Shengkai Innovations (NASDAQ:VALV)

Third Quarter 2013 Financial Results

• Revenues in the third quarter were approximately $2.9 million as compared to approximately $5.7 million in the third quarter of FY2012.
• Non-GAAP loss was $0.07 per diluted share compared with Non-GAPP earnings of $0.05 per diluted share in the third quarter of FY2012.

Business Outlook

In response to the business disruptions and changes in the global ceramic valves industry as well as in PRC's economic conditions, management of the Company 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. The Company has increased its product sales price since fiscal 2012 to match industry levels and to reflect its superior product quality. The Company has also been making efforts to streamline operations through headcount reduction and other cost-saving measures to conserve capital and reduce the impact of revenue loss. Meanwhile, the Company will continue to leverage its self-developed ceramic material technologies to continue in-house and joint research and development of innovative and superior-performance products for the international oil and chemical markets and commit its resources to expanding the acceptance of its products overseas.

As such, we expect that in the immediately following quarter ending June 30, 2013, total revenues would remain flat on a quarter-over-quarter basis; and major contribution to our sales would continue to be from the petrochemical and chemical industry. Such situation may persist until our marketing and sales efforts on some new customers and projects pay off, and the expansion in the international market picks up meaningfully. Successful penetration into international oil and chemical markets would also require the Company to obtain various certifications, including but not limited to different class API certification, such as API 6A which covers higher pressure valve products, and other firm-specific supplier qualifications, which will take time to go through various application procedures, develop new products and invest in additional or different equipment.

Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

On January 9, 2013, Shengkai Innovations, Inc. (the “Company”) received approval from the NASDAQ Listing Qualifications Department (“NASDAQ”) to transfer the listing of its common stock from The NASDAQ Global Market to The NASDAQ Capital Market. The transfer was effective at the opening of business on January 11, 2013 and the Company's common stock continues to trade under the symbol “VALV.”

As previously announced, on July 2, 2012, NASDAQ notified the Company that its common stock no longer met the minimum $1 bid price per share requirement.  In that regard, the Company was not able to regain compliance within an initial 180 day period provided to cure the deficiency. However, NASDAQ determined that the Company is eligible for an additional 180 calendar day period, or until July 1, 2013 (the “Expiration Date”), to cure the deficiency.  NASDAQ’s determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Capital Market with the exception of the bid price requirement.  NASDAQ further relied upon the Company’s written notice of its intention to cure the deficiency during a second compliance period.

If at any time during the second compliance period granted by NASDAQ, the closing bid price of the Company’s security is at least $1 per share for a minimum of 10 consecutive business days, the Company will regain compliance.  If the Company cannot demonstrate compliance by July 1, 2013 or the Company does not comply with the terms of the extension granted by NASDAQ, the Company’s common stock will be delisted. At that time, the Company may appeal NASDAQ’s determination to a Hearings Panel.

The NASDAQ Capital Market is a continuous trading market that operates in substantially the same manner as The NASDAQ Global Market. All companies, whose securities are listed on The NASDAQ Capital Market, must meet certain financial requirements and adhere to NASDAQ’s corporate governance standards.

Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

On January 2, 2013, Shengkai Innovations, Inc. (the “Company”) received a notification letter (the “Notice”) from the Nasdaq Listing Qualifications Department (“NASDAQ”) advising the Company that it has not regained compliance with Listing Rule 5450(a)(1), the continued listing requirement to maintain the closing bid price of its common stock at $1.00 per share, and, accordingly, that its common stock is now subject to delisting from The NASDAQ Global Market.
 
However, the Company may be eligible for a second 180 day period. To qualify, the Company must submit an on-line application to transfer its common stock to The Nasdaq Capital Market by January 9, 2013. The Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. As part of its review process, NASDAQ will make a determination of whether it believes the Company will be able to cure this deficiency. Should NASDAQ concludes that the Company will not be able to cure the deficiency, or should the Company not make the required representation, its common stock will be delisted from The Nasdaq Global Market.

