China Water & Drinks Sees Rapid Growth Toward Goal of Top Bottled Water Producer for China Market

Last week, Joe Chan, CFO of China Water & Drinks Inc., presented his company's outlook for the next couple of years at a dinner meeting in Manhattan.

The company (CWDK, OTC BB), with 2006 revenue of $36 million and net income of $8.8 million, is looking for sharp growth through 2009 -- with projected revenues of $69 million, $105 million and $165 million for 2007, 2008 and 2009, respectively.

CWDK, with headquarters in Shenzhen City, Guangdong Province, produces bottled water for the China market. Right now, it is a small player in the market (4% market share at the end of 2006), but according to the presentation, has as its goal to be the largest in the industry in China.

Chan noted the major opportunity in bottled water in China, with an average annual growth from 1994 to 2005 of 38% -- from 300 million liters in 1994 to 14 billion liters in 2005. Even with that growth, bottled water consumption in China is only 9.5 liters per capita, vs. 25.4 liters globally, nearly 100 liters in the U.S. and nearly 200 liters in Italy. Thus, there is tremendous room for growth.

Sharp Growth in Chinese Middle Class

The potentially rapid growth will in large part be due to the sharp growth in China's middle class -- with greater disposable income, Chan said, citing McKinsey statistics.

The company, which started in 1996 (incorporated in Nevada), is banking on an important relationship with Coca Cola. It was the first bottled water supplier for Coke, and is now the largest bottled water supplier to that company in China. It also has OEM relationshps with Uni-President (Taiwan) and JianLiBao (China).

CWDK also produces bottled water under the Darcunk brand name, as well as producing private label for Sands and Macau Casino.

Rapid Capacity Expansion

Among recent actions, China Water acquired Nanning Taoda Drink Co. Ltd., Aixin Bottled Water Co., and Hutton Holdings Corp. (HTTH.OB), indicating a rapidly expanding capacity. It is also building a new production plant in Changchun City (expected completion November 2007); in Guangzhou City (January 2008) and Beijing (January 2008).

Production volume was 650 million liters of purified water in 2006. As of September 2007, the production capacity was up by 37% to 890 million liters. In addition, the company projects at least a 50% increase in capacity each year for the coming couple of years. It has an "aggressive action plan" going forward, with plans to acquire 12 plants at the beginning of 2008.

It marketing strategy includes: growing with Coke (Olympic sponsor, quick expansion prior to the Olympics); exclusive supplier to the Fifth China Changchun International Auto Expo (one of the top three auto shows in China); and over 3600 distributors and retailers in 11 provinces.

With all this planned growth, China Water & Drinks can be expected to increase its market share over the next several years.

CWDK had a share price of $9.00 as of September 25, down from $10.00 at the previous close. It has about 94 million shares outstanding. The company projects EPS of $0.21 this year and $0.33 in 2008.