China Power Equipment, Inc (CPQQ)

[GorillaGorilla]

Ok, Working from two quotes and the 10-Q and 10-K....

1)

http://finance.yahoo.com/news/China-Power-Equipment-Inc-prnews-1559286993.html?x=0&.v=4

Mr. Song went on to say, "However, the strong demand within China for energy efficient products has also prompted Hitachi Metals Japan, our main supplier of the amorphous strips used in our cores, to expand its production capacity, which has, in turn, resulted in a significant reduction in our raw material costs. This decrease in the price of one of our key raw materials, combined with continual improvement in productivity and increased sales, should start to be reflected in the Company's financial results toward the end of this year."

First half:
Net Income $ 1,634,383
Second half should be stronger than first but lets double it...
$ 3,268,766

2)

http://finance.yahoo.com/news/China-Power-Equipment-Reacts-prnews-1811518553.html?x=0&.v=66

We know that they intend to "at least" double the manufacture next year... but lets say due to inefficiencies - contract workers and contracting out say. They get 150% increase in income instead - which I get to be:

Low Ball Net Income Estimate 2010 = $8,171,915
12.5% tax rate = 1,021,489

Income Net of tax = $7,150,426



Plant Costs

Plant and office building, Amort 20 years and in the 10-K it's worth $ 2,386,592
Machinery and production equipment, Amort 10 years $941,347
So that's $3,327,939

Worse case senario is assuming they are at full capacity now so they need to at least double the value $7 million and make it up to $10 million spend to cover capacity growth.


They do have construction for first half of year at $653,078
Cash flow for first six months is $1.25 Million, so we assume same for second half
Exercise Warrants $4 Million
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Around $6 million potential Contruction without additional financing
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So they need an additional 4 million in cash so they sell another 4 million shares at $1.


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Pessemistic Quote

- Second half should strong than first but I've made it the same.
- Warrants dilute giving $4 million cash
- Already at capacity - so cannot increase earnings without buildout and need 4 million more cash through equity dilution.
- 10 million buildout for Building and Machines
- 150% growth in 2010 - conservative given management estimate of 200% growth.
- Valuation of P/E 10 for growing company
- 12.5% tax but will be 25% if not considered Hi-tech by PRC

EPS = $7,150,426 / 23,365,013 = 0.31
So P/E of 10 that's $3.10 share

$3.10 / 1.15 so that's $1 down for potential of $2.7 back in 2010.


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Upsides

1) Annual production capacity 1000 ton and were not at capacity now - requiring fewer sold shares, and higher EPS in the last 2 quarters.
2) Sourcing amorphous alloy from China An Tai Technology Co rather than Hitachi.
3) 200% + income increase instead of 150%
4) Company expect second half to be stronger than first
5) Higher Multiple for company growing at > 100%


rich