China Valves Technology, Inc. Announces Unaudited Results for the Nine Month Transition Period Ended September 30, 2011

ZHENGZHOU, China, Nov. 15, 2011 /PRNewswire-Asia-FirstCall/ -- China Valves Technology, Inc. (NASDAQ: CVVT) ("China Valves" or the "Company"), a leading Chinese metal valve manufacturer, today announced its financial results for the three and nine months ended September 30, 2011. The results are unaudited and subject to change.

Highlights for the Three Months Ended September 30, 2011

• Net revenue reached $61.8 million, up 11.7% from $55.3 million for the same period last year
• Gross profit was $24.4 million, compared to $25.1 million for the same period last year
• Net income was $11.2 million, or $0.31 per fully diluted share, compared to $15.9 million, or $0.45 per fully diluted share, for the same period of 2010

"For the three months ended September 30, 2011, we continued to experience a slowdown in sales growth due to a general slowdown of China's economy which delayed orders and pushed back delivery schedules. The completion of large projects during the quarter and our expanded sales to the petrochemical and oil and gas sectors were partially offset by a decrease in sales to the water supply sector, mainly due to unfavorable development of investments in the sector because of the tight liquidity in China during the period. Our gross margin continued to narrow as increased raw material and labor costs and higher operating expenses strained our operating performance," said Mr. Jianbao Wang, Chief Executive Officer of China Valves. "While we are pleased with the growing amount of larger orders, of which the success of our 24-way rotary valves warrants particular mention, the more complex projects have lengthened collection times, increasing our account receivables balance. In light of China's tighter credit environment, we continue to monitor our bidding and collection practices in order to maintain a healthy operating cash flow."

Unaudited Results for the Three Months Ended September 30, 2011

For the quarter ended September 30, 2011, the Company's total revenue was $61.8 million, up 11.7% from $55.3 million in the same quarter last year. The increase was primarily attributed to strong demand for check valves and gate valves from the power generation and petrochemical and oil sectors. For the three months ended September 30, 2011, sales for the above mentioned valve products increased 21.8% and 14.8%, respectively, compared to the same period in 2010.      

Gross profit for the quarter was $24.4 million, compared to $25.1 million for the same period of 2010. Gross margin was 39.5% for the quarter compared to 45.4% for the same period in 2010 due to significantly higher raw material costs, such as cost of casting and forging steel, steel bars, shafts, bolts, nuts and other raw materials, as a result of inflation in China. Labor cost for the three months ended September 30, 2011 increased more than 10% compared to the same period in 2010.

Selling expenses were $5.1 million compared to $2.4 million in the same quarter 2010, an increase of $2.7 million, or approximately 108.1%. As overall sales increased, sales tax, sales commissions, marketing and promotion expenses, and freight charges have increased as well. As a percentage of sales, total selling expenses increased to 8.2% for the three months ended September 30, 2011 from 4.4% for the same period in 2010.

General and administrative expenses were $5.2 million compared to $3.0 million in the same period of 2010. The increase was mainly due to higher bad debt expenses and labor costs in the period.

Income tax expense was $3.3 million, compared to $4.1 million for the same period of 2010. The decrease was in line with decrease in income from operations.

Net income for the three months ended September 30, 2011 was $11.2 million, compared to $15.9 million for the corresponding quarter of 2010. Diluted earnings per share were $0.31, compared to diluted earnings per share of $0.45 for the same period of 2010.

