China Tracker - Details for China Valves Technology (CVVT)


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 China Valves Technology
 Analyst Coverage
2011-08-09Roth CapitalReiterationBuy$5.00
2011-07-18Roth CapitalReiterationBuy$5.00
 

We are lowering our price target on shares of CVVT to $5 (from $7.50) and maintain our BUY rating after shareholders voted to maintain Frazer Frost as independent auditor. An auditor upgrade appears delayed indefinitely, postponing a key prerequisite for multiple expansion, in our view. We believe shares will continue to trade dislocated from fundamentals.

2011-05-11Brean MurrayReiterationHoldn/a
 

We do not expect an announcement for a Big 4 auditor upgrade to be imminent, as management has been promising to preview the event with since Q4/10. In addition, heightened sensitivities around engagement with a major auditing firm appear to be further hindered by ongoing China based RTO governance issues that have plagued sector. This has likely evoked management reference to an imminent engagement with a “Big 5” auditor during the conference call. We would remain on the sidelines as 2011 is best characterized by restructuring efforts and implementing procedural improvements internally, as opposed to pursuing major drivers for growth. We also suggest investors remain patient until there is clarity around its auditor upgrade. Maintain Hold rating.

2011-05-10Rodman & RenshawReiterationOutperform$13.00
 

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.

2011-05-10Roth CapitalReiterationBuy$7.50
 

We maintain our BUY rating on shares of CVVT after the company reported 1Q11 results exceeding our expectations. Management maintained its annual revenue growth target of 25-28%, which we believe could prove conservative. We lower our price target to $7.50 and believe meaningful valuation multiple expansion will be limited until CVVT appoints a new auditor and completes its 2011 annual audit.

2011-03-21Global HunterDowngradeTerminatedn/a
 

We are discontinuing coverage of these companies due to the departure of our analyst and due to a shift in our resources to other areas in the China space.

2011-03-17Brean MurrayReiterationHoldn/a
2011-03-16Roth CapitalReiterationBuy$15.00
2011-03-08Brean MurrayInitiationHoldn/a
2011-03-03Piper JaffrayReiterationOverweight$13.00
2011-02-22Piper JaffrayReiterationOverweight$13.00
2011-01-18Roth CapitalReiterationBuy$15.00
 

Valuation ~27% below recent PE take-out levels. For valuation purposes, we view private equity take-out multiples in the China industrials sector as a floor. We note that the Harbin (HRBN-$19.04-BUY) and Fushi (FSIN-$9.67-NEUTRAL) go-private bids were at 6.8x and 7.8x 2011 ROTH EPS estimates, respectively (at the time of bid). Shares of CVVT currently trade at 5.3x our 2011 adjusted EPS estimate of $1.30 (excludes $0.21 benefit from favorable supply relationship). Our channel checks indicate that mainland and HK private equity firms have been actively looking at companies within the US-listed China sector where valuations of many such companies are below that of their private Chinese counterparts.

2011-01-18Rodman & RenshawReiterationOutperform$21.00
 

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.

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. 

2011-01-18Global HunterReiterationBuy$17.00
2011-01-10Piper JaffrayReiterationOverweight$13.00
2011-01-07Roth CapitalReiterationBuy$15.00
 

Our $15 price target is based on a 10.0x multiple applied to our 2011 EPS estimate of $1.51. We believe improvements in the company's transparency, corporate governance, and internal controls are prerequisites for shares of CVVT to trade at a global industrial sector multiple (approximately 15x NTM earnings).

2010-12-23Rodman & RenshawReiterationOutperform$21.00
 

China Valves Technology 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."

2010-12-17Global HunterReiterationBuy$17.00
2010-11-19Roth CapitalReiterationBuy$15.00
 

We are raising our estimates and price target and upgrading to BUY (from Neutral) after CVVT posted strong Q3 results and raised 2010 guidance. While we believe corporate governance and internal control deficiencies remain, recent mgt actions to improve transparency and our extensive due diligence have improved our comfort level.

Q3 results beat estimates; mgt raises guidance. Revenue equaled $55.3mm vs. ROTH/Consensus est. of $48.5mm/$48.6mm. Non-GAAP net income equaled $15.9mm, or $0.44/share, vs. ROTH/Consensus est. of $12.3mm, or $0.35/share. Upside was due to stronger than expected results from acquired subsidiaries. Management raised 2010 guidance, calling for net income of $47mm (implies $1.35/share), vs. prior target of $40mm ($1.15/share).

Organic growth the focus for 2011. We view ~20% revenue growth for 2011 as a reasonable target, based on an assumption of ~$15mm in incremental revenue from acquisitions and organic growth of ~10% y/y. While we acknowledge upside potential to our estimates, we view management's 30% growth target as optimistic for several reasons.

