Why Are Insiders Buying Shengkai Innovations?

| About: Shengkai Innovations, (VALV)
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Shengkai Innovations, Inc. (NASDAQ:VALV) is primarily engaged in the design, manufacture and sale of ceramic valves, high-tech ceramic materials and the provision of technical consultation and related services. The company's industrial valve products are used by companies in the electric power, petrochemical and chemical, metallurgy and other industries as high-performance, more durable alternatives to traditional metal valves. The company was founded in 1994 and is headquartered in Tianjin, People's Republic of China.

The company is one of the few ceramic valve manufacturers in the world with research and development, engineering, and production capacity for structural ceramics and is able to produce large-sized ceramic valves with calibers of 6" (150mm) or more. The company's product portfolio includes a broad range of valves that are sold throughout the People's Republic of China, to Europe, North America, United Arab Emirates, and other countries in the Asia-Pacific region. The company has over 400 customers, and is the only ceramic valve supplier qualified to supply China Petroleum & Chemical Corporation Limited (SINOPEC, (NYSE:SHI)). The company also became a member of the PetroChina supply network in 2006.

Overview of Industrial Valve Industry

At present, the world industrial valve industry has been experiencing stable growth and development. According to statistical data in the Freedonia Group’s 2008 report titled “World Industrial Valves to 2011” (the “Freedonia Report”), world industrial valve demand has been growing steadily since 2006 with sales reaching $62.6 billion. The report indicates that world industrial demand for valves will reach $77.55 billion by 2011 and is expected to grow by an additional 23.3% through 2016 with world industrial valve sales reaching $95.65 billion.

The China market for industrial valves has been growing rapidly since 2001. According to the Freedonia Report, sales for Chinese industrial valves were $2.48 billion in 2001 and reached $5.75 billion as of the year end 2006-- a growth rate of 132.1% over this time period. As of the end of 2006, China was the second largest market for industrial valves on a worldwide basis behind the U.S. with market shares of 9.2% and 22.2%, respectively.

The Freedonia Report indicates that Chinese industrial valve sales will reach $10.30 billion by year end 2011 with further growth expected through 2016 with sales reaching $15.75 billion or a growth rate of 52.9% over this time period. Due to the projected increased growth of the Chinese industrial valve market, by 2016 it is anticipated that China will gain significant market share from the U.S. and will represent 16.5% of the overall industrial worldwide valve market versus 19.8% for the U.S.

Insider Transactions

Shengkai Innovations CEO Chen Wang purchased 76,777 shares of company at November 18th 2011. Chen Wang now holds a total of 17,476,777 shares in Shengkai. That is 17,476,777 / 33,276,611 or 52.5 % of all outstanding shares.

CFO He Ming also purchased 8,300 shares of Shengkai at November 18th 2011.

These purchases were made after the most recent quarterly report filed on November 9th 2011.


Shengkai has three industry segments. Electric power industry lost revenue while the two other industry segments added revenue at the most recent quarter. Shengkai has decided to gradually phase out its less profitable domestic market segments including the electric power market and focus on expanding its presence in the more profitable domestic and foreign oil and chemical industries where ceramic valve products typically command higher prices than the domestic Chinese market.

Successful penetration into international oil and chemical markets requires the company to obtain various certifications, including but not limited to ISO14000 and OHSAS 18000 and other firm-specific supplier qualifications. I am expecting the company to obtain these certifications some time during 2012.

The company expects that in the quarter ended December 31, 2011, revenue from the electric power industry would continue to drop, and major contribution to the sales would be from the petrochemical and chemical industry. The company's management estimates that for the quarter ended December 31, 2011, total revenue would be between $10.0 million and $10.5 million, and gross margin would be approximately 43%. Shengkai is expected to continue to run with positive but significantly reduced cash flow from operations.

The electric power industry represented only 31.8% of company's revenue for the last quarter compared to 65.3% year ago. My revenue estimates for each industry group for the quarter ended December 31, 2011 are as follows: electric power industry $2 million, petrochemical and chemical industry $7 million and aluminum, metallurgy and others $1 million. I think we will see growing revenues again starting this year compared to the most recent quarter.

Conference Call

During the most recent conference call Shengkai was asked why it does not consider a management buyout? I think it is a good question considering that Shengkai currently trades at less than half of its cash balance and the CEO already owns more than 50% of the company. The response was that the company is considering all the options and will issue a press release when it has come to a decision.

Disclosure: I am long VALV.