China Power Equipment, Inc. Reports Higher Revenues and Net Income

XI'AN, China, April 1, 2011 /PRNewswire-Asia-FirstCall/ -- China Power Equipment, Inc. ("China Power," "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 year ended December 31, 2010.

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.
• Earnings conference call and webcast will be held on April 1, 2011 at 8:00 a.m. EDT (New York).

Chairman's comments

Mr. Yong Xing Song, Chairman of the Board of China Power Equipment, said, "Our work in the fourth quarter and the year 2010 resulted in very good increases in operating results and financial performance for China Power Equipment.

"During the year, in operations, we added two independent directors and established Board's audit committee.

"We tripled our capacity for cores by opening our new plant. We also moved most of our equipment from our first factory to the new plant. That expansion increased our ability to qualify for and win much larger orders for cores. It also greatly improved our ability to fill orders quickly.

"We carried out the testing of amorphous alloy strip made by a Chinese technology company and found that it was good for several core models.

"We were granted three new patents in China, and we completed the planning for our new production line for amorphous alloy transformers.

"With those efforts, we believe we can benefit even more from the Chinese government's new plan in November last year to boost the country's energy efficiency.

"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."

In cost of goods sold, Hitachi Metals, the world's largest producer and China Power's main supplier of amorphous alloy strip, reduced prices in 2010 to encourage more rapid adoption of high-performance amorphous alloy transformers, which will help improve energy efficiency and speed their use in China and other parts of the world. China Power passed most of the cost reductions on to its customers. As a result, the average price per metric ton for its amorphous alloy cores was 10.9% lower in 2010 than in 2009.

In July 2010, the Company increased its capacity for transformer cores to 6,500 metric tons from 1,500 tons in 2009, up 333.3%. Higher tonnage produced in the second half of 2010 and reductions in the prices of raw materials were the primary reasons for its higher gross profit margin of 26.3% in 2010 from 23.9% in 2009. Gross profit margin is defined as gross profit as a percent of net revenues.

Net income increased 30.2% to $5.5 million in 2010 from $4.2 million in 2009 mainly due to higher gross profits and good control of higher expenses that were consistent with its growth, partly offset by higher taxes.

Basic earnings per share increased 196.9% to $0.31 in 2010 from a loss of $0.32 in 2009, with weighted average basic shares outstanding 19.4% higher 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 with weighted average diluted shares outstanding 48.5% higher in 2010 than in 2009. The loss in 2009 was created by a deemed dividend from the beneficial conversion feature of preferred stock.

China Power's amorphous alloy cores in 2010 increased 26.2% in revenues and 41.6% in gross profit from 2009. Amorphous alloy transformers in 2010 increased 21.6% in revenues and 26.2% in gross profit from 2009. The Company had no revenues from silicon steel cores and transformers in 2010 because it discontinued that product line to focus on amorphous alloy cores and transformers.

Mr. Song continued, "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."

Revenues

Net revenues increased $5,791,607 or 24.3% in 2010 from 2009 primarily due to higher tonnage of amorphous alloy cores and amorphous alloy transformers sold, offset in part by lower average selling prices for amorphous alloy cores. To help fill customers' orders, the Company subcontracted the manufacturing of some cores and transformers to other companies in the first half of 2010 before its new plant began production in July 2010. The revenues from traditional silicon steel cores and transformers were zero in 2010 because the Company has focused on amorphous alloy cores and transformers as its major products and has exited all manufacturing, marketing, and distribution of steel cores and transformers.

In 2010, the average sales price per metric ton of amorphous alloy cores was 10.9% lower than in 2009. The lower average price of amorphous alloy cores per ton was the result of lower prices for amorphous alloy strip, the primary raw material used to make amorphous alloy cores.

The average sales price per metric ton for amorphous alloy transformers was 33.5% higher in 2010 than in 2009 primarily due to more expensive high capacity transformers that were sold in our transformer product mix.

Cost of goods sold

Cost of goods sold increased $3,701,128 or 20.4% in 2010 from 2009 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. In 2010, the average price per ton of amorphous alloy strip decreased 15.4% from 2009. The world's main supplier of amorphous alloy strip has been setting its price for amorphous alloy strip lower to promote sales of amorphous alloy transformers at more affordable prices.

Gross profit and gross profit margin

Gross profit increased $2,090,479 or 36.7% in 2010 from 2009 primarily due to higher revenues of amorphous alloy cores and transformers.

