China Valves Technology: Invest in China's Stimulus Plan

| About: China Valves (CVVT)

Recent headlines have trumpeted a massive $586b Chinese stimulus plan, the latest in a series of moves by the Central Government to shore up the economy. Although few details have been forthcoming, we know that the government will be initiating a number of ambitious projects focused on rail, power and water. One way to invest in China’s growing infrastructure is by buying shares of China Valves Technology, Inc. (OTC:CVVT), a maker of metal valves for the electric, petroleum, gas, chemical, geothermal, nuclear power and water industry.

China Valves is an industry leader with an 82% market share in thermal water plants and an 86% market share in the municipal water and sewage sector. In Shanghai and Beijing, they have a 70% market share. They just reported their third quarter results in November, growing revenue 237% over Q3 2007 and net income by 224%.

With Q4 guidance issued on their conference call, the company should finish 2008 with $68m in revenue and around $13m in net income.

During their recent $30m capital raise, they projected 2009 revenue of $135m and net income of $23m and 2010 revenue at $184m with $31m in net income. How are they able to forecast such rapid top and bottom line growth? Well, for starters, 80% of their business is with large state-owned public service enterprises. And over 60% of their revenue is from repeat customers. (Only 10% of their business is export)

The main factory is running at 100% utilization, having just added a third shift to meet the heavy demand. (earthquake ravaged Sichuan rebuilding efforts have been a driver of a recent surge in orders) A new facility is being renovated which will provide some additional capacity. With $27m in cash on the balance sheet, the company intends to purchase competitors in order to gain additional production capacity. Mr. Fang Siping, the CEO, is a renown industry expert. He’s head of China’s 4,000 member China Valve Association and as such sees all the new valve technology and knows the industry like the back of his hand.

With a strong brand name, an established customer base, corporate discipline to focus on high-margin products and the Chinese government’s favorable treatment, this stock could be a great way to play China’s internal boom.

Disclosure: Author holds a long position in CVVT.OB