Duoyuan Global Water Inc. Reports Third Quarter 2010 Financial Results

BEIJING, Nov. 17, 2010 /PRNewswire-Asia-FirstCall/ -- Duoyuan Global Water Inc. (NYSE: DGW) ("Duoyuan" or the "Company"), a leading China-based domestic water treatment equipment supplier, today announced unaudited financial results for the third quarter of 2010.  The Company will hold a conference call at 8:00 am ET.  Dial in details may be found at the end of the release.

Third Quarter 2010 Financial Highlights

• Revenue increased 35.1% to RMB344.7 million ($51.5 million(1)) from RMB255.2 million in the prior year period.
• Gross profit increased 25.7% to RMB158.8 million ($23.7 million) from RMB126.4 million in the prior year period.
• Gross margin was 46.1% compared to 49.5% in the prior year period.
• Diluted earnings per ADS was $0.55.  Each ADS represents two of the Company's ordinary shares.

(1) This press release contains translations of certain Renminbi amounts into US dollars at specified rates solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to US dollars for the quarter ended September 30, 2010, were made at a rate of RMB6.6905 to USD1.00, the noon buying rate in effect on September 30, 2010 in the City of New York for cable transfers in Renminbi per US dollar as certified for customs purposes by the Federal Reserve Bank of New York. Duoyuan Global Water makes no representation that the Renminbi or US dollar amounts referred to in this press release could have been or could be converted into US dollars or Renminbi, at any particular rate or at all.

Mr. Wenhua Guo, the Company's Chairman and Chief Executive Officer, stated, "We are pleased to announce strong third quarter results, which demonstrate another quarter of sustained growth and presence in China's water treatment industry.  This quarter's revenue increased due to strong demand from all three product segments, which was partially due to a change in the timing of sales as some customers shifted fourth quarter purchases to the third quarter in order to meet the completion deadlines of China's 11th Five Year Plan.  From a business perspective, we are also excited to have signed three new licensing agreements so far this year that will not only complement and enhance our existing product portfolio, but also extend our reach into new areas of technology so we may further diversify our high-quality product offerings.  Moving forward, we are confident in our ability to drive long-term growth through our comprehensive and high-quality product offerings, our low cost manufacturing base, our extensive distribution network and our focus on continually developing new products."

Third Quarter 2010 Financial Performance

Third quarter 2010 revenue increased by 35.1% to RMB344.7 million ($51.5 million) from RMB255.2 million in the comparable period of 2009.  Revenues were calculated net of sales rebates, which were flat compared to the prior year period at RMB2.1 million ($0.3 million) in the third quarter of 2010.  

Revenue from water reuse equipment, which includes wastewater treatment equipment, increased by 42.4% to RMB142.5 million ($21.3 million) in the third quarter of 2010 compared to RMB100.1 million in the third quarter of 2009, due to increased demand for the Company's belt filter press machines, flocculant preparation systems, UV shelving disinfection systems, sludge screws and online testing equipment.

Revenue from water purification equipment increased by 36.3% to RMB75.0 million ($11.2 million) in the third quarter of 2010 compared to RMB55.0 million in the prior year period, due to strong market demand for the Company's industry pure water equipment, central water purifiers and UV water purifiers.  

Revenue from water conservation equipment, which includes circulating water treatment equipment, increased by 21.9% to RMB117.1 million ($17.5 million) in the third quarter of 2010 compared to RMB96.1 million in the third quarter of 2009, driven by continued demand for the Company's fully automatic filters, electronic water conditioners and circulating central water processors.  

Revenue from spare parts increased by 121.6% to RMB12.2 million ($1.8 million), in the third quarter of 2010, compared to RMB5.5 million, in the third quarter of 2009.  

For the third quarter of 2010, gross profit increased by 25.7% to RMB158.8 million ($23.7 million) from RMB126.4 million in the prior year period.  Gross margin for the third quarter of 2010 was 46.1%, compared to 49.5% in the third quarter of 2009 and 47.8% in the second quarter of 2010.  The year-over-year decline in gross margin may be attributed to increased raw material costs, partially offset by fluctuations in the Company's mix of products sold as new higher margin products are introduced.  

Operating income increased by 30.3% to RMB124.7 million ($18.6 million) in the third quarter of 2010 from RMB95.7 million in the comparable period of 2009.  