Gross margins remain in mid-40% range. CVVT posted gross margins of 45.4% during Q3. Rising material costs, lower utilization rates of acquired businesses, and product mix led to downside vs our est. We view gross margins as stable at the mid-40% range (industry-leading levels) and do not expect meaningful increases going forward.

Improving confidence in pubco infrastructure. While we believe corporate governance and internal control deficiencies remain, our deep due diligence over the past several weeks has improved our comfort level. Our due diligence included site visits, interviews with the company's management, directors, and independent auditor, and industry channel checks. We are also encouraged by the improved transparency and disclosure (as suggested by yesterday's 8-K).

Raising estimates and price target. We are raising our estimates to reflect CVVT's strong Q3 results and our more bullish outlook. We are raising our price target from $8 to $15, reflecting our increased estimates and a higher multiple.

2010-11-11Piper JaffrayUpgradeOverweight$14.50
2010-11-10Rodman & RenshawReiterationOutperform$21.00
 

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.

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.

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%.

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.

2010-11-05Rodman & RenshawReiterationOutperform$21.00
 

We expect the company will report very strong results for the quarter. The Chinese industrial valve market has remained robust during the recent quarters, and we believe the company continues to fare well in its core thermal power generation and water supply markets. Its relatively new ventures into the petrochemical, oil, and nuclear power markets have also been successful. For the quarter, we project revenue and gross profit will reach $49.1 million and $23.7 million, up 76.0% and 72.7% YoY, respectively. We believe gross margin for 3Q10 will exceed that of 2Q10, as better divisional alignment and operation streamlining post-Hanwei acquisition should improve production efficiency. We expect non-GAAP net income for the quarter will reach $13.2 million, or $0.38 per diluted share, up 77.3% and 59.6% YoY, respectively. We also believe there could be additional upside potential to our already optimistic forecasts.

For the conference call, we look for updates from management with regard to its previous 2010 net income guidance of $40 million. We believe the company should have no problem achieving this goal. We also await progress updates on the business integration efforts of the Hanwei acquisition.

We reiterate our Market Outperform rating and $21 price target on the shares of China Valves. We continue to believe the Street has not fully recognized the company's growth potential as well as the true values of its recent acquisitions, such as Hanwei. Trading at 6.7x our expected 2011 EPS, we believe the valuation is compelling.

2010-10-12Rodman & RenshawReiterationOutperform$21.00
 

We are reiterating our Market Outperform rating on the shares of China Valves and price target of $21. The shares are currently trading at 5.0x our 2011 EPS estimate. At such a level, we view the valuation of China Valves as compelling and continue to believe it offers attractive investment opportunities for investors looking to gain exposure to China's industrial sector. Our price target is based on the shares trading at 14x our 2011 EPS estimate of $1.53.

2010-10-12Roth CapitalReiterationNeutral$8.00
 

This morning, CVVT announced that Jianbao Wang has been named Chief Executive Officer, effective October 11th. Mr. Wang has served as the company's General Manager since July 2009. He replaces Mr. Siping Fang, who will remain Chairman. The company indicated that it has "intensified" its search for a permanent CFO and plans to strengthen its internal financial team. We believe timely progress in improving the company's financial management and internal control weaknesses will improve investor confidence and drive multiple expansion.

2010-10-04Roth CapitalDowngradeNeutral$8.00
 

We are downgrading shares of CVVT to NEUTRAL (from BUY) and lowering our price target to $8 (from $15). We believe CVVT's M&A-focused strategy and related party transactions demand the highest standards of financial management, internal controls, and corporate governance. We view the company's weaknesses in these areas as risk factors that present an overhang to meaningful share price appreciation, particularly given heightened investor caution within the U.S.-listed China sector.

We acknowledge that CVVT has been public for a relatively short time (Dec 2007 reverse merger), but believe that its business operations are substantial enough to demand higher standards. While management has consistently voiced its commitment to improving these areas, its actions thus far (no auditor upgrade; interim CFO since May 2010) do not suggest a high level of urgency, in our view. We believe key milestones (permanent CFO, SOX 404 attestation, top-tier auditor) will occur over the next 12 months. Furthermore, instituting a public-company culture and strong corporate governance is likely a longer-term, evolutionary process, in our view.

