China Valves Tech (NASDAQ:CVVT)

Rodman and Renshaw on CVVT                                5/11/2011

1Q11 Results Below Expectations; Lowering Price Target to $13

1Q11 Results Missed Expectations

China Valves Technologies (“China Valves”, Ticker: CVVT, Market Outperform) reported its 1Q11 financial results that missed our expectations. Revenue in the quarter came in at $42.0 million, up 56.6% YoY, but a touch shy of our estimate of $42.6 million. Gross profit reached $17.5 million, up 26.3% YoY, but also a bit light compared to our expectation of $17.7 million. Non-GAAP net income came in at $6.7 million, or $0.19 per diluted share, clearly missing our respective estimates of $8.0 million and $0.23.

At the end of the quarter, China Valves had $24.2 million in cash and cash equivalents, $105.3 million in working capital, and a current ratio of 3.4. Q1 accounts receivable were $96.0 million and DSO were 193. The company had no long-term debt and its shareholders’ equity stood at $206.1 million.

The company reiterated its previous financial guidance for 2011, in which it expected to achieve 25%-28% of YoY sales growth and gross margin of 41%-42% “for the next few quarters.”

Our Take on the Quarter

In our opinion, after several quarters of outstanding growth, much of it coming from acquisitions, the company has entered into a period of digestion and consolidation, during which period macro influence will become more pronounced, management execution will take on greater significance, and blockbuster financial performance will be harder to come by. This is further compounded by difficulties in the U.S. capital market with shareholder lawsuits and pressure to improve both corporate governance and accounting standard further distracting and burdening the management. Thus we are now adopting a somewhat more conservative view on the company’s near to medium term financial performance. In this regard, we do not consider the company’s Q1 performance as a major disappointment. Revenue was quite close to our estimate, and gross margin of 41.7% represented a nice bounce back from a dismal 35.3% in 4Q10. The high accounts receivable and DSO are a major concern, however. Management cited Chinese government’s tightening credit policy and a high number of large state-owned enterprise clients who are accustomed to delaying payments as major reasons for this problem. While we can accept this explanation, we certainly want to see reductions in these numbers, particularly in the current market environment, in which high accounts receivable numbers are often viewed with suspicion. We believe the ability of the management to achieve its stated goal of limiting DSO to 140-145 will be a major testament to China Valves management’s competency.


Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on CVVT                                              3/16/2011

4Q10 Earnings Results: Here Comes Margin Pressure

4Q10 Results

After four consecutive above-expectation quarters, China Valves Technologies (“China Valves”, Ticker: CVVT, Market Outperform) reported 4Q10 financial results that clearly missed market’s bottom-line expectation despite a strong sales performance. Revenue for the quarter reached $52.3 million, up 106.3% YoY and easily beating Street consensus of $44.0 million and our Street-high estimate of $44.4 million. Gross profit, however, actually came in below expectations. At $18.4 million, it missed our estimate of $20.6 million. Non-GAAP net income came in at $4.3 million, easily missing both the company’s own guidance of $11 million and our estimate of $11.7 million. Actual diluted EPS was $0.12, falling significantly short of our $0.33 expectation and $0.31 Street consensus. For full year 2010, the company realized $40.3 million of non-GAAP net income and $1.16 non-GAAP diluted EPS, satisfying its existing make good provision of $34 million after tax net income and $1.082 non-GAAP EPS.

As of December 31, 2010, China Valves had $25.8 million of cash and cash equivalents, $86.2 million of working capital, and a current ratio of 2.7. The company had no long-term debt and its shareholders’ equity was $188.6 million.

Updated 2011 Guidance

China Valves provided an updated financial outlook for 2011. The company now expects to achieve 25%-28% of YoY sales growth in 2011 (excluding any potential acquisitions) and gross margin of 41%-42% “for the next few quarters.” Management also indicated during the earnings conference call that it anticipated a full year 2011 net margin between 18% and 21%. The new guidance was by and large less optimistic compared to the company’s previous stance.

Discussions

Greater margin pressure The main culprits of the much weaker-than-expected bottom-line performance were write-downs, escalating operating expenses, and rising costs. Gross margin was hit hard by $0.7 million of inventory allowance, $1.9 million of price adjustment loss, and $1.3 million of impairment loss. Actual G&A and selling expenses during the quarter were $ 6.5 million and $3.8 million, much higher than our respective estimates of $2.7 million and $2.2 million as well as the company’s historical norms. While we are cognizant of the current inflationary environment in China and management’s assertion that some of the charges and write-downs were more or less one-time events, we do believe the company is facing increasing margin pressure and would like to see greater cost-management discipline.