Selling expenses decreased 22.1% year-over-year to RMB15.0 million ($2.2 million), primarily due to the Company's decision to discontinue certain advertising activities.  General and administrative expenses increased 59.2% to RMB11.2 million ($1.7 million) from RMB7.0 million in the prior year period, partially reflecting a RMB2.3 million ($0.3 million) realized foreign exchange loss due to conversion of IPO proceeds. Research and development expenses increased 82.2% to RMB8.0 million (1.2 million) from RMB4.4 million, reflecting the Company's aim to drive future growth through product innovation.  Sequentially, operating expenses decreased 14.0% from the second quarter of 2010.

Provision for income taxes in the third quarter of 2010 increased to RMB34.6 million ($5.2 million), an effective tax rate of 27.7%, from RMB22.4 million in the prior year period.  

Net income increased 23.2% to RMB90.5 million ($13.5 million) from RMB73.4 million in the prior year period.  Diluted earnings per share was RMB1.84 ($0.27) in the third quarter of 2010, compared to RMB1.67 in the third quarter of 2009.  Diluted earnings per ADS was RMB3.67 ($0.55) in the third quarter of 2010, compared to RMB3.35 per ADS in the prior year period.  

During the third quarter of 2010, the Company recorded non-cash share-based compensation expense of approximately RMB0.9 million ($0.1 million), or approximately $0.01 per ADS, compared to RMB1.1 million in the third quarter of 2009.  Excluding share-based compensation, non-GAAP net income increased by 22.7% to RMB91.4 million ($13.7 million) in the third quarter of 2010, from non-GAAP net income of RMB74.5 million in the third quarter of 2009.  Non-GAAP diluted earnings per share was RMB1.85 ($0.28) in the third quarter of 2010, compared to RMB1.70 in the third quarter of 2009.  Non-GAAP diluted earnings per ADS was RMB3.71 ($0.55) in the third quarter of 2010, compared to RMB3.40 in the prior year period.  Please refer to the non-GAAP presentation provided below for a period-to-period comparison excluding non-cash share-based compensation expense.

The Company had approximately 49.3 million weighted average diluted shares outstanding for the period ended September 30, 2010, compared to 43.8 million weighted average diluted shares outstanding for the period ended September 30, 2009.

Nine Months Ended September 30, 2010 Financial Performance

For the nine months ended September 30, 2010, revenue increased by 35.5% to RMB798.8 million ($119.4 million) from RMB589.6 million for the nine months ended September 30, 2009.  During this same period, gross profit increased by 31.0% to RMB374.1 million ($55.9 million) from RMB285.5 million in the prior year period.  Operating income increased to RMB262.6 million ($39.2 million) from RMB133.2 million in the prior year period.  Net income was RMB193.0 million ($28.8 million) compared to RMB77.2 million in the prior year period.  Diluted earnings per share was RMB3.97 ($0.59) in the nine months ended September 30, 2010, compared to RMB2.22 in the nine months ended September 30, 2009.  Diluted earnings per ADS was RMB7.93 ($1.19) in the nine months ended September 30, 2010, compared to RMB4.44 per ADS in the prior year period.  

For the nine months ended September 30, 2010, the Company recorded non-cash share-based compensation expense of approximately RMB2.8 million ($0.4 million), or approximately $0.01 per ADS, compared to RMB91.6 million in the prior year period.  Excluding share-based compensation, non-GAAP net income increased by 16.0% to RMB195.8 million ($29.3 million) from RMB168.8 million in the prior year period.  Non-GAAP diluted earnings per share was RMB4.02 ($0.60) for the first nine months of 2010, compared to RMB4.85 in the prior year period.  Non-GAAP diluted earnings per ADS was RMB8.05 ($1.20) for the first nine months of 2010, compared to RMB9.71 in the prior year period.  Please refer to the non-GAAP presentation provided below for a period-to-period comparison excluding non-cash share-based compensation expense.  Weighted average diluted shares outstanding was approximately 48.7 million for the nine months ended September 30, 2010, up from 34.8 million in the prior year period.

As of September 30, 2010, the Company had cash and bank deposits of RMB1.0 billion ($152.6 million), compared to RMB918.7 million as of December 31, 2009.  Cash flows provided by operating activities for the nine months ended September 30, 2010 were approximately RMB158.7 million ($23.7 million).  Depreciation and amortization expense was RMB11.6 million ($1.7 million) for the nine months ended September 30, 2010.  Cash flows used in investing activities were RMB549.6 million ($82.2 million) for the period, reflecting the Company's progress on its new capital expenditures plan begun during the third quarter of 2009.  Cash flows provided by financing activities were approximately RMB504.3 million ($75.4 million), reflecting RMB524.3 million raised in a follow-on offering of the Company's ADSs as well as RMB20.0 million of debt repaid during the first quarter of 2010.

