Duoyuan Global Water up 140% since Summer IPO and Growth Continues

• Comments
• Print
• Email

This is a good time to review DGW because the company advises that its third quarter results, reported recently, reflect their strongest period, whereas the 4^th quarter is normally its weakest period. The third quarter results were good. Therefore, is it time to be skeptical and point out the risks versus rewards potential, especially in line of the stock is up 140% since its IPO this summer? Yes, this discussion is appropriate at this time.

 

Negative risks: include the following. The company is considered small relative to other investment grade companies. 2008 sales were $86.9 million. The company has a short period of being a public company (IPO this past summer) and there is a lack of data to show how the company reacted in previous environments. The company is domiciled in China and is subject to different cultural, business and legal standards that may be difficult to discern. 

 

Positive Forces include the following. The balance sheet is very strong. After adjusting current assets to  include only cash ($137 million) and reducing this cash more to reflect $60 million of capital spending (for manufacturing facilities, new products and laboratory as announced in its IPO 2009 registration) and dividing this adjusted cash position of $77 million by all the liabilities ($21 million)  this ratio is 3.6 which is very high. The company has no long term debt. Sales are growing at much faster rate than similar companies in developed economies. 2007 and 2008 revenue growth was 55% and 49%. Let's consider these as "fattening up data for the 2009 IPO). But if growth is in the 25% range, then revenues could double in almost 4 years. The government is active in promoting better water systems because China has bad data for water standards. As a result, higher investment in the water industry in China, and higher water prices to the consumer and industry  make the fundamental outlook refreshing.

 

In conclusion, this is a good growth story and new positions can be added for investors with a 2-3 year time horizon.

 

 

(Disclosure: Thomas H. Wilkins, CFA owns shares of Duoyuan Global Water.)