Zhongchai Machinery (PINK:EQPI)

Going Private Details

(1) Calculated solely for purposes of determining the filing fee. This amount assumes the acquisition of approximately 100,000 shares of Common Stock, par value $0.001 per share, for $0.56 per share in cash in lieu of issuing fractional shares to holders of less than one share after the proposed reverse stock split.
(2) Determined pursuant to Rule 0-11(b)(1) by multiplying $56,000.00 by .0001161.

In connection with the March 9 2007 private placement, eight of the former shareholders of Usunco pledged a total of 10,140,846 shares of EQPI common stock to secure the following 2007 and 2008 make good targets:
 
The 2007 make good targets require EQPI to achieve after tax net income reported in its annual report on form 10-KSB for the fiscal year ending June 30, 2007 equal to or greater than $2.32 million and earnings before income tax provision and before minority interest reported in its annual report on form 10-KSB for the fiscal year 2007 equal to or greater than $3.2 million. 
 
The 2008 make good targets require EQPI to achieve:

(1) earnings per share reported in its annual report on form 10-KSB for the fiscal year ending June 30, 2008 equal to or greater than $0.343 on a fully diluted basis;

(2) earnings per share before income tax provision and before minority interest for the fiscal year ending June 30, 2008 equal to or greater than $0.446 on a fully diluted basis;

(3) after tax net income reported in its annual report on form 10-KSB for the fiscal year 2008 equal to or greater than $10.0 million;

(4) earnings before income tax provision and before minority interest reported in its annual report on form 10-KSB for the fiscal year 2008 equal to or greater than $13.02 million.
 
If the make good targets are not achieved, the investors will be entitled to receive the shares that were pledged by those eight of the former shareholders of Usunco. The investors will receive 3,042,254 shares in aggregate if the 2007 make good targets are not achieved and 7,098,592 shares in aggregate if the 2008 make good targets are not achieved.

As of September 30, 2010, Zhongchai had current assets equal to $8,714,043, current liabilities equal to $9,455,517 and working capital shortage is about $741,474. Zhongchai believes that it shall have sufficient operating capital for its current operations by increasing current bank loans. Zhongchai believes that it shall have sufficient bank credit to increase current loan level.

As Zhongchai expands its operations and considers additional acquisitions of private companies and divisions or product lines, it may require additional capital for its business development and operations. Zhongchai does not have any specific sources of capital at this time; therefore, it would need to find additional funding for its capitalization needs. Such capital may be in the form of either debt or equity or a combination. To the extent that financing is in the form of debt, it is anticipated that the terms will include various restrictive covenants, affirmative covenants and credit enhancements such as guarantees or security interests. The terms of any proposed financing may not be acceptable to Zhongchai. There is no assurance that funding will be identified or accepted by Zhongchai or, that if offered, it will be concluded.

On October 1, 2010, the company entered into a consulting agreement with Mr. Larry Chin. Pursuant to the agreement, in exchange for the consulting service provided by Mr. Chin, upon the approval of the Board of Directors and the closing of recent fund raising, the Company will grant incentive stock purchase options to Mr. Chin to purchase 300,000 shares of the company’s common stock at an exercise price of $0.50 per share. These options shall vest over thirty-six months with a life of five years.

Consulting for what???????

The Fiscal Year Ended June 30, 2010 Highlights:

Revenue increased by $6,059,882 or 123% to $10,983,800 for the year ended June 30, 2010 compared with $4,923,918 for the year ended June 30, 2009. Revenue for the year ended June 30, 2010 consists of sales of gears and transmission gearboxes in China, for $5,061,608 and $5,922,192, respectively. The increase in gears and gearboxes sales in fiscal 2010 compared to last year was attributed to the Company’s expansion in production capacity and continuous marketing efforts, and taking advantage of the recovery of the domestic market in China for gear and gearbox products as a result of Chinese government’s economic stimulus plan.

Net Income was $1,072,405 in the year ended June 30, 2010 compared with net loss of $1,132,190 in the year ended June 30, 2009. The net loss for fiscal year of 2009 was mainly attributed to the increase in SG&A related to a lawsuit, increase in R&D expenses, and the loss on disposal of IBC. Net profit for the fiscal year of 2010 was mainly attributed to the increase in production and sales.