Financial Outlook

Mr. Stephen C. Park, Chief Financial Officer, stated, "As we move forward through 2010, our competitive position remains strong and we are poised for future growth supported by our trusted brand name and extensive distribution network.  With this in mind, we expect to generate revenue of approximately RMB210 million in the fourth quarter of 2010 or over RMB1.0 billion for the full year of 2010.  This implies a year-over-year growth rate of approximately 29% for the full year of 2010."

This forecast reflects the Company's current and preliminary view, which is subject to change.

Conference Call

The Company will hold a conference call at 8:00 am ET on November 17, 2010 to discuss third quarter results.  Listeners may access the call by dialing:

A telephone replay will become available beginning two hours after the conclusion of the call and will be available through November 23, 2010. Listeners may access the replay by dialing:

Preregistration and a webcast will also be available through the Company's website at www.duoyuan-hq.com.

Non-GAAP Disclosure

Non-GAAP net income represents net income before share-based compensation expense. The Company believes that non-GAAP net income is useful to both management and investors in evaluating the Company's operating performance compared with that of other companies in its industry. The calculation of non-GAAP net income allows the Company to compare its operating results with those of other companies without giving effect to expenses related to share-based compensation, which may vary for different companies for reasons unrelated to the overall operating performance of a company's business.

Non-GAAP net income is not a measure of performance under accounting principles generally accepted in the United States (U.S. GAAP).  The Company includes it in this presentation in order to:

• improve transparency for investors;
• assist investors in their assessment of the Company's operating performance;
• facilitate comparisons to historical performance;
• ensure that this measure is fully understood in light of how the Company evaluates its operating results; and
• properly define the metric used and confirm its calculation.

Non-GAAP net income is not meant to be considered in isolation or as a substitute for items appearing on the Company's financial statements prepared in accordance with U.S. GAAP.  Rather, the non-GAAP measure should be used as a supplement to U.S. GAAP results to assist the reader in better understanding the operational performance of the Company.  The Company cautions that this measure is not a defined term under U.S. GAAP and its definition should be carefully reviewed and understood by investors.  The Company recognizes that the usefulness of non-GAAP net income has certain limitations, including:

• Non-GAAP net income does not include share-based compensation expense.  Because the Company periodically has granted, and expects to continue to grant, options and restricted share awards to its employees, share-based compensation expense is a necessary element of the Company's costs and ability to generate profits and cash flows. Therefore, any measure that excludes share-based compensation expense may have material limitations; and
• the manner in which the Company calculates non-GAAP net income may differ from that of other companies, which limits its usefulness as a comparative measure.

The Company compensates for the foregoing limitations by using non-GAAP net income as a comparative tool, together with U.S. GAAP measurements, to assist in the evaluation of its operating performance.  Please refer to the non-GAAP reconciliation table for a reconciliation of non-GAAP net income to net income, which is the most directly comparable U.S. GAAP financial measure as well as a reconciliation of non-GAAP earnings per share and non-GAAP earnings per ADS to earnings per share and earnings per ADS, respectively.

About Duoyuan Global Water Inc.

Duoyuan Global Water Inc. is a leading China-based domestic water treatment equipment supplier.  Duoyuan's product offerings address key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis.  Duoyuan offers a comprehensive set of complementary products across three product categories: water conservation, including circulating water treatment; water purification; and water reuse treatment, including wastewater treatment. The Company has an extensive local distribution network, which provides proximity to end-user customers and responsiveness to local market demand.  Learn more at www.duoyuan-hq.com.

Cautionary Note Regarding Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. These forward-looking statements may include, but are not limited to, statements containing words such as "may," "could," "would," "plan," "anticipate," "believe," "estimate," "predict," "potential," "expects," "intends" and "future" or similar expressions. These forward-looking statements speak only as of the date of this press release and are subject to change at any time.  These forward-looking statements are based upon management's current expectations and are subject to a number of risks, uncertainties and contingencies, many of which are beyond the Company's control that may cause actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. The Company's actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including those described under the heading "Item 3. Key Information – Risk Factors" in the Company's Annual Report on Form 20-F for the year ended December 31, 2009, filed with the Securities and Exchange Commission on June 18, 2010, and in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE Duoyuan Global Water Inc.

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