China Power Equipment Announces Third Quarter 2011 Financial Results

XI'AN, China, Nov. 14, 2011 /PRNewswire-Asia-FirstCall/ -- China Power Equipment, Inc. ("China Power Equipment", OTCBB: CPQQ), a manufacturer of a new generation of energy saving amorphous metal transformer cores and transformers in China, today announced financial results for its third quarter ended September 30, 2011.

Third Quarter Highlights:

• Net revenues increased 19% to $10.3 million year-over-year
• Net revenues generated by amorphous alloy cores business increased 20% year-over-year
• Net income of $1.7 million with $0.07 in diluted EPS

"I am pleased to report a strong third quarter, as China Power Equipment continued to benefit from increasing demand in China for energy-saving and environmentally friendly energy infrastructure components. Increased sales of amorphous alloy cores and high capacity amorphous alloy transformers confirm the underlying strength of the addressable market we serve," began Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment. "We completed the capacity expansion of our amorphous alloy core production line in the third quarter of 2010, and capacity utilization has increased steadily since then. With the efforts of our R&D, we started to use domestically-produced strips to process several models of cores for customers. Diversified products, capability of large-scale production and the quantity-based pricing strategy for our amorphous alloy cores result in more orders from key customers and new customers."

Total net revenues for the quarter increased $1.6 million, or 19%, to $10.3 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 amorphous alloy cores increased 20% to $7.5 million for the quarter, representing 73% of sales. The growth benefited from a quantity -based pricing program to secure larger orders from the customers.  Net revenues generated by transformer business were $2.8 million, up 16% from the third 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, an increase of approximately $0.1 million or 4% compared to the same period in 2010. This was primarily due to higher sales revenues generated by high capacity amorphous alloy transformers. Consolidated gross margin declined to 24.3% from 27.7% in the third quarter of 2010, while was flat compared to the previous two quarters in 2011. Gross margins on amorphous cores declined from 29.1% to 24.2%, primarily due to lower average selling prices. Costs of amorphous alloy strip, the key raw material used in production, declined 9.5% in the third quarter of 2011. The Company passed the cost savings on raw material onto customers through the Company's quantity-based pricing strategy which attracted bigger orders from customers.  Gross margins on the Company's amorphous core step-down transformers were up 50 basis points from 24.1% a year ago to 24.6%.

Sales, general and administrative ("SG&A") expenses totaled $0.4 million for the three months ended September 30, 2011, down approximately 5% from the same period prior year.

Operating income increased approximately 7% year-over-year to $2.1 million, with operating margin of 20%.

Net income for the third quarter was $1.7 million, up 2% versus the same period in 2010 as the higher operating income offset by higher income taxes. Earnings per share based on 23.6 million fully-diluted shares were $0.07.

Net revenues increased 27% to $27.7 million during the nine months ended September 30, 2011, primarily attributable to higher tonnage of amorphous alloy cores sold, offset in part by lower average selling prices of amorphous alloy cores. Net revenues generated by amorphous cores increased 38% during the period and accounted for 74% of total sales. Net revenues from step-down transformers grew by 3% to $7.4 million for the period.

Gross profit for the period was $6.7 million, an increase of 13% versus the same period in prior year, primarily due to higher sales revenues of amorphous alloy cores. Consolidated gross margin decreased 3.0 percentage points to 24.3% in the first nine months of 2011 from 27.3% in the same period of 2010, primarily due to the lower average selling prices of amorphous alloy cores. Gross margin for China Power's amorphous alloy cores and transformers were 24.2% and 24.5%, respectively.

SG&A expenses increased 43% to $1.3 million due to an increase in shipping expenses resulting from higher revenues, an increase in public company expenses, and an increase in administrative personnel expenses. Operating income increased 7% to $5.4 million, representing an operating margin of 20%.

Net income was $4.5 million and earnings per share were $0.19 based on 23.6 million fully-diluted shares.

Financial Condition

Cash and cash equivalents were $19.4 million at September 30, 2011 compared to $17.9 million at December 31, 2010. Working capital increased to $21.5 million from $18.5 million at the end of 2010. Accounts receivable was $2.4 million at September 30, 2011, flat from June 30, 2011 and up from $1.6 million at end of 2010.

The Company generated $3.4 million of cash flows from operating activities in the first nine months of 2011 due primarily to net income, partially offset by higher working capital needs. China Power spent approximately $2.6 million on capital expenditures during the first nine months of 2011.

Business and Facilities Update

Since the Company commenced commercial production at its new amorphous alloy step-down transformer line this August, 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. Previously, the Company used third party manufacturers to assemble transformers. With the completion of this new facility, orders that were previously subcontracted will be gradually taken in-house. Meanwhile, the Company is actively participating in and undertaking larger national projects.

"We delivered the first shipments of transformers from our new production line to customers in September. Our customers are very satisfied with the quality and performance. With sufficient production preparation and additional marketing, we expect to secure new orders and commence sizable production in the first half of 2012," stated Mr. Song Yongxing, Chairman, CEO, and President of China Power Equipment.

During this quarter, the Company began to commercially purchase 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 the supply base and help improve the profit margin of China Power Equipment's 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 programs.

With the implementation of China's Twelfth Five-year plan, the rural grid improvement program will effectively boost the market demand for energy-efficiency products. As the leading amorphous alloy core and transformer manufacturer in the Western 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.

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: +86 (29) 6261 9758
Mobile: +86 186 1633 1170
Email: [email protected]

INVESTOR RELATIONS:

Mr. Scott Powell (English)
Senior Vice President
MZ Group
Tel: +1-212-301-7130
Email: [email protected]
www.mz-ir.com

SOURCE China Power Equipment, Inc.