Unaudited Results for the Nine Months Ended September 30, 2011

Revenue for the first nine months of 2011 was $161.4 million, up 22.9% from revenue of $131.4 million for the first nine months of 2010. The increase was mainly attributed to Shanghai Pudong Hanwei Valve Co., Ltd. ("Hanwei Valve"), a subsidiary acquired on April 8, 2010, operated fully during the nine months ended September 30, 2011, compared to only 175 days of operation in the same period of 2010. This results in 98 more days of operation in the nine months ended September 30, 2011 and an increase in sales of $6.5 million. Meanwhile, China Valve Technology (Changsha) Valve Co., Ltd. ("Changsha Valve"), acquired on February 3, 2010, also operated fully during the nine months ended September 30, 2011, resulting in an increase of sales of $2.7 million. The acquisitions of Hanwei Valve and Changsha Valve attributed 5.7%, or approximately 9.3 million in growth of sales for the nine months ended September 30, 2011 compared to the same period in 2010. Organic growth in sales for the nine months ended September 30, 2011 was 15.8% from the same period in 2010. Strong demand for products in the petrochemical and oil sector, and the power supply sector also contributed to the growth in sales. Sales in both sectors increased by 36.6 % and 25.8%, respectively, for the nine months ended September 30, 2011 from the same period in 2010. Sales of ball valves, gate valves and butterfly valves, for the nine months ended September 30, 2011 increased by 39.7%, 33.6%, and 15.2%, respectively, from the same period in 2010.

Gross profit was $65.6 million, up 5.9% from gross profit of $62.0 million for the nine months of 2010. Gross margin was 40.7%, compared to 47.2% for the first nine months of 2010. The decrease in gross margin was mainly because of Hanwei Valve, which contributed a lower gross profit margin of 33.8% due to product mix. In addition, higher raw material and labor costs and a higher share of low-priced valves in its product mix during the quarter contributed to the decrease in gross profit margin.

Net income was $29.6 million, or $0.83 per diluted share, compared to $36.8 million, or $1.06 per diluted share, for the same period a year ago.

Financial Condition

As of September 30, 2011, China Valves had $28.1 million in cash and cash equivalents, $130.7 million in working capital and a current ratio of 3.2:1. Current accounts receivable were $124.5 million as of September 30, 2011 compared to $84.3 million as of December 31, 2010, while long term retainage was $5.7 million as of September 30, 2011 compared to $4.8 million as of December 31, 2010. Days Sales Outstanding for the nine months ended September 30, 2011 were 175 compared to 111 for the corresponding period last year.

The Company had no long-term debt on its balance sheet as of September 30, 2011. Shareholders' equity stood at $234.7 million, compared to $188.6 million as of December 31, 2010.

Net cash used in operating activities was $5.3 million in the nine months ended September 30, 2011, compared to net cash provided by operating activities of $6.6 million in the same period in 2010. The decrease was primarily attributable to the increase in accounts receivable and inventory.

Net cash used in investing activities decreased to $3.3 million in the nine months ended September 30, 2011, compared to $32.9 million primarily for the acquisitions of new subsidiaries in the corresponding period in 2010. The net cash used was for the purchase of equipment, intangible assets and cash deposit due to notes payable and sales covenant.

Net cash provided by financing activities was $10.1 million in the nine months ended September 30, 2011, compared to net cash provided by financing activities of $20.0 million in the same period in 2010 due to lower net proceeds from the January 2011 registered direct offering compared to the January 2010 registered direct offering. As of September 30, 2011, the Company had $4.7 million short-term bank loans outstanding under its credit facilities and lines of credit.

Subsequent Events

• China Valves has engaged BDO China Shu Lun Pan CPAs LLP ("BDO China"), the Shanghai-based member firm of the BDO International network, as its new independent auditor, replacing Frazer Frost LLP. The change was effective as of October 29, 2011. Frazer Frost LLP will audit the financial statements for the nine-month transition period ended September 30, 2011, and BDO China will take over starting from the quarter ended December 31, 2011.
• In October 2011, Hanwei Valve successfully conducted system tests for and completed delivery of the RV III-1200 24-way rotary valve for a purchase order from Yangzi Petrochemical for the separation of Metaxylene, or MX, and Paraxylene, or PX, the original ingredients for Purified Terephthalic Acid, or PTA, commonly used in polyester production.

