China Tracker - Details for Duoyuan Global Water (DGWIY)

 Duoyuan Global Water
 Analyst Coverage
2011-05-05Rodman & RenshawDowngradeTerminatedn/a

Effective immediately, we are terminating coverage on Duoyuan Global Water Inc. to better allocate resources within our coverage universe. Our last rating for DGW was Under Review / Speculative Risk. Investors should not rely on our previously published financial projections.

2011-04-06Rodman & RenshawDowngradeUnder Reviewn/a

We revised our rating on DGW on March 23rd 2011 after the 4Q10 earnings release based on the fact that the third party review has been further delayed to the end of 2Q11. The stock has been trending lower since then. We are removing our financial projections for DGW and putting the company Under Review until we get further clarity on the third party review.

2011-04-05Piper JaffrayDowngradeSuspendedn/a
2011-03-23Rodman & RenshawDowngradeMarket Performn/a

We are revising our rating on DGW from Market Outperform to Market Perform. We believe the stock will remain in limbo until the Skadden led internal review is complete. When the review was initiated (at the end of September 2010) the expected timeline for completion was one to four months. Management now expects the review to only be complete by end of 2Q11. Though the company continues to report healthy operational execution we believe the stock will only reflect this in the form of an appropriate multiple once Skadden reports its findings. We will revisit our rating upon the completion of the internal review.

2010-11-17Rodman & RenshawReiterationOutperform$24.00

DGW reported 3Q10 revenue and GAAP net income of $51.5 MM and $13.5 MM, with diluted Earnings Per ADS of $0.55, compared to our expectations of $47.9 MM, $11.3 MM, and $0.46, respectively. On a non-GAAP basis, which excludes a share-based compensation of $0.14 MM, net income and earnings per ADS should be $13.7 MM and $0.55, compared to our estimates of $11.4 MM and $0.46. Top-line grew by ~37.8% Y-o-Y and 18.9% sequentially. Gross profit stood at $23.7 MM or 46.1% gross margin, compared to $18.5 MM or 49.5% in 3Q09 and $20.7 MM or 47.8% in 2Q10. GAAP-net income was $13.5 MM, compared to $10.8 MM in 3Q09. Diluted EPS was $0.55, while Non-GAAP net income and diluted EPS were $13.7 MM and $0.55, respectively. The company ended the quarter with $152.6 MM in cash while accounts receivable and inventory stood at $40.5 MM and $8.6 MM.

CCTV Campaign Ended: After a third-party analysis, the company decided to terminate the CCTV advertising campaign in September 2010. This decision has reduced the selling expenses by 22.2% Y-o-Y, due to a RMB 6 MM refund upon the termination of the CCTV contract. Going forward, management expects selling expenses to be in the range of 5%~7% of total revenue.

CapEx Plan Raised: Management has raised its goal of capital spending for 4Q10 and FY11. For 4Q10, management expects a total CapEx of RMB 233 MM ($34.8 MM), of which $23 MM will be used for building construction, $5 MM for licensing expense, and $6.8 MM for equipment purchases. For FY11, total CapEx is expected to reach $92 MM. Management also indicated that guidance for the aggregate CapEx for the next two year has been raised to $209 MM from $165 MM issued previously.

Near-Term Growth Drivers: We believe near-term growth drivers should include (1) acceleration of China's demand for water treatment equipment imposed by the upcoming 12th Five-Year Plan. (2) additions of new distributors across China. (3) New product launches and new licensing agreement signed.

Guidance & Estimates: Management maintained 4Q10 revenue guidance of RMB 210 MM, or ~$31.3 MM, implying a 29% Y-o-Y growth for the full year. We are now projecting 4Q10 revenue, net income, and diluted EPS of $34.2 MM, $8.6 MM, and $0.35, leading to full year estimates of $152.6 MM, $37.2 MM, and $1.52. For FY11, our projections are $178.3 MM, $40.3 MM, and $1.61, respectively.

Valuation: At current levels DGW is trading at P/E multiples of ~8.4x and ~7.9x to our FY10 and FY11 estimates. These multiples are well below industry averages of 17.6x and 16.6x. We believe DGW should be trading, at a minimum, in line with the industry given the growth opportunity associated with it. We are comfortable maintaining a $24.00 price target for DGW, which translates into P/E multiples of 16x and 15x to our estimates for FY10 and FY11 EPS. 

2010-10-19Rodman & RenshawReiterationOutperform$24.00

DGW's management has provided us with access to their distributors in cities we have been traveling to as a part of this trip. Below is a summary of our meeting with the company's distributor for water circulation products in Dalian.

