China Valves Technology, Inc. Responds to Allegations

2011-01-14 22:52 1907

ZHENGZHOU, China, Jan. 14, 2011 /PRNewswire-Asia/ -- China Valves Technology, Inc. (NASDAQ: CVVT) ("China Valves" or the "Company"), a leading Chinese metal valve manufacturer, today responded to allegations presented in an online report published on January 13, 2010 and provided clarification to investor questions related to its acquisitions and cash position.

"China Valves management categorically denies the assertions made in a report published yesterday by an online blog," said Mr. Jianbao Wang, Chief Executive Officer of China Valves, Inc. "All of the acquisitions referenced in this report were made in the best interests of all our shareholders and we stand by the integrity of our financial reporting and the quality of the assets that we have acquired."

The report calls into question the acquisition of China Valves Technology (Changsha) Valve Co., Ltd ("Changsha Valve"), previously known as Able Delight (Changsha ) Valve Co., Ltd., and suggests that the financial results of Changsha Valve have been overstated and that the acquisition was an improper related party transaction.

China Valves strongly disputes these assertions. Changsha Valve, which was acquired from Watts Regulator Co., has performed very well under the management of China Valves. Management had initially estimated that Changsha Valve would generate approximately $20 million in revenues in 2010, and currently estimates that 2010 revenues of Changsha Valve were approximately $30 million. This is as a result of RMB 59 million of contracts that had not been performed by Changsha Valve at the time of the acquisition due to the cessation of operations of Changsha Valve, an additional RMB 70 million of contracts transferred to Changsha Valve from China Valves to maximize business synergies, and RMB 70 million of new sales by Changsha during 2010. Given the strong demand for water treatment infrastructure in China and China Valves sales and marketing capability, management believes that the outlook for Changsha Valves' products is robust.

Able Delight Investment Limited was used as a transitory vehicle to facilitate the acquisition from Watts Regulator Co. on behalf of China Valves as Watts Regulator Co., a party controlled by Watts Water Technologies, preferred not to transact with a public company buyer.

Qing Lu, who arranged the formation of Able Delight Investment Limited, is the wife of Bin Li, the first cousin of Mr. Siping Fang, the Chairman of China Valves, and a majority shareholder of the Company. China Valves entrusted Qing Lu to set up Able Delight Investment Limited as an acquisition vehicle and own it during the transitory period prior to the formal transfer to China Valves. To facilitate the transaction, China Valves also loaned Able Delight Investment Limited the funds required to complete the transaction. As was previously disclosed, Qing Lu received a total of $50,000 for acting as the sole stockholder of Able Delight on behalf of the Company, the consideration paid by Able Delight for the acquisition of Changsha Valve was $6.07 million, and the remaining balance of $8.88 million paid in the acquisition of Changsha Valve was used to cover costs of the acquisition, including assumed liabilities. With regards to the structure of the acquisition of Changsha Valve, a detailed explanation of the compensation paid as part of the total $15 million acquisition cost was provided in the company's 8-K/A filing with the SEC on November 18, 2010.

China Valves' management started to negotiate with two shareholders, Shanghai Hanhuang Valve Co., Ltd ("Hanhuang") and Hong Kong Hanxi Investment Co., Ltd. ("Hanxi"), of Shanghai Pudong Hanwei Valve Co., Ltd ("Hanwei Valves") in November 2009. There were a number of competitors who wanted to buy Hanwei Valve at the same time. The Company signed a due diligence agreement with Hanwei Valves on December 5, 2009 and paid RMB 10 million as a deposit on December 10, 2009. After conducting due diligence, management decided to acquire Hanwei Valves. China Valves paid all acquisition costs of $19.5 million before March 3, 2010 and since the purchase price was already paid in full the control of Hanhuang and Hanxi was transferred to China Valves pending the documentation of the acquisition which was concluded on April 8, 2010, the date of the signing of the Asset Transfer Agreement.

The accusation against that China Valve's management paid too little when China Valves paid $7.3 million to acquire the assets of Yangzhou Rock is baseless. The Company sees no issue with acquiring assets at favorable valuations.

The report impugns China Valves' gross margins as being "too good to be true" because they are the highest in a "commoditized sector."  China Valves management encourages any serious analysts to visit our facilities and speak with our customers so as to better understand the performance characteristics of our highly advanced products serving sectors including nuclear power generation and large scale water infrastructure.

Finally, the report asserts that China Valves' is running short of cash and will be pressured to complete a secondary offering. China Valves had approximately $28.9 million in cash as of December 31, 2010. The Company recently completed a $10 million registered direct offering, the proceeds of which will be used to construct a manufacturing facility for big size ball valves used for nuclear power plants.

"China Valves is focused on becoming the largest and most sophisticated supplier of advanced industrial valves in China," said Mr. Jianbao Wang, CEO of China Valves. "In order to support our future growth and development we have significantly strengthened our finance and accounting team in 2010 with hiring of several senior managers with Big Four accounting backgrounds, and the recent appointment of Mr. Gang Wei as our CFO. With this strong team in place, we expect to announce the appointment of a Big Four auditor in the near future and I have every confidence that the transition will be smooth and successful. Our balance sheet is strong and we have the financial resources available to us to execute our growth plan."

"I hope our shareholders will trust their initial judgment, and not allow irresponsible rumors to ruin their interests," added Mr. Wang.

China Valves plans to hold a conference call to respond to investor questions. The details will be released separately.

About China Valves Technology, Inc.

China Valves Technology, Inc. through its subsidiaries, Zhengzhou Zhengdie Valve Co., Ltd., Henan Kaifeng High Pressure Valve Co., Ltd., Tai Zhou 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

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 any forward-looking statements, whether as a result of new information, future events, or otherwise. 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.

Source: China Valves Technology, Inc.
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Keywords: Mining/Metals