China Power Equipment, Inc (CPQQ)

[eom7]

China Power Equipment Announces Fourth Quarter and Full Year 2011 Financial Results

XI'AN, China, March 28, 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 fourth quarter and twelve month period ended December 31, 2011.

Fourth Quarter Highlights:

Net revenues increased 19.6% to $9.3 million year-over-year
Net income increased 49.5% to $1.4 million with $0.06 in diluted EPS

Full Year Ended December 31, 2011 Highlights:

Net revenues increased 24.8% to $37.0 million year-over-year
Net income of $5.9 million with $0.25 in diluted EPS
"I am pleased to report strong financial results for both our fourth quarter and full year 2011 which underscored the increased recognition for energy efficient electric products by China," said Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "We continue to see strong demand for our energy saving products and we have further expanded our production levels and increased our market share. Continued strong demand in China for energy infrastructure components has allowed us to further increase our capacity utilization at our new step down transformer production facility which commenced commercial production in the third quarter of 2011. Our R&D team continues to innovate, develop and upgrade patents and use lower cost, high quality domestically-produced raw materials in our products, all of which should allow us to better service our existing client base, improve margins and allow us to gain more market share in the future."

Summarized Fourth Quarter Ended December 31, 2011 Results

Q4 2011
Q4 2010
Increase (Decrease)
Net Revenues
$9.3 million
$7.8 million
19.6%
Gross Profit
$2.5 million
$1.8 million
37.8%
Selling, General and Administrative Expenses
$0.8 million
$0.5 million
65.9%
Net Income
$1.4 million
$1.0 million
49.5%
EPS*
$0.06
$0.04
50.0%




*Earnings per share are based on weighted average fully diluted shares outstanding of 23.6 million and 22.1 million in Q4 2011 and Q4 2010, respectively. All numbers are rounded to nearest $1,000,000, excluding EPS.
Total net revenues for the quarter increased $1.5 million, or 19.6%, to $9.3 million, compared to the same period of 2010, primarily attributable to increased sales of amorphous alloy cores and high capacity amorphous alloy transformers. Net revenues generated by sales of amorphous alloy cores increased 12.3% to $6.4 million for the quarter, representing 69.5% of sales. The growth benefited from a quantity-based pricing program to secure larger orders from customers in addition to our ability to more competitively price our products due to the use of lower cost domestically produced raw material. Net revenues generated by sales of amorphous alloy transformers were $2.8 million, up 40.4% from the fourth quarter of 2010, primarily due to higher average sales prices due to a change in the product mix in favor of more expensive high capacity transformers.

Gross profit for the quarter was $2.5 million, representing an increase of approximately $0.7 million, or 37.8% compared to the same period in 2010. This was primarily due to higher sales revenues generated by amorphous alloy cores and high capacity amorphous alloy transformers. Consolidated gross margin increased to 26.7% from 23.2% in the fourth quarter of 2010, and increased 2.4 percentage points compared to the previous quarter in 2011. Gross margin on amorphous cores increased to 29.1% from 22.9% in the fourth quarter of 2010 primarily due to the Company's increased usage of lower priced domestically-produced amorphous alloy strips. By the end of year 2011, cores using domestically-produced amorphous alloy strips accounted for 30% of the total cores sold. Gross margin on the Company's amorphous alloy transformers declined 2.6 percentage points to 21.4%, compared to 24.0% a year ago mainly due to the lower than expected capacity utilization of the new transformer production lines.

Selling, general and administrative ("SG&A") expenses totaled $0.8 million for the three months ended December 31, 2011, an increase of approximately 65.9% from the same period in 2010. Operating income increased approximately 45.7% year-over-year to $1.7 million, with an operating margin of 18.6%.

Net income for the fourth quarter was $1.4 million, up 49.5% versus the same period in 2010 despite the higher operating income was offset by higher income taxes. Earnings per share based on 23.6 million fully-diluted shares were $0.06, compared to $0.04 in the fourth quarter of 2010.

Fiscal Year 2011 Results

Summarized Twelve Months Ended December 31, 2011 Results

FY 2011
FY 2010
Increase (Decrease)
Net Revenues
$37.0 million
$29.7 million
24.8%
Gross Profit
$9.2 million
$7.8 million
18.4%
Selling, General and Administrative Expenses
$2.1 million
$1.4 million
50.9%
Net Income
$5.9 million
$5.5 million
7.8%
EPS*
$0.25
$0.25
0%




*Earnings per share are based on weighted average fully diluted shares outstanding of 23.6 million and 22.1 million in 2011 and 2010, respectively. All numbers are rounded to nearest $1,000,000, excluding EPS.
Net revenues increased 24.8% to $37.0 million during the year ended December 31, 2011, primarily attributable to higher tonnage of amorphous alloy cores sold, offset in part by lower average selling prices of our amorphous alloy cores. More high capacity high-priced amorphous alloy transformers sold in 2011 also contributed to the increase in net revenue. Net revenues generated by amorphous cores increased 31.0% during the period and accounted for 72.5% of total sales. Net revenues from amorphous alloy transformers grew by 10.9% to $10.2 million for the period.