Oct 17 Meeting: We met Mr. Wang from Dalian Sanbo New Tech Development, a DGW distributor for water circulation products in Dalian. This company also distributes energy conservation / HVAC solutions. His end customers for DGW's products are iron and steel plants, petroleum / chemical companies etc. They sell DGW products ranging between RMB 10,000 to RMB 200,000 doing approximately RMB 1 MM per month in sales. This company has been doing business with DGW for the last six to seven years and the relationship began through a former manager at the company. In most instances products are shipped from DGW's facilities. However, orders for large units are assembled on site.

Competition: Dalian Sanbo has looked at competing offerings in the market but are satisfied with DGW primarily due to 1) an established /smooth relationship between the two companies2) DGW's diversified range of products that provides Dalian Sanbo with some leverage with customers 3) their view that DGW is a large and reliable supplier that can support their growth.

Impact of TV Marketing: Mr. Wang believes that the company's TV marketing campaigns are a positive for him. The ads air around the CCTV1 national news at 10 pm that is watched by officials and managers of state owned entities. This is a key target market for DGW. He believes this marketing effort helps his customers become aware of the brand and the related offerings.

Margins: 50% of this distributor's revenues come from DGWs products. DGW allows its distributors to mark up according to local competitive conditions but within a minimum and maximum range. Key drivers in end customers purchase decisions include 1) brand 2) history of execution 3) product quality and 4) customer service. These drivers play into higher margins for DGW i.e. customers are willing to pay more for reliable products as these equipment impact core production functions.

Key Takeaway: After meeting some of DGW's distributors we believe new distributor sign-ups will play a very important role in DGW's growth strategy. DGW has been doing a decent job of adding new products to its portfolio of offerings but it needs to also expand its distributor base at a quick pace; otherwise new product introductions may be under leveraged.

Valuation: At current levels DGW is trading at P/E multiples of ~9.8x and ~9.5x to our FY10 and FY11 estimates. These multiples are well below industry averages of 17.7x and 17.6x. We are comfortable maintaining a $24.00 price target for DGW, which translates into P/E multiples of 17x and 16.5x to our estimates for FY10 and FY11 EPS.

2010-09-13Piper JaffrayDowngradeUnderweight$9.00
2010-08-18Rodman & RenshawReiterationOutperform$30.00

DGW is guiding for revenue of RMB 326 MM ($48.1 MM) for 3Q10. In line with this, we are projecting revenue and GAAP-net income of $47.9 MM and $11.3 MM, with diluted EPS of $0.46. On a Non-GAAP basis, our estimates for net income and EPS are $11.4 MM and $0.46, respectively. For FY10, we are projecting revenue, net income and EPS of $151.2 MM, $35.0 MM, and $1.43. Our estimates for FY11 are $196.2 MM, $45.0 MM, and $1.79 per ADS, respectively.

2010-07-20Rodman & RenshawReiterationOutperform$30.00

We are expecting DGW to report its 2Q10 results around mid-August. We are maintaining our 2Q10 revenue and net income forecast of $40.7 MM and $8.4 MM. Our channel checks indicate healthy demand for DGW’s offerings over the quarter that could potentially lead to a stronger than expected top line. We believe management has been making efforts to conserve expenses but should be expected to continue its TV marketing efforts. Investors will continue to look for tangible indicators for effectiveness of TV advertising efforts on sales but should keep in mind that this is a longer term brand building strategy.

2010-06-17Rodman & RenshawInitiationOutperform$30.00

At current levels DGW is trading at P/E multiples of ~15x and ~12x to our FY10 and FY11 estimates. These multiples are well below industry averages of 24x and 18x. We believe DGW should be trading, at a minimum, in line with the industry given the growth opportunity associated with it. We are comfortable assigning DGW a $30.00 price target, which translates into P/E multiples of 22x and 17x to our estimates for FY10 and FY11 EPS. We believe these are reasonable multiples given that historically water treatment and waste management companies have traded within a range of 8x to 30x P/E multiples.

2009-11-10Piper JaffrayReiterationOverweight$49.00
Waste & Water Treatment

READ: Score Cards Explained
DETAILS: Safety/Risk Model for DGWIY
Current Price:  $0.04
F10k Day (2009-06-24): -99.83%$21.87
2009 Close: -99.90%$35.78
2010 Close: -99.70%$12.77
High (2012-02-17): -96.13%$1.00
Low (2012-05-30): -78.50%$0.18
Exchange: PNK
Market Capitalization: 0.94 mill
Total Shares: 24.33 mill
Float: n/a
Avg Volume: n/a
Last Quarter: 2010-09-30
Revenue (MRQ): 51.52 mill
Net Income (MRQ): 13.66 mill
Op. Cash Flow (MRQ): 10.80 mill
all financial data provided without warranty