The Notice also states that the Company may appeal Staff’s determination to the Panel, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series. Unless the Company has submitted an application to transfer its common stock to The Nasdaq Capital Market or requests an appeal of the determination to delist the Company’s common stock, the Company’s common stock will be scheduled for delisting at the opening of business on January 11, 2013, and a Form 25-NSE will be filed with the Securities and Exchange Commission, which will remove the Company’s securities from listing and registration on The Nasdaq Stock Market. If the Company files the hearing request before 4:00 p.m. Eastern Time on January 9, 2013, the suspension of the Company’s common stock and the filing of the Form 25-NSE will be stayed pending the Panel’s decision.

FY2013 First Quarter Results

• Revenues in the first quarter were approximately $4.7 million as compared to approximately $11.0 million in the first quarter of FY2012.
• GAAP net income was approximately $53,000 compared with approximately $0.9 million in the first quarter of FY2012. Diluted earnings per share were $0.003 compared to $0.052 in the first quarter of FY2012.

Business Outlook

In response to the business disruptions and changes in the global ceramic valves industry as well as in PRC's economic conditions, management of the Company 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. The Company has increased its product sales price to match industry levels and to reflect its superior product quality. The Company has also been making efforts to streamline operations through headcount reduction and other cost-saving measures to conserve capital and reduce the impact of revenue loss.

Additionally, the Company will continue to leverage its self-developed ceramic material technologies to continue in-house and joint research and development of innovative and superior-performance products for the international oil and chemical markets and commit its resources to expanding the acceptance of its products overseas.

As such, we expect that in the immediately following quarter ended December 31, 2012, total revenues would remain flat, and major contribution to our sales would be from the petrochemical and chemical industry. Such situation may persist until our marketing and sales efforts on some new customers and projects pay off, and the expansion in the international market picks up meaningfully. Successful penetration into international oil and chemical markets would also require the Company to obtain various certifications, including but not limited to different class API certification, such as API 6A which covers higher pressure valve products, and other firm-specific supplier qualifications, which will take time to go through various application procedures, develop new products and invest in additional or different equipment.

Fourth Quarter 2012 Results

• Revenues were approximately $5.3 million compared with approximately $27.3 million in the fourth quarter of fiscal year ended June 30, 2011 ("FY2011");
• Revenues from the electric power segment were approximately $1.2 million compared with approximately $14.9 million in the fourth quarter of FY2011;
• Revenues from the petrochemical and chemical segment were approximately $2.4 million compared with approximately $8.4 million in the fourth quarter of FY2011; and
• Gross profit was approximately $2.2 million with a gross margin of 41.5%, compared with approximately $14.7 million and 54.0% in the fourth quarter of FY2011.
•  Non-GAAP earnings were $0.01 per diluted share compared with $0.51 per diluted share in the fourth quarter of FY2011.

Business Outlook

In response to the business disruptions and changes in the global ceramic valves industry as well as in PRC's economic conditions, management of the Company 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. The Company has increased its product sales price to match industry levels and to reflect its superior product quality. The Company has also been making efforts to streamline operations through headcount reduction and other cost-saving measures to conserve capital and reduce the impact of revenue loss.

Additionally, the Company will continue to leverage its self-developed ceramic material technologies to continue in-house and joint research and development of innovative and superior-performance products for the international oil and chemical markets and commit its resources to expanding the acceptance of its products overseas.

As such, we expect that in the immediately following quarter ended September 30, 2012, total revenues would remain flat, and major contribution to our sales would be from the petrochemical and chemical industry. Such situation may persist until our marketing and sales efforts on some new customers and projects pay off, and the expansion in the international market picks up meaningfully. Successful penetration into international oil and chemical markets would also require the Company to obtain various certifications, including but not limited to different class API certification, such as API 6A which covers higher pressure valve products, and other firm-specific supplier qualifications, which will take time to go through various application procedures, develop new products and invest in additional or different equipment.