Growth story unchanged Despite the subpar quarterly performance, we believe China Valves remains a compelling growth story. The fear related to the Japanese nuclear crisis notwithstanding, we continue to believe the company enjoys a viable and growing market, both

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on CVVT                 01/18/2011

Maintain Market Outperform Rating after the Company’s Response to Allegations 

China Valves Technology (“China Valves”, Ticker: CVVT, Market Outperform) responded to some internet allegations of impropriety mostly related to some of its past acquisitions by first releasing a written rebuttal last Friday and then hosting a conference call this morning.

Company response and explanations 

Among other things, China Valves categorically denied allegations that its acquisition of Changsha Able Delight was an improper related party transaction and it might have inflated the financial performance of the unit since the acquisition. The company provided detailed explanations of the indirect purchase of the Changsha unit from Watts Water Technologies (WTS, Not Rated) and offered supporting arguments on its financial projections of the Changsha unit. It also maintained that its Pudong Hanwai acquisition, especially with regard to its ownership structure, was proper. The company indicated that it had $28.9 million of cash at the end of December, and that it was not “running short of cash.” It also continued to indicate that it would retain a Big 4 auditor after the current reporting period.

Our view 

We are by and large comfortable with the company’s response. The company’s explanation on the Able Delight acquisition appears reasonable (especially when considering the unit’s state of operation immediately prior to the acquisition, the large back order, and the business reshuffling since the acquisition), and the Hanwei purchase also does not appear to be self-dealing. In our opinion, while there are certainly areas that the company can and should improve upon, particularly with regard to internal control and timely disclosure, its acquisitions of Able Delight, Yangzhou Rock, and Hanwei were legit and made business sense for the company. In fact, based on our due diligence and channel check, we believe China Valves’ underlying business is not only real, but also experiencing robust growth.

Looking forward, we believe retaining the independent auditing service of a Big 4 firm will be critical for the company to remove any significant lingering doubt on the company. We recognize that the business environment in China is vastly different from that of the U.S, which might make many corporate practices (such as timely disclosure) that are common in the U.S. somewhat more difficult for Chinese companies. However, as a U.S. publically traded company, it is not only China Valves’ obligation but also its own interest to further improve its internal control, provide timely disclosure, and engage in more independent appraisals and obtain fairness of opinions on acquisitions. We hope this current turbulence will serve as a lesson for the company on its way to becoming a dominant industrial valve manufacturer in China.


Notice Regarding Privacy and Confidentiality: 

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on CVVT                                  12/23/2010

Encouraged by the Recent Series of Positive Corporate Developments 

China Valves Technology (“China Valves”, Ticker: CVVT, Market Outperform) announced a series of corporate developments over the past 3 weeks. While we believe a major motivation behind such an effort was to stave off an increase in short interests, we are nevertheless encouraged by the company’s proactive and shareholder friendly stance. In our opinion, these developments underscore China Valves’ strong fundamentals, and we continue to view the company as a solid growth story. In this regard, we are reiterating our Market Outperform rating on the shares of China Valves. In fact, within our coverage universe, it is our top pick for 2011.

New CFO announced: China Valves appointed Mr. Gang Wei as its new CFO, effective December 16, 2010. Judging from his professional background, we believe Mr. Wei is well qualified for the position. Before joining the company, he held multiple senior management positions in both state-owned enterprises and international companies, with extensive experience in financial reporting, budgeting, forecasting, and internal control. Mr. Wei holds a doctorate degree in Finance from Cardiff Business School of Cardiff University and a master’s degree in accounting from Shanghai University of Finance and Economics. He also holds a Chinese CPA certificate, an ACCA certificate, a CFA designation, and a Hong Kong CPA certificate. We expect the appointment of Mr. Wei will further strengthen China Valves’ corporate management, especially in improving its financial management, internal control, as well as the company’s communication with the investment community. We hope the company will be able to retain the service of Mr. Renrui Tang, the acting CFO prior to the arrival of Mr. Wei. As a company veteran, Mr. Tang provides valuable experience and expertise in the company’s financial and accounting management and serves an integral role on China Valves’ senior management team.