The gross profit margin (gross profit as a percent of total revenues) increased to 26.3% in 2010 from 23.9% in 2009 primarily due to the lower prices for amorphous alloy strip in 2010 than in 2009.

Selling, general, and administration expenses

Selling, general, and administrative expenses increased $174,554 or 14.6% in 2010 from 2009 mainly due to an increase in shipping expenses of $116,363 resulting from higher revenues, an increase in administrative employee expenses of $60,677, an increase in stock-based compensation of $52,078, and an increase in depreciation and amortization of $56,675 as a result of the additions to plant and equipment, partly offset by lower professional fees and recovery in bad debt.

Selling, general, and administrative expenses as a percent of revenue decreased in 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 in 2010 increased $4,519 or 5.0% from 2009 primarily due to higher earnings from a 20% equity method investment. The Company invested $165,377 (using the exchange rate of RMB 6.591 to $1.00 as of December 31, 2010) or RMB 1,090,000 in Shaanxi Yan An Amorphous Alloy Transformer Co., Ltd. ("Yan An") for 20% of its ownership in 2005. The Company recorded this investment using the equity method because of its significant influence on the entity. At December 31, 2010, it sold the shares of Yan An back to Xi'an Amorphous Alloy Science And Technology Co., Ltd. (Alloy Science) from whom the Company purchased the shares of Yan An in 2005, for its carrying balance of $329,466. The Company sold its investment in Yan An's shares to avoid any potential for conflicts of interest in bidding for new work, as both companies produce and sell alloy transformers.

Income taxes

Income taxes in 2010 increased in 2010 from 2009 mainly due to the higher net income before income taxes that resulted from higher revenues. The Company's 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

Net income increased $1,276,145 or 30.2% to $5,496,145 in 2010 from $4,220,000 in 2009. The increase in net income was mainly due to higher revenues and lower raw material prices that were partly offset by higher selling, general, and administrative expenses, impairment loss on equipment, and higher income taxes.

Net income (loss) applicable to common shareholders increased 213.9% to $5,496,145 in 2010 from a loss of $4,825,005 in 2009. The loss resulted from a deemed dividend from the beneficial conversion feature of preferred stock.

Basic earnings per share increased 196.9% to $0.31 per share in 2010 from a loss per share of $0.32 in 2009 on weighted average basic shares outstanding that were 19.4% higher in 2010 than in 2009.

Diluted earnings per share increased 178.1% to $ 0.25 per share in 2010 from a loss per share of $0.32 in 2009 on weighted average diluted shares outstanding that were 48.5% higher in 2010 than in 2009.

Liquidity and capital resources  

The Company has funded its operations and capital expenditures using cash generated from operations and funds raised from issuing convertible preferred stock. It will continue its investment in the development and enhancement of the production facilities for amorphous alloy cores and transformers. Cash generated from operations and funds raised from issuing convertible preferred stock will be used to fulfill such commitments.

China Power Equipment believes its existing cash will be sufficient to maintain its operations at the present level for at least the next 12 months.

The following table summarizes our liquidity and capital resources on December 31, 2010 and 2009.

Working capital is defined as current assets minus current liabilities.

The following table summarizes the changes in the sources and uses of cash in 2010 and 2009.

Net cash provided by operating activities in 2010 was $6,719,135 and came mainly from net income of $5,496,145 and a change in accounts payable of $546,782.

Net cash used in investing activities in 2010 was $2,475,520 and was mainly used for increases in property, plant, and equipment.

Net cash provided by financing activities in 2010 was $4,454,702 and came mainly from the exercise of outstanding warrants originally issued with the Company's Series A convertible preferred stock.

Financial statements follow.

Conference call and webcast 

China Power Equipment will host its first earnings conference call and live webcast at 8:00 a.m. Eastern Daylight Time (New York) on Friday, April 1, 2011, which is 8:00 p.m. in China on the same day.

The dial-in details for the live conference call are:

The live webcast and archive of the conference call will be available on the Investor Relations section of China Power's website at http://www.chinapower-equipment.com. Be sure to log in about 15 minutes before the call starts to download any necessary software.

A telephone replay of the call will be available after the conclusion of the conference call through 9:00 a.m. Eastern Daylight Time, April 8, 2010. The dial-in details for the telephone replay are:

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 Alloy Zhongxi Transformer Co., Ltd., designs, manufactures, and distributes amorphous alloy transformer cores and amorphous alloy core distribution 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," "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 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.