2010-09-23Piper JaffrayDowngradeNeutraln/a
2010-08-11Brean MurrayReiterationBuy$17.00
 

On the back of better-than-expected 2Q results, we are raising our revenue and earnings estimates but lowering our gross margin assumptions for both 2010 and 2011. Our new estimates for 2010/2011 revenues and adjusted net income are $168/$197 million and $43.7/$51.6 million, versus our previous estimates of $151/187 million and $41/$51 million, respectively, representing 76%/17% and 76%/18% YoY growth. Our 2010 adjusted EPS estimate is raised to $1.26 from $1.18; however, our 2011 adjusted EPS forecast remained unchanged as a result of a lower gross margin assumption despite the higher revenue estimate.

2010-08-10Rodman & RenshawReiterationOutperform$21.00
 

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%.

2010-08-06Roth CapitalReiterationBuy$15.00
2010-07-26Piper JaffrayInitiationOverweight$14.00
2010-05-28Rodman & RenshawReiterationOutperform$21.00
 

While a CFO resignation almost always leads to market speculation and introduces uncertainty, we believe the impact should be minimal in this particular case. Ms. Shih had a relatively short tenure at China Valves, and her impact on the company’s financial operations should not be overestimated. We await the company’s announcement of a permanent CFO. In the mean time, we believe it will be business as usual at China Valves. We are reiterating our Market Outperform/Speculative Risk rating and $21 price target. Our price target of $21 is based on the shares trading at 18x our 2010 EPS estimate of $1.18, representing a PEG ratio of 0.2.

2010-05-14Brean MurrayReiterationBuy$17.00
 

We are lowering our 2010 revenue and adjusted net income estimates to $151 and $41 million from $162 and $42 million, respectively, representing 58% and 65% YoY growth, and reflective of a higher estimated gross margin of 51%, up from 49.1%. Although 1Q10 results came in a bit lighter relative to our expectations, we believe the company’s strong growth outlook and solid business execution warrant a revaluation in its shares, currently trading at 7.8x and 6.3x our pro forma EPS estimates for 2010 and 2011 of $1.18 and $1.46, respectively.

2010-04-30Brean MurrayReiterationBuy$18.00
 

We view the recent stock weakness as presenting a compelling opportunity for investors to participate in the company’s substantial growth potential at fairly attractive valuations. Shares of CVVT are currently trading at 9x and 7x our estimated 2010 and 2011 pro forma EPS estimates, on top of our estimated 70% and 51% YoY growth for revenues and earnings, respectively, which we view as significantly undervalued.

2010-04-23Rodman & RenshawReiterationOutperform$21.00
 

We estimate the company will generate $161.3 million of revenue and $40.3 million in net income in 2010, and the respective figures will grow to $198.5 million and $55.9 million in 2011. Our price target of $21 is based on the shares trading at 18x our 2010 EPS estimate of $1.15, representing a PEG ratio of 0.2.

2010-03-29Rodman & RenshawReiterationOutperform$21.00
 

We are adjusting our financial projections upward for the company for both 2010 and 2011. We now estimate that the company will generate net revenue of $161.3 million for 2010 and $198.5 million for 2011, representing a 2008-2011 revenue CAGR of 44.4%. We estimate net income (non-GAAP) will reach $40.3 million in 2010 and $70.8 million in 2011, representing a CAGR of 87.3%. These also correspond to diluted EPS (non-GAAP) of $1.17 and $2.02 for 2010 and 2011, respectively, and 2008-2011 three-year CAGR of 105.3%.

2010-02-09Brean MurrayReiterationBuy$16.00
 

We reiterate our Buy rating on CVVT and are raising our 12-month target price slightly to $16 from $14 based on 13x our new 2010 EPS estimate.

2010-01-27Rodman & RenshawInitiationOutperform$16.00
2010-01-14Piper JaffrayInitiationOverweight$15.00
 

CVVT is attractively valued and under-appreciated for its clean tech exposure. CVVT trades at 8x our FY11 EPS estimate of $1.27. We believe the stock deserves to trade at 12x, which values the stock between a China industrials peer group (trades at 10x) and a China cleantech peer group (trades at 17x). We believe a blended multiple is appropriate given CVVT's exposure to the water market.

CVVT
Infrastructure
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Current Price:  n/a
F10k Day (2009-04-23): -100.00%$2.76
2009 Close: -100.00%$9.24
2010 Close: -100.00%$10.48
2011 Close: -100.00%$2.13
High (2012-02-08): -100.00%$3.12
Low (2012-09-21): -100.00%$0.40
Exchange:
Market Capitalization: n/a
Total Shares: 35.68 mill
Float: n/a
Avg Volume: 198.00 k
Short Interest: 3.10 mill
Short Ratio: 15.33%15.6 d
Last Quarter: 2011-03-31
Revenue (MRQ): 41.95 mill
Net Income (MRQ): 6.66 mill
Op. Cash Flow (MRQ): -10.42 mill
all financial data provided without warranty