FY2012 Third Quarter Highlights

• Revenues were approximately $5.7 million compared with approximately $26.6 million in the third quarter of fiscal year of 2011 ("FY2011");
• Revenues from the electric power segment were approximately $1.3 million compared with approximately $15.5 million in the third quarter of FY2011;
• Revenues from the petrochemical and chemical segment were approximately $4.0 million compared with approximately $8.5 million in the third quarter of FY2011; and
• Gross profit was approximately $2.6 million with a gross margin of 46.2%, compared with approximately $15.2 million and 57.0% in the third quarter of FY2011.
•  Non-GAAP earnings were $0.05 per diluted share compared with $0.54 per diluted share in the third quarter of FY2011.

Business Outlook

In response to the business disruptions and changes in the application of ceramic in the valve industry, Shengkai management has decided to gradually phase out its less profitable domestic market segments including the electric power market and focus on expanding the Company's 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 the international oil and chemical markets, however, would require the Company to obtain various industry-wide certifications, including but not limited to ISO14000 and OHSAS18000 and other firm-specific supplier qualifications, which will take time to go through various application procedures, efforts in new product development and investment in additional or different equipment.

As such, the Company expects that in the immediately following quarter ended June 30, 2012, revenue from the electric power industry would continue to drop, and major contribution to our sales would be from the petrochemical and chemical industry. Such decrease may persist until our marketing and sales efforts to some new customers and projects pay off, and the expansion in the international market picks up meaningfully.

As previously reported, David Ming He resigned as Chief Financial Officer (the “CFO”) of Shengkai Innovations, Inc. (“Company”) on March 20, 2012. On April 6, 2012, the board of directors of the Company (the “Board”) appointed Ms. Linbin Zhang, the Company’s treasury manager to be the Company’s interim CFO, effective April 19, 2012.

Ms. Zhang, 29, has been serving as the Company’s treasury manager since February 2010. From October 2009 to December 2009, she served as accountant in Worldwide Clinical Trials, Inc., in Los Angeles, California. From August 2007 to September 2009, she served as accountant in Turbo-Tek International, Inc., in Los Angeles, California. From June 2006 to June 2007, Ms. Zhang was an audit associate in Deloitte Touche Tohmatsu CPA Ltd.in Tianjin, China. Ms. Zhang holds designation of Certified General Accountants of Canada since 2007. She received her Bachelor of Business Administration degree in Accounting from Nankai University in 2006.

TIANJIN, China, March 8, 2012 (GLOBE NEWSWIRE) -- Shengkai Innovations, Inc. (Nasdaq:VALV) ("Shengkai" or the "Company"), a leading ceramic valve manufacturer in the People's Republic of China (the "PRC"), today announced the Company will implement a 1 for 2 reverse stock split of its issued and outstanding common stock ("Reverse Split"), effective on Friday, March 9, 2012. The Reverse Split was approved by the shareholders of the Company on the 2012 Annual Meeting of Shareholders on December 22, 2011. The Company's common stock will continue to trade under the symbol "VALV" on the Nasdaq Global Market after the Reverse Split.

Immediately upon the Reverse Split becoming effective, every two shares of common stock of the Company prior to the Reverse Split will be combined into one share of common stock of the Company. Any owner of less than a single full share of common stock after the Reverse Split will receive a full share of common stock in lieu of the fractional share. The Reverse Split will reduce the number of shares of common stock outstanding to approximately 16.7 million shares from approximately 33.3 million shares, based on the number of shares outstanding as of March 8, 2012.

The Company's transfer agent, Broadridge Corporate Issuer Solutions, Inc. will process the corporate action. The Company's shareholders are required to exchange their current stock certificates for new stock certificates reflecting the adjusted number of shares as a result of the Reverse Split upon receipt of instructions and documents necessary to obtain the new certificates from Broadridge Corporate Issuer Solutions, Inc.