Auditor issue: In light of the problems that the company’s current auditor, Frazer Frost LLP, is facing for its work on some other Chinese companies, it has become almost a necessity for China Valves to address its auditor issue. During a well-attended analyst day held on December 10, the company indicated that it had extensive discussions with major international auditing firms with regard to a possible auditor upgrade. Considering the year-end timing, the company announced that it would retain its current auditor, for its 2010 annual report. However, it intended to have a top 5 auditing firm to unofficially “joint” audit its year end results, thus providing a smoother transition when the company officially changes auditors next year. We can understand and accept this approach. However, in light of December 20 settlement between the SEC and Moore Stephens Wurth Frazer & Torbet that effectively barred the auditor from accepting any new Chinese client, we would not be surprised if China Valves were to take on an even more aggressive approach in the timing of its auditor upgrade in order to avoid further “guilty by association.”


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.

Rodman & Renshaw on CVVT

3Q10 results beat estimates again
Similar to the previous quarter, China Valves’ 3Q10 earnings were well above our and Street expectations. Net revenue for the quarter was $55.3 million, much higher than our expectation of $49.1 million and Street consensus of $49.3 million. Non-GAAP net income was $15.6 million, far above our Street-high expectation of $13.2 million and Street consensus of $12.5 million. Non-GAAP EPS for the quarter was $0.44, also easily beating our Street-high estimate of $0.38 and $0.36 Street consensus. 

2010 guidance increased
The company also provided a financial outlook update for the remainder of 2010. In light of the RMB500 million ($73 million) backlog at the end of September, China Valves now expects to realize RMB300 million ($44 million) of sales and $11 million of net income in 4Q10. As a result, the company increased its 2010 net income guidance to $47 million from the previous $40 million. 

Adjusting 2010 and 2011 projections
We are adjusting our financial projections for both 2010 and 2011 based on the 3Q10 performance and company’s updated guidance. We now estimate that China Valves will generate net revenues of $175.7 million for 2010 and $226.8 million for 2011, representing a 2008-2011 revenue CAGR of 50.5%. We estimate non-GAAP net income will reach $47.8 million in 2010 and $58.3 million in 2011, representing a CAGR of 75.7% between 2008 and 2011. These figures correspond to respective non-GAAP diluted EPS of $1.37 and $1.64 for 2010 and 2011, and three-year EPS CAGR of 91.3%. 

Reiterating Market Outperform rating and price target of $21
We are reiterating our Market Outperform rating and price target of $21 on the shares of China Valves. In our opinion, as the largest industrial valve manufacturer in China, China Valves has one of the strongest business fundamentals in our coverage universe, and the stock remains our top pick. Our price target is now based on the shares trading at 13x our 2011 EPS estimate of $1.64, corresponding to a PEG ratio of 0.6. The 13x multiple represents 21% discount to the 15.7x average 2011 P/E ratio of the company’s 10 international valve manufacturer peers currently trading on U.S. stock exchanges. With its strong state of operation and growth potential, we believe the company justifies such a valuation. 

Risks
Major risks to our rating and price target include macroeconomic risks, competition from both domestic and foreign competitors, business execution risks, fluctuation of raw material prices, and political and regulatory risks related to operating in China.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on China Valves Tech

The share price of China Valves Technology ("China Valves",Ticker: CVVT, Market Outperform) has retreated by more than 30% since the beginning of August, punctuated by the 9% drop earlier today due to some market commentaries. In our opinion, the business fundamentals of China Valves remain strong and the stock remains one of our top picks. We believe the share price weakness should only create more attractive entry levels for long term investors. 

Based on our available information on the Chinese valve industry, China Valves is already the largest player in this space that includes both state-owned and private enterprises. Its acquisitions of Yangzhou Rock, Able Delight, Shanghai Hanwei, and TaiDe have made the company a truly national player with industry leading production capacity and technology (please see Exhibit 1 in this report for acquisition summary). Among its many industry-leading achievements, the company produced China’s first high-pressure large diameter oil pipeline valves and first 600MW power station steam gate valves, and is still the country’s sole designer of 1000MW power station steam gate valves and the sole manufacturer of China’s largest butterfly valves with diameter of 5,500mm. We believe the company will continue to grow and prosper in the rapidly expanding Chinese industrial valve market.

