Bought a 2% position in Duoyuan Global Water, ticker DGW, at $13.79.
This purchase is primarily a value play with strong support against the stock moving lower due to both its balance sheet and cash flow trends. Yet, the company should benefit from healthy secular growth trends within the water industry and a rising yuan.
Reasons for buying:
(1) $209 million of net cash on balance sheet, relative to a market cap of about $340 million.
(2) Guided sequential revenue growth in 3Q of 10%, or almost 30% y/y, in constant currency.
(3) Consistently CFO and FCF positive, reporting $18.6 million of FCF in 2009 (~13% unlevered FCF yield).
(4) Management appears active in pulling in new technologies to address China's water issues, improving competitiveness of the company within China.
(5) Benefit from a rise in the Yuan relative to the dollars for reporting purposes.
(6) Company positioned in the attractive clean water niche in China.
Duoyuan Global Water Inc. is a China-based domestic water treatment equipment supplier. Duoyuan's product offerings address several steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis. Duoyuan offers a comprehensive set of complementary products across three product categories: water conservation, including circulating water treatment; water purification; and water reuse treatment, including wastewater treatment. The Company has a local distribution network, which provides proximity to end-user customers and responsiveness to local market demand.
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