GeoTeam® Notes:

• EPS for the fourth quarter was $0.03 vs. $(0.01).
  
• Legal expense referenced earlier was $315,000.

Added to the GeoSpecial list on October 14, 2009 @ $0.13

Catalyst: Was selling below book;  Were speculating that the strength in China’s auto industry would carry through to operations.
Peak performance: Reached a high of $0.35 on May 14, 2010
Current Price: $0.27
 
Current road block:  Lack of investor awareness; Shares are quite illiquid;  While revenue has begun to grow rapidly and profitability in its first quarter has been attained for the first time, the raw EPS number has yet to break out to meaningful level. (2010 first quarter EPS was $0.01).

Remains on the GeoSpecial list: still sells below its book value per share of $0.35, despite the fact the company has made operational stride to:

• report a profit
• reduce short-term debt by 35.28% to $1.42 million

Investors will likely require to few more quarters of profitability to ensure that EQPI's positive momentum will stick.

Liquidity seems intact, but door is still open for a money raise:

"As of March 31, 2010, Equicap had current assets equal to $12,249,212, current liabilities equal to $5,480,930 and working capital of $6,768,282. Equicap believes that it has sufficient operating capital for its current operations."

"As Equicap expands its operations and considers additional acquisitions of private companies, divisions or product lines, it may require additional capital for its business development and operations.  The company does not have any specific sources of capital at this time, therefore, it would need to find additional funding for its capitalization needs.  Such capital may be in the form of either debt or equity or a combination." 

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

***Very Important GeoTeam note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

On May 14, 2010 we issued an alert on EQPI. While not fantastic it was nice to see that the company was finally able to post a profitable quarter.  We will keep tracking this story for further improvements.

Excerpt from GeoBargain & Special Update - Performance Laggards Article

Equicap Inc (OTCBB:EQPI)

Although it is experiencing strong revenue gains, Equicap is still losing money.

The decrease in gross margin in this quarter as compared to the same period in the prior fiscal year was attributable mainly to a general decrease in gear prices and the launch of new lower-margin gearbox products. The shift in product mix and development of new products has been implemented by the Company as a strategy to quickly penetrate the market for its products and build sales.

It is important to note that Equicap has significantly reduced its losses. If we include minority interest income, the Company is actually profitable. It will be interesting if EQPI intends to acquire a majority interest in this entity. See original note for further research and caveats on the EQPI story.

As GeoTeam members may have gathered, we are actively seeking companies that are selling under book that may offer hidden value. The returns from these plays have been nothing short of amazing.  China Agritech Inc (NASDAQ:CAGC), Orient Paper Inc (OTC BB:OPAI) and China Gengsheng Minerals (OTC BB:CHGS) are examples of stocks that we mentioned at opportune times.

We constantly stress that investors need to approach these plays with caution. Sometimes, all the due diligence won’t uncover some of the problems that exist behind closed doors.  Furthermore, we unfortunately don’t have the time to interview 50 companies in a timely fashion.  But we are willing to take an immediate chance based on a risk/reward basis, especially if the companies are profitable.  One of the biggest unknowns is the likelihood that these firms will partake in dilutive events in order to rectify liquidity situations—situations that are often the cause for discounted stock prices.  As always, we are eager to receive investor input while performing our due diligence so we can all profit quicker.

Our “book value” list has grown to near 50 stocks, all of which we are tracking. Two that we have added to our portfolios are Equicap Inc (OTC BB:EQPI) and Sino Gas Intl. Holdings (OTC BB:SGAS).  We are coding both of these stocks as special situation plays.

Equicap Due Diligence

Equicap’s book value per share is $0.44.  The GeoTeam is seeking input from investors on this stock.  On the surface EQPI seems to benefit from the stimulus plan.  An interview is needed to confirm this assumption.

Equicap manufactures and distributes gears and gearboxes mainly used in or together with diesel engines for industrial and agricultural machinery, fork lifts, excavators, construction equipment, tractors, pumps and other machinery.  The Company also had served the auto industry but recently sold this business to focus on its core more substantial industrial and agricultural segment.

From a net income perspective, the Company’s position is not overly attractive.  However, a more thorough inspection of its filings reveals that a good deal of the losses was the result of one time non-cash charges and legal expenses:

Fiscal Year 2009 vs. 2008 Financial Snapshot

Equicap Stats

As far as we can tell the financial statements are clean.