We view China Valves’ management as one of the stronger teams among U.S-listed Chinese small cap companies. The Chairman and founder of the company, Mr. Siping Fang, is the president of the Chinese Valve Industry Association and brings more than 20 years of industry experience. The company’s General Manager (and de facto CEO), Mr. Jianbao Wang, is a professional manager, and enjoys substantial managerial autonomy – a rarity among small cap Chinese companies, in which outsiders (not family members) typically have no core decision making power. We believe this arrangement speaks volumes about the company and its chairman’s vision and aspirations. The company’s current acting CFO, Mr. Renrui Tang, is a veteran of the company, having spent more than 15 years with China Valves. While Mr. Tang lacks English language skills, his accounting competency and industry knowledge more than compensates such a weakness. And the fine English skills of Mr. Wang and other managers at the company should prove sufficient when communicating with the investment community.

We would also like to highlight the fact that the company, as of the end of last quarter, had $6.8 million of net cash (excluding restricted cash), and has been generating positive free cash flow since the beginning of 2009. In addition, we expect the company will continue to enjoy robust sales and profit growth in the foreseeable future. Trading at less than 5x our expected 2011 EPS, we believe the valuation is compelling. Therefore, we reiterate our Market Outperform rating and $21 price target on the shares of China Valves. We believe the current market pessimism on Chinese small cap companies creates more attractive entry points for investors with a long term horizon. We believe when the dusts settle, strong companies with sound business fundamentals will not only survive, but also prosper. And we are confident that China Valves is such a company.

Notice Regarding Privacy and Confidentiality:  

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw Update:

2Q10 results blew away estimates. China Valves announced its 2Q10 earnings that were well above our and Street expectations. Net revenue for the quarter was $49.3 million, much higher than our expectation of $40.4 million and Street consensus of $39.7 million. Non-GAAP net income was $13.5 million, well above our expectation of $10.6 million and Street consensus of $10.7 million. Non-GAAP EPS for the quarter was $0.39, also easily beating our (and Street consensus) estimate of $0.31. The company maintained its previous net income guidance of $40 million for 2010. 

A major reason for the strong performance was revenue contribution of $20.5 million from the three recently acquired subsidiaries: Yangzhou Rock, Able Delight, and Shanghai Hanwei. Hanwei alone contributed $8.6 million of revenue for the quarter. Excluding the contribution from acquisitions, the revenue grew at 15.6% YoY. Gross margin for the quarter was 46.7%, below our estimate of 50.5%, largely pulled down by the three new acquisitions that still need to improve production efficiency through raw material waste reduction. Actual expense items were overall mostly in-line with expectations with G&A expenses of $3.0 million, selling expenses of $2.8 million, and R&D expenses of $80,729. Non-GAAP net income margin was 27.4%, slightly higher than our forecast of $26.2%.

We are certainly encouraged by this earnings report. We had anticipated a blow-out Q1 performance. Due to later-than-expected closing of the Hanwei acquisition (dragged to the beginning of April from the end of March as originally planned), the positive surprise was effectively delayed to 2Q10. The three acquisitions, in our opinion, should provide significant upside to the company’s top- and bottom-lines in the coming quarters. Hanwei, in particular, also brings sophisticated patented technologies and potentially higher profit margins. We believe China Valves’ operations are right on track, and continue to expect solid Q3 and Q4 results, especially in light of the announced $87.9 million backlog to be realized as revenue by the end of 2010. In terms of macro environment, while there are concerns regarding the Chinese economic slowdown in general and the end of the RMB4 trillion stimulus package in particular, we believe the market for China Valves is sufficiently large. Thus we do not expect any material near to medium-term macro-induced weakness for the company. 

Adjusting 2010 and 2011 projections In light of the quarterly performance, we are adjusting our financial projections for both 2010 and 2011. We now estimate that China Valves will generate net revenues of $166.1 million for 2010 and $204.9 million for 2011, representing a 2008-2011 revenue CAGR of 45.9%. We believe management’s $40 million 2010 net income guidance is conservative, and we now estimate net income (non-GAAP) will reach $43.4 million in 2010 and $53.8 million in 2011, representing a CAGR of 71.0% between 2008 and 2011. These figures correspond to respective diluted EPS (non-GAAP) of $1.25 and $1.53 for 2010 and 2011, and three-year EPS CAGR of 86.8%