China Valves Technology Presents An Opportunity As Promising As Gold

Sep. 7.11 | About: China Valves (CVVT)

China Valves Technology Inc. (OTC:CVVT) is said to be a leader in developing and supplying valves and related services in China. The company valves are used in different applications, including nuclear power, fossil power, hydropower, oil and gas, chemical and petrochemical, water treatment, mining and metal industries.

CVVT, created in 2007 with the merger of two fluid motion and control companies, now has six subsidiaries after a series of acquisitions. China Valves claims to produce over 800 models of valves with more than 10,000 variations to meet a wide range of specifications.

Over the past year, many Chinese firms listed in US exchanges have been accused of fraud. As a result, Chinese companies, including legitimate ones, have been significantly driven down by investor fear. As regard CVVT, there are several signs of its legitimacy and leading position in China valve industry. In this article, I will present such signs:
  • CVVT is mentioned as one of the key China valve enterprises in the free headlines of a third-party report in 2011.
  • CVVT subsidiaries were well-known in the China valve industry even before being part of CVVT. In fact, they had websites or online sales networks ahead of their acquisition or merger. Examples include: Zheng Zhou City Zhengdie Valves Co. Valve, Kaifeng High-Pressure Valve Corporation, Yangzhou Rock Valve Lock Technology, Shanghai Pudong Hanwei Valve.
  • Intellectual Property: CVVT and its subsidiaries have dozens of announced patents, certifications and recognition in major project participation. The company also received several awards like the award for Top 10 Technological Innovative Enterprise in Henan Province, award of Highest Growth Company of 2010 and also ranks among China's Top 500 Machinery Manufacturers in 2011, all announced by the company over the past two years.
  • CVVT's management team has a long history in the valve and heavy industry. Board Chairman Mr. Siping Fang was recognized as a Top Entrepreneur in Henan Province in 2009. Presenters of the award highlighted the significant contributions made by Mr. Fang to the development of China's valve market. Mr. Fang was also a president of the China Valve Industry Association.
  • The reader is referred to the company website for further details on the management team.
  • A recent inspection report confirms Hanwei ability to manufacture the valve specifications claimed by CVVT.
  • CVVT has announced several business links with big Chinese firms, such as Sinopec (NYSE:SHI), as well as governmental and state-owned enterprises.
  • The company also has a Chinese website. Having all these business links, how can they possibly deceive the Chinese media with false or exaggerated contracts and numbers?
  • Unlike many other Chinese firms that have only one analyst, CVVT is followed by six firms, including Piper Jaffray, Roth Capital, JMP Securities, Global Hunter, Rodman & Renshaw, and Oppenheimer. Why would a fraudulent company invite all these analysts and present at their conferences?
  • CVVT has recently received a Class AAA Credit Rating by the China Machinery Enterprise Management Association (CMEMA).
Now, let’s compare CVVT financials and valuations to other Chinese valve manufacturers listed in China. Further details can be found at Bloomberg Businessweek:
Company name
Market cap
(Million USD)
Revenue 2010
(Million USD)
Gross Profit
(Million USD)
Net income
(Million USD)
P/E
1
Sufa Technology Industry Co., Ltd
868
92.2
22.2
8.1
104
2
Jiangsu Shentong Valve Co., Ltd
372
46
19.7
6.8
48
3
Hubei Hongcheng General Machinery Co., Ltd
227
36.8
10.4
1.3
169
4
Zhejiang Sanhua Co., Ltd
1600
483.2
120.7
49
28
5
Zhejiang Dun'an Artificial
1700
573 .6
122
33.9
45.9
6
China Valves Technology, Inc
116
183
81.8
43.2
1.7
Click to enlarge
Although it appears that CVVT has a profit margin better than its peers, the question remains whether this is "too good to be true" or "good and true". CVVT stock price has already been severely punished by 10x more than its peers listed in China, owing to the investor fear of fraud among Chinese companies listed in the US. However, legitimate companies will sooner or later be distinguished.
To sum up, CVVT seems significantly undervalued, with a current P/E ratio of 1.7, not to mention the projected growth in China's valve market. In fact, some experts forecast that the China valve market could surpass that of the United States by 2015. They also expect the global industrial valve revenues to reach $52 billion by then, with the biggest growth projected in East Asia.
In conclusion, with the current low valuation of CVVT, it seems to be a good investment opportunity, just like gold and Apple (NASDAQ:AAPL) seemed to be in 2002. Even a target price of $10 for CVVT might be conservative if the company keeps its current profit and proves to be legitimate, which our signs suggest.

Disclosure: I am long CVVT.