• No long term debt
• Current ratio is 2.3:1
• Cash per share is $0.14
• In 2009 The company turned cash flow positive: $1.7 million
• At June 30, 2009, Equicap had working capital of $6,202,353 and believes that it has sufficient operating capital for its current operations.

For a final analysis, investors would need to at a minimum consider the following:

• Even after adding back unusual charges, Equicap is still losing money.  Furthermore, 2009 losses exceed 2008 losses. We ultimately need to ascertain if the company will turn a profit.
• It seems that the Company has not issued a news release since August 2008.
• In 2008, for the gear segment, two customers accounted for 86% of sales.
• “As the demand for gear and gearbox products has grown in China, the competition within that market has also grown and has become severe.  There are many local manufacturers making gears and gearboxes, and most of them are willing to compete for customers and market share through low pricing. There are also many global manufacturers interested in the large Chinese market who are entering the market and selling gear and gearbox products having better quality and design.”  (Source, 2009 10K)

• The company had some legal issues with certain investors.  In July 2009, it settled these issues through buying back stock from these investors.
• 2007 and 2008 financial targets were not reached.
• Short term bank loans: $2 million.
• Need to determine capital needs.
  

The GeoTeam is requesting an interview.

Sino Gas Due Diligence

Sino Gas’s book value per share is $1.90. (Fully diluted Book value: $1.68, taking into account about 9 million shares from dilutive instruments that have exercise prices starting at prices above $3).  The GeoTeam is seeking input from investors on this stock as well. 

Sino Gas is a leading developer of natural gas distribution systems in small and medium sized cities in China, as well as a distributor of natural gas to residential, commercial and industrial customers in China.

We have been tracking SGAS for a while and is a stock that has been on a tear over last few days, moving about 75% to the upside since October 8, 2009.

We haven’t really delved into the story but thought savvy investors might want to take a closer look at it.  Per press releases and SEC filings, the company is profitable and seems bullish about being able to resume growth during the recovery from the global recession.

“The Chinese government has adopted new policies to address the slowdown of the real estate market, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. The Chinese government has also decided to inject stimulus package to boost the overall economy, including allocation of funds for mass housing projects. We have seen signs of recovery of the real estate market in China in recent months.”  (Source: 2009 June 10Q)

Sino Gas Stats

• Current Ratio is less than 1
• Account payables are higher than its accounts receivable and cash positions.
• As of  the most recent quarter net margins are noticeably thin at 6%
  

The GeoTeam will request an interview and provide more details if warranted.

Disclosure: Long EQPI, SGAS

On July 29, 2009, in connection with the settlement of litigation brought on November 6, 2008, by various shareholders of the Company against the Company and Peter Wang, the Chief Executive Officer of the Company, and vFinance Investment, Inc., Ruihua International Limited, acquired 17,741,304 shares of Common Stock of the Company. These shares represent 62.98% of the issued and outstanding shares of the Company. Ruihua does not have any agreements with the Company in respect of the shares, including voting agreements, lock up agreements, and registration rights agreements or any special rights to have representation on the board of directors, other than through its right to vote its shares and make nominations in accordance with the by-laws of the Company.

Source: SEC Form 8K (August 4, 2009)

The global economic issues that are limiting capital and otherwise affecting the economies of North America and Europe may have an effect on the Company and its business plan. As long as there is this dislocation in the global economy, the portion of the automotive industry in which the Company operates will be subject to its stresses which may reduce the demand for the Company’s products in North America. Such dislocation may also require the Company to focus more marketing and business attention on its markets in China. Although the Chinese economy is still considered to be growing, albeit at slower rates than before, there is no assurance that its economy and the engine market in which the Company operates will not experience slowdown or other dislocation. Furthermore, new capital may be limited or unobtainable, or if obtainable at prices and terms that will not be acceptable to the Company or permit the Company to implement its business plan and be profitable. Therefore, investors must evaluate an investment in the Company and its success in light of the larger global economy, the Chinese and North American markets for its products and the impact it will have on the Company’s ability to implement its business plan, and ultimately the Company’s ability to survive the economic dislocations that have occurred and are continuing to occur.

Source: SEC Form 10Q (For the quarterly period ended March 31, 2009, page 14)