01 million, reflecting an operating margin of 21.2%.

Net income for the second quarter ended June 30, 2012 was $1.70 million, a slight increase of 1.6% versus the same period of 2011, primarily attributable to higher gross profit, offset by higher SG&A expenses. Earnings per share based on 23.7 million fully-diluted shares were $0.07.

Six Month Results

Total net revenues for the six-month period ended June 30, 2012 decreased $682,047 or 3.9%, compared to the same period of 2011. Net revenues generated by sales of amorphous alloy cores decreased 3.3% to $12.43 million during the period and accounted for 74.2% of total sales. Net revenues generated by sales of amorphous alloy transformers decreased 5.7% to $4.32 million and comprised of 25.8% of sales for the period. Net revenues decreased primarily as a result of the lower average selling prices of amorphous alloy cores and transformers and the lower sales volume of amorphous alloy transformers, partly offset by higher tonnage of amorphous alloy cores sold, as described above.

Gross profits for the first half of 2012 were $4.34 million, an increase of 2.5% versus the same period last year. Gross profit margin for the period for amorphous alloy cores increased 2.7 percentage points to 26.9%, while gross profit margin for amorphous alloy transformers decreased 1.3 percentage points to 23.2%.

SG&A expenses for the first half of 2012 increased 18.1% to $1.03 million compared to the same period of last year and represented 6.2% of the total net revenues.

Net income for the first half of 2012 was $2.74 million, a decrease of 2.1% versus the same period of last year and earnings per share were $0.12 based on 23.7 million fully-diluted shares.

Financial Condition

Cash and cash equivalents were $25.18 million at June 30, 2012 compared to $23.09 million at December 31, 2011. Working capital increased to $27.36 million at June 30, 2012 from $23.89 million at the end of 2011. Accounts receivable was $3.63 million at June 30, 2012, compared to $ 1.99 million at the end of 2011.

The Company generated $1.95 million of cash flows from operating activities during the first six months of 2012.

Business and Facilities Update

Since the third quarter of 2010, the Company has expanded its amorphous core production lines from an annual capacity of 1,500 to 6,500 tons. The capacity utilization of the lines ramped up very well and was 100% in the second quarter and 88% in the first half of 2012 based on the designed capacity with one shift. The amorphous core production lines can easily be expanded to annual capacity of 10,000 tons with minimal capital expenditure.

Since the Company commenced commercial production at its new amorphous alloy transformer production line during the third quarter of 2011, it has invested a significant amount of time to recruit and train personnel working at the new transformer facility to ensure the highest standards of quality and reliability of its transformers. The efforts were also recognized by Quality Inspection and Test Center for Equipment of Electric Power ("QITCFEEP"), a quality inspection authority for the transformers industry in China. On June 6, 2012, the Company received a Qualified and Satisfactory Test Report issued by QITCFEEP. Previously, the Company used third party manufacturers to make transformers. With the completion of this new facility, orders that were previously subcontracted are gradually being taken in-house. During the second quarter of 2012, the Company produced about 76% of all transformers in-house at the new production facility.

As the domestically-produced amorphous alloy strip continues to improve and becomes more reliable, during the second quarter of 2012, about 57% of the Company's amorphous alloy cores were made from the domestically-produced amorphous alloy strip which contributed to a decrease in cost of goods sold and an increase in gross profit margin.

According to the category of new technologies mandated by China State Grid, starting in 2012 all newly-installed distribution transformers must be energy-saving transformers. Furthermore, the Southern Grid plans to significantly increase its usage of amorphous alloy transformers in its electric grid projects. The Company expects these positive developments to drive demand for amorphous alloy transformers in the second half of 2012. As one of the leading companies that has large-scale production capacity and produces high efficient new models of amorphous alloy transformers in northwestern China, the Company anticipates capturing a good share of the emerging rural markets to increase sales and further grow its business.

Conference Call

China Power will hold its second quarter 2012 financial results conference call at 8:00 am ET on Wednesday, August 15, 2012.

To attend the call, please use the information below for dial-in access. When prompted on dial-in, ask for "China Power Equipment Second Quarter 2012 Earnings Conference Call".

Please dial in at least 10 minutes before the call to ensure timely participation. A playback will be available through September 15, 2012. To listen, please call +1 866 753 0743 within the United States, 800 876 5016 if calling in China, or +852 3005 2020 if calling internationally. Utilize the pass code 160773# for the replay.

The archive of the conference call will be available on China Power Equipment's website at: http://www.chinapower-equipment.com

About China Power Equipment, Inc.

China Power Equipment, Inc. designs, manufactures, and distributes amorphous alloy transformer cores and amorphous core step-down transformers in 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," "could," "estimates," "expects," "future," "intends," "plans," "should," "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 and inflation 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 and at www.chinapower-equipment.com.

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 news 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.