Gross profit for the period was $9.2 million, representing an increase of 18.4% versus the same period in the prior year, primarily due to higher sales revenues associated with amorphous alloy cores and transformers. Consolidated gross margin decreased 1.4 percentage points to 24.9% in 2011 from 26.3% in 2010, primarily due to the lower average selling prices of amorphous alloy cores in year 2011 compared to the same period of 2010. Gross margin for China Power's amorphous alloy cores and transformers were 25.4% and 23.7%, respectively.

SG&A expenses increased 50.9% to $2.1 million due to an increase in shipping expenses of $61,974 resulting from higher revenues, an increase in professional fees of $152,158 resulting from higher audit and investor relations service fees, an increase in administrative personnel expenses of $321,332 resulting from higher director and officer insurance, new hiring and higher salary and related employee benefits, and an increase in administrative facility expenses of $35,995. Operating income increased 14.3% to $7.2 million, representing an operating margin of 19.3%.

Net income attributable to China Power's common shareholders and diluted earnings per share were $5.9 million and $0.25 respectively in the twelve months ended December 31, 2011, compared to $5.5 million and $0.25 in the previous twelve month period, primarily attributable to higher gross profit, offset by higher SG&A expenses and higher income taxes.

Financial Condition

Cash and cash equivalents were $23.1 million at December 31, 2011 compared to $17.9 million at December 31, 2010. Working capital increased to $23.9 million from $18.5 million at the end of 2010. Accounts receivable was $2.0 million at December 31, 2011, an increase of 28.2% or $0.4 million from $1.6 million at end of 2010.

The Company generated $6.3 million of cash flows from operating activities in 2011 primarily due to net income, partially offset by higher working capital needs. China Power spent approximately $2.1 million on capital expenditures in 2011.

Business and Facilities Update

Since the Company commenced commercial production at its new amorphous alloy step-down transformer line during the third quarter of 2011, it has further tested and refined its preparation and production processes, equipment, and quality controls to prepare for the mass production in the next stage. All these efforts were recognized by our reception of ISO 9001 2008 certification in 2012. Previously, the Company used third party manufacturers to make transformers. With the completion of this new facility, orders that were previously subcontracted will be gradually taken in-house. Meanwhile, the Company is actively seeking to participate in and undertake larger national grid projects and private end users' projects.

"We delivered the first shipments of transformers from our new production line to customers in September 2011. Our customers are very satisfied with the quality and performance. The in-house produced transformers accounted for 15% of the total transformers we sold by the end of 2011. Sufficient production preparation and additional marketing strengthen our confidence in the expansion and we expect to secure new orders and hope for sizable production in 2012," stated Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment.

Beginning from 2011, the Company gradually increased the commercial purchase of amorphous alloy strips, the main raw material of amorphous alloy cores, from a Chinese domestic manufacturer, Advanced Technology & Materials Co., Ltd. (AT&M) after a long period of internal testing. Sourcing alloy strips from a trusted domestic supplier will help the Company broaden its supply base, lower the risk of concentration of raw material supply, provide more options to clients and help improve the profit margin of the amorphous alloy cores. The transformers made in-house improve the efficiency in order turnaround and product quality, which will in turn enhance our ability to get larger projects.

The Company was successfully granted three new patents in 2011, while we applied for a new patent related to the design of transformers in the same year and received the certificate in 2012.

With the ramp up of the capacity utilization of the new transformer production lines, greater usage of domestically produced raw materials, and R&D innovation, the Company should continue to improve profit margins and financial and operational performance.

With the implementation of China's Twelfth Five-year Plan, we believe that the rural grid improvement plan, which is expected to be released as early as the first half of 2012, will effectively boost the market demand for energy-efficiency products. It is estimated that both the State Grid Corporation and South China Grid Corporation, the two large grid corporations in China, will invest at least $79 billion USD (500 billion RMB) into the rural grid upgrade project during China's current five year plan. As the leading professional amorphous alloy core and transformer manufacturer in northwestern China, China Power Equipment is well positioned to secure new orders from the Chinese government's planned renovation and upgrade of rural power grids in both the Central and Western regions of China.

Conference call

China Power will hold its fourth quarter and full year 2011 financial results conference call at 8:00 am ET on Thursday, March 29, 2012.

To attend the call, please use the information below for dial-in access. When prompted on dial-in, ask for "China Power Equipment Fourth Quarter and Full Year 2011 Earnings Conference Call".

Conference Call

Date:
Thursday, March 29, 2012
Time:
8:00 am Eastern Time, US
US Toll Free Dial-In:
[phone]
International Toll Free Dial-In:
[phone]
Asia Toll Free Dial-In:
Mainland China: 800 876 8626
Hong Kong:
3005 2050
Password:
896358#
Conference ID:
China Power Equipment Fourth Quarter and Full Year 2011 Conference Call
Please dial in at least 10 minutes before the call to ensure timely participation. A playback will be available through April 28, 2012. To listen, please call [phone] within the United States, 800 876 5016 if calling in China, or [phone] if calling internationally. Utilize the pass code 160773# for the replay.

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

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 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.

For more information, please contact:

COMPANY:

Ms. Nicole Chen (English and Chinese)

Vice President of Finance

China Power Equipment, Inc.

Telephone: [phone]

Mobile: [phone]

Email: [e-mail]

INVESTOR RELATIONS:

Mr. Scott Powell (English)

Senior Vice President

MZ Group

Tel: [phone]

Email: [e-mail]

www.mz-ir.com