China Water & Drinks: Getting Diluted

China Water & Drinks, Inc. (CWDK.OB) is, on the surface, a great looking company. A leading producer and distributor of bottled water in China, its own branded water, Darcunk, was recently named one of the ''Top Ten Quality Brands in the Bottled Water Industry'' by the influential Nationwide Consumer Survey. It is profitable (returning net income of $6.1m for the first 6 months of 2007), with good margins (net of 32.5%), and recently applied to be listed on the AMEX. It has made good acquisitions to integrate its operations.

So why is its share price at a 52-week low? The answer is simple - dilution. In May 2007, the company issued 4,477,612 of preferred stock, each convertible into 5 shares of CWDK's common stock. The maximum number of new shares to be issued on conversion is 22.4m. The company noted that as of 7/12/2007, all preferred stock holders have indeed converted. Compare that to the company's weighted average shares outstanding of 20.1m (as at 6/30/07). But wait, the company issued 59.9m shares for the reverse acquisition of Gain Dynasty (also in May) so its actual shares outstanding is 70.0m (as of 2Q 2007). Therefore, the number of shares currently stands at 92.4m.

As such, the company's historical EPS numbers have now to be relooked at:

• Pre-Dilution EPS for 6 months ending: (2006) 0.24 (2007) 0.28
• Post-Dilution EPS for 6 months ending: (2006) 0.24 (2007) 0.07*

* Full-diluted based on 92.4m shares outstanding.

At the current share price of $7.00, assuming a FY2007 EPS of, say, $0.14, this is a forward P/E of 50.0, which is pretty rich. Even if we assumed a net income increase of 30% for the second half of the year, the potential EPS would only be $0.16, yielding a P/E of 43.8. The company's net income will have to increase by 243% for the rest of the year for it to even match its 6-month results from 2006. See the problem? I think this is a stock with huge downside potential, and if I were long (which I'm not), I would weigh my options very carefully.

Disclosure: none

Comments

[jimfromchina:]

Good !

2007 Nov 10 04:04 PM

[#8:]

Better check your math ..... From Q2 EARNINGS REPORT:

Revenue/earnings growth is dependent upon acquisitions and dilution at this early stage but given the dilution the growth will be relevant with revs in 1st half 07' of $18.7 million and 2nd half projected to be $50 million and net income of $5.6 million (1st half) vs $13.4 million .... that's about 250-275% growth from one half to the next! Outstanding shares have grown from 20 to 94 million or about 375% .... you're right about the dilution being greater than the rev/inc growth but given time to consolidate operations the earnings should improve with efficiency ....

>> For full year 2007, the Company expects revenues of approximately $68.0 million, net income of $19.0 million, and earnings per diluted share of $0.18. For 2008, the Company expects revenues to be about $105.0 million, net income of approximately $30.0 million and earnings per diluted share of $0.30. <<

They are projecting fully diluted earnings for 07' of $0.18 vs your estimate of $0.07 and 08' earnings of $0.30 for 65-70% YOY earnings growth ..... based on 08' earnings of $0.30 at 70% growth (with no add'l acq or dilution) one could project a share price of $21 which is quite a discount to the closing price of $6.20 today .... Odd, No?

2007 Nov 13 07:52 PM

[#8:]

Edit: See that your $.07 was for 6 mos not full year and you estimated 07' earnings at $0.14 vs company estimate of $0.18 .... none the less the anticipated growth does exceed your rosiest of scenarios and the current p/e is 35 and looking out to 08' the current p/e is 21.

2007 Nov 13 08:07 PM

[#8:]

Better check your math ..... From Q2 EARNINGS REPORT:

Revenue/earnings growth is dependent upon acquisitions and dilution at this early stage but given the dilution the growth will be relevant with revs in 1st half 07' of $18.7 million and 2nd half projected to be $50 million and net income of $5.6 million (1st half) vs $13.4 million .... that's about 250-275% growth from one half to the next! Outstanding shares have grown from 20 to 94 million or about 375% .... you're right about the dilution being greater than the rev/inc growth but given time to consolidate operations the earnings should improve with efficiency ....

>> For full year 2007, the Company expects revenues of approximately $68.0 million, net income of $19.0 million, and earnings per diluted share of $0.18. For 2008, the Company expects revenues to be about $105.0 million, net income of approximately $30.0 million and earnings per diluted share of $0.30. <<

They are projecting fully diluted earnings for 07' of $0.18 vs your estimate of $0.07 and 08' earnings of $0.30 for 65-70% YOY earnings growth ..... based on 08' earnings of $0.30 at 70% growth (with no add'l acq or dilution) one could project a share price of $21 which is quite a discount to the closing price of $6.20 today .... Odd, No?

2007 Nov 13 07:52 PM