FY2012 Second Quarter Highlights

• Revenues were approximately $10.3 million compared with approximately $22.4 million in the second quarter of FY2011;
• Revenues from the electric power segment were approximately $2.6 million compared with approximately $16.0 million in the second quarter of FY2011;
• Revenues from the petrochemical and chemical segment increased 32.8% year-over-year to approximately $7.1 million;
• Gross profit was approximately $4.3 million with a gross margin of 42.0%, compared with approximately $13.3 million and 59.2% in the second quarter of FY2011; and
• Non-GAAP earnings were $0.05 per diluted share compared with $0.24 per diluted share in the second quarter of FY2011. 
• Quarterly ceramic valves output was 1,784 sets compared with 5,350 sets a year ago.

FY2012 First Six Months Highlights

• Revenues were approximately $21.3 million compared with $39.5 million in the first six months in FY2011;
• Revenues from the electric power segment were approximately $6.1 million compared with $27.2 million in the first six months in FY2011;
• Revenues from the petrochemical and chemical segment increased 30.1% year-over-year to approximately $13.8 million;
• Gross profit was approximately $9.1 million with a 42.9% gross margin, compared with $23.2 million and 58.7% in the first six months of FY2011;
• Net income was approximately $2.7 million, or $0.08 earnings per diluted share;
• non-GAAP diluted earnings for the six months ended December 31, 2011 were $0.11 per diluted share, compared to non-GAAP earnings of $0.42 per diluted share for the comparable period in FY2011.
• First six months ceramic valves output was 3,762 sets compared with 9,806 sets during the same period a year ago.

Business Outlook

In response to the business disruptions and changes in the application of ceramic in the valve industry, Shengkai management has decided to gradually phase out its less profitable domestic market segments including the electric power market and focus on expanding the Company's 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 the international oil and chemical markets, however, would require the Company to obtain various industry-wide certifications, including but not limited to ISO14000 and OHSAS18000 and other firm-specific supplier qualifications, which will take time to go through various application procedures, efforts in new product development and investment in additional or different equipment.

There are less effective working days during the period between January and March due to various holidays such as the New Year and the Spring Festival. In addition, the increase in the average selling price of our products is impacting our domestic sales in the foreseeable future before the new pricing dynamics takes hold. In light of such developments, we expect the total revenue for the quarter ending March 31, 2012 to be approximately $5.5 million. We expect the Company to continue to run with positive but significantly reduced cash flow from operations. Such decrease may persist until our marketing and sales efforts to some new customers and projects pay off, and the expansion in the international market picks up meaningfully.

In recent months, because of the heightened suspicions on the integrity of PRC companies, enquiries into our business and domestic customers mounted by certain shareholders and interested parties without the Company’s approval or endorsement have resulted in severely damaged relations with some of our important domestic customers. This has resulted in considerable loss of business since June 2011, and a higher turnover in our sales agents and representatives. Some of our other customers have seized this opportunity to demand price cuts from us. Meanwhile, some of our competitors also have seized this opportunity to take away our customers.

Fourth Quarter Highlights

• Revenues increased 70.9% yoy to approximately $27.3 million;
• Revenues from the electric power segment increased 48.8% yoy to approximately $15.0 million;
• Revenues from the petrochemical and chemical segment increased 68.8% yoy to approximately $8.4 million;
• Revenues from other industries, including aluminum and metallurgy, increased 315.7% to approximately $3.9 million;
• Gross profit increased 56.1% yoy to approximately $14.7 million with a 54.0% gross margin.

