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Monday, May 28, 2007

Asia Electrical Power International (AEPW)

We design, manufacture and market electrical power systems designed to monitor and control the flow of electrical energy and to provide protection to motors, transformers and other electrically powered equipment.
The 10-K for 2006 has an interesting table on page 19. Good idea.

Only 18% gross margins in 2006, but that's up from 14% in 2005.
6% net margins in 2006, up from 4.2% in 2005.

Reasonably strong balance sheet. More than 1/4 of assets are PP&E.
More than half equity.

Revenues increased 18% in 2006.

Officers and directors own 57% of the company. CEO owns 47% but has controlling interest via the preferred shares (see below).

51 million shares on April 16, 2007. The weighted ave shares is only 26.3 million for the year 2006. The Q1 results show a weighted ave share count of 33 million.

According to the equity statement on page 30 (F4) of the 10-K, they started 2006 with 24 million shares and had a 2-for-1 stock split during the year. They also issued another 3 million shares. Why weren't the share counts and per-share numbers adjusted retroactively to adjust for the stock split like other companies?

There's also 5 million preferred shares outstanding, issued to the CEO for compensation along with 2.5 million shares of common (another 0.5 went to the CFO). No options outstanding at the end of 2006.

Each preferred share has 100 votes (common has 1), and not publicly traded.

They also quietly split the stock in the amendments to the bylaws.
(a) the number of authorized common stock, par value $0.001, was increased on a one for two basis, so that the number was increased from 75,000,000 to 150,000,000. Accordingly, the number of issued common stock increased from 24,000,000 to 48,000,000
Accordingly? I could see it the other way around, but it doesn't make sense to me to say "Oh, we just increased the authorized number of shares so, what the hell, we might as well split the stock."

I've been trying to track this down to explain why the diluted share count shows up as such a low number. It just makes no sense and I can't find an explanation. The 10-K shows a weighted average diluted share count of 26,250,000. The Q1 10-Q shows a the weighted average diluted share count of 33,000,000 for the quarter despite the fact that there were 51 million shares at the start and end of the period and apparently no changes in between.

(51 + 51) / 2 = 33 ?
Am I misunderstanding something?

I sent an e-mail to IR and I'm dropping this for the time being.

UPDATE next day:
IR got back to me on my question. Here's what they said:
The 33,000,000 weighted average number of shares was calculated as follows:

24,000,000 shares originally issued and outstanding - these shares have been
outstanding for more than 12 months
24,000,000 stock split made December 2006 - therefore as of March 31, 2007,
these shares were 4 months outstanding
3,000,000 shares issued to Directors December 2006 - therefore as of March
31, 2007, these shares were 4 months outstanding

The calculation is:

24,000,0000 original shares * 12/12 = 24,000,000
24,000,000 stock split * 4months/12 months = 8,000,000
3,000,000 shares to directors * 4months/12 months= 1,000,000
And here's my response:

According to Wiley GAAP 2007, in the section on earnings per share,
"The number of shares outstanding determined by relating (1) the portion of time within a reporting period that a particular number of shares of a certain security has been outstanding to (2) the total time in that period. For example, if 100 shares of a certain security were outstanding during the first quarter of a fiscal year and 300 shares were outstanding during the balance of the year, the weighted-average number of outstanding shares would be 250 [(100 X 1/4) + (300 X 3/4)]. In computing DEPS, equivalent common shares are considered for all dilutive potential common shares." [emphasis mine]

Note that in your calculation below, during the reporting period in question, the first quarter of 2007, all 51 million shares existed for the entire period. It seems to me that you're using a sliding 12 month period when reporting the weighted average shares for the one quarter.

Not only that, but this is a stock split, not an infusion of capital. If I understand correctly, FAS 128 says that stock splits of this nature are to be given recognition retroactively.

I'm not an accountant and I realize this stuff requires a great deal of experience and knowledge. That's why I have an accountant (it took me long enough to realize that I needed one). I'll see if I can get his take on this stuff. We were just going over the same issue for tax purposes a few weeks ago (the weighted average issue, not the stock split).

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