Business Outlook

The Company focuses on improving profitability through the consolidation of sales and raw material procurement functions between its different subsidiaries and by emphasizing technological expertise to win larger projects. While the Company expects the power generation and petrochemical and oil sectors to remain the largest contributors to sales, a slowdown of China's economy in combination with a tighter credit policy may delay orders and lengthen the sales cycle.

"Looking forward to 2012, we expect to further strengthen the cooperation between our operating subsidiaries to take advantage of synergies in the sales network and improve production efficiency. Improving our research and development capabilities are of particular importance as we strive to develop our product offerings, expand our project scopes and strengthen our competitive advantages against both domestic and international valve players in niche markets. We continue to monitor our high account receivables, which we believe are a systemic issue in our industry given the current market conditions, and work to further improve our collection practices," said Mr. Wang. "Due to the current uncertain macro-economic outlook and persistent inflation, we maintain a conservative stance regarding our growth and margin development in the current fiscal year. We expect to provide more detailed guidance in terms of our fiscal year 2012 performance as we have more visibility."

Conference Call

The Company will host a conference call at 8:30 a.m. Eastern Time on Tuesday November 15, 2011 to discuss its financial results for the three and nine months ended September 30, 2011. To participate in this live conference call, callers from United States should call 186 6242 1388. Callers from China should call 400 698 8166. Callers from other countries should call +61 2 8823 6760. The Conference Pass Code is 27091374.

If you are unable to participate in the call at this time, a replay will be available for seven days starting on Tuesday November 15, 2011 at 11:00 a.m. Eastern Time. To access the replay, callers from United States should call 186 6214 5335. Callers from China should call 400 692 0026. Callers from other countries should call +61 2 8235 5000. The Conference Pass Code is 27091374.

About China Valves Technology, Inc.

China Valves Technology, Inc. through its subsidiaries, Zhengzhou City ZD Valve Co, Ltd., Henan Kaifeng High Pressure Valve Co., Ltd., Taizhou Taide Valve Co., Ltd., Yangzhou Rock Valve Lock Technology Co., Ltd., China Valve Technology (Changsha) Valve Co., Ltd. and Shanghai Pudong Hanwei Valve Co., Ltd., is engaged in the development, manufacturing and sale of high-quality metal valves for the electricity, petroleum, chemical, water, gas and metallurgy industries. The Company has one of the best known brand names in China's valve industry, and its history can be traced back to 1959 when it was formed as a state-owned enterprise. The Company develops valve products through extensive research and development and owns a number of patents. It enjoys significant domestic market share and exports to Asia and Europe. For more information, visit http://www.cvalve.com

Safe Harbor Statements

Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the Company's ability to develop and market new products, the ability to access capital for expansion, the ability to acquire other companies, changes from anticipated levels of sales, changes in national or regional economic and competitive conditions, changes in relationships with customers, changes in principal product profits and other factors detailed from time to time in the Company's filings with the United States Securities and Exchange Commission and other regulatory authorities. The Company undertakes no obligation to update or revise to the public any forward-looking statements, whether as a result of new information, future events or otherwise. This press release was developed by China Valves, and is intended solely for informational purposes and is not to be construed as an offer or solicitation of an offer to buy or sell the Company's stock. This press release is based upon information available to the public, as well as other information from sources which management believes to be reliable, but it is not guaranteed by China Valves to be accurate, nor does China Valves purport it to be complete. Opinions expressed herein are those of management as of the date of publication and are subject to change without notice.

China Valves Technology, Inc.
Gang Wei, CFO
Tel: +86-371-8601-8777
E-mail: [email protected]
http://www.cvalve.com

CCG Investor Relations
Linda Salo, Account Manager
Tel: +1 646-922-0894
E-mail: [email protected]

Crocker Coulson, President
Tel: +1 646-213-1915
E-mail: [email protected]
http://www.ccgirasia.com

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SOURCE China Valves Technology, Inc.