DGW-China Water Play

As risk aversion among investors subsides, growth stocks may be in fashion. Duoyuan Global Water Inc. (DGW) could be one of the niche plays amidst increased government spending and regulations on the standard of water in China.

The company reported a earnings result that epitomizes a growth company for the third quarter 2009

• Revenue increased 30.9% to RMB255.2 million ($37.4 million) from RMB195.0 million in the prior year period.
• Gross margin increased to 49.5% from 46.8% in the prior year period.
• Operating income increased 31.1% to RMB95.7 million ($14.0 million) from RMB73.0 million in the prior year period.
• Net income increased 23.1% to RMB73.4 million ($10.8 million) from RMB59.6 million in the comparable period of 2008.
• Diluted earnings per ADS was $0.49. Each ADS represents two of the Company's ordinary shares.

While all three segments of the business grew fast , the wastewater segment outpaced circulating water treatment and water purification.

• Revenue from wastewater treatment equipment increased 42.3%, to RMB100.1 million ($14.7 million) in the third quarter of 2009 compared to RMB70.3 million in the third quarter of 2008, due to increased demand for Duoyuan's belt filter press machines, sludge screw, online testing equipment, ultraviolet shelving disinfection systems and microporous aerators.
• Revenue from circulating water treatment increased by 20.0% to RMB96.1 million ($14.1 million) in the third quarter of 2009 compared to RMB80.1 million in the third quarter of 2008, driven by increased demand for the Company's new fully automatic filters, electronic water conditioners and circulating water central processors.
• Revenue from water purification equipment increased by 28.4% to RMB55.0 million ($8.1 million) in the third quarter of 2009 compared to RMB42.8 million in the prior year period, as the Company's newly introduced models for central water purifiers, industry pure water equipment and ultraviolet water purifiers continued to be well-received by the marketplace.

While the growth is good, Chinese water market is a highly fragmented one. DGW carries only about 1% of the market share, facing large rivals such as Zhejiang Omex Environmental Engineering, is a subsidiary of Dow Chemical, General Electric and Ashland that are also players in the Chinese market.

As a strategic plan, I would expect the company to acquire smaller companies to consolidate long-term growth. The company has cash and bank deposits of RMB937.2 million ($137.3 million), compared to RMB198.5 million as of December 31, 2008, mostly reflecting net proceeds from the Company's initial public offering.

Until the company gains reasonably larger market share, I would view this as a tactical speculative play that works well in a market that is less risk averse rather than a long-term growth value play.

You may also be interested in the following articles:
http://cocacolabuffet.blogspot.com/2009/10/tap-into-chinese-water.html
http://cocacolabuffet.blogspot.com/2009/10/no-drought-for-trit.html


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Disclosure: The blog author does not have positions of DGW as of November 9, 2009