FY2011 Highlights

• Revenues increased 72.6% yoy to approximately $93.5 million;
• Revenues from the electric power segment increased 63.4% yoy to approximately $57.7 million;
• Revenues from the petrochemical and chemical segment increased 73.1% yoy to approximately $27.5 million;
• Revenues from other industries, including aluminum and metallurgy, increased 178.6% yoy to approximately $8.3 million;
• Gross profit increased 64.8% yoy to approximately $53.1 million with a 56.8% gross margin;
• GAAP net income was approximately $93.5 million, or $2.67 earnings per diluted share, compared to a net loss of approximately $56.4 million, or $2.48 loss per share in FY2010;
• Non-GAAP net income was approximately $33.5 million, or $0.95 non-GAAP earnings per diluted share after adjusting for non-cash share-based compensation and changes in the fair value of instruments;
• Annual ceramic valves output achieved 23,298 sets compared with 14,376 sets a year ago.

Business Outlook

Due to heightened suspicions on the integrity of Chinese companies, unsolicited and unapproved third parties' investigations severely damaged relations with some of the Company's important domestic customers. This has resulted in considerable loss of business since June 2011, and a higher turnover in the Company's sales agents and representatives. In response, the Company has decided to 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.

As such, the Company expects that in the immediately following quarter ended September 30, 2011, revenue from the electric power industry would significantly drop, and major contribution to our sales would be from the petrochemical and chemical industry. We estimate that for the quarter ended September 30, 2011, total revenue would fall by as much as 60% sequentially compared with the quarter ended June 30, 2011, and gross margin would drop to around 45% due to fixed overhead cost being spread over expected fewer sales. We expect the Company to run with positive but significantly reduced cash flow from operations. Such decrease may persist until our marketing and sales efforts to some new customers and projects pay off, and the expansion in the international market picks up meaningfully.

Successful penetration into international oil and chemical markets would also require the Company to obtain various certifications, including but not limited to ISO14000 and OHSAS 18000 and other firm-specific supplier qualifications, which will take time to go through various application procedures, efforts in new product development and investment in additional or different equipment. These estimations are based upon the Company's current views on operating and market conditions, which are subject to change. The Company will periodically update the situation.

TIANJIN, China, Sept. 16, 2011 (GLOBE NEWSWIRE) -- Shengkai Innovations, Inc. (Nasdaq:VALV) ("Shengkai" or the "Company"), a leading ceramic valve manufacturer in the People's Republic of China (the "PRC"), today announced that it will be implementing a strategic transition away from the low-end markets including the electric power markets, to the high-end oil and chemical markets, both domestically and abroad, in response to recent business disruptions and changes in the global ceramic valves industry.

In recent months, because of the heightened suspicions on the integrity of Chinese companies, enquiries into the Company's business and domestic customers mounted by certain shareholders and interested parties without the Company's approval or endorsement have resulted in severely damaged relations with some of the Company's important domestic customers. This has resulted in considerable loss of business since June, and a higher turnover in the Company's sales agents and representatives. Some of the Company's other customers have seized this opportunity to demand price cuts from the Company. Meanwhile, some of the Company's competitors also have seized this opportunity to take away our customers.

"Shengkai Innovations, Inc announced that its auditor BDO China Li Xin Da Hua CPA Co., Ltd. ("BDO") resigned on August 4, 2011 because parties were unable to agree to BDO's proposed increase in their fee for conducting its 2011 audit.

BDO had proposed to increase its 2011 audit fee from $200,000 to $610,000, which management felt was too sizable and unjustifiable.

The Audit Committee of the Company then appointed Albert Wong Co. ("AW") as its new independent registered public accounting firm on August 4, 2011."

Please see Rest of Today's Update.

TIANJIN, China, Aug. 10, 2011 (GLOBE NEWSWIRE) -- Shengkai Innovations, Inc. (Nasdaq:VALV) (the "Company"), a leading ceramic valve manufacturer in the People's Republic of China (the "PRC"), today announced that its auditor BDO China Li Xin Da Hua CPA Co., Ltd. ("BDO") resigned on August 4, 2011 because parties were unable to agree to BDO's proposed increase in their fee for conducting its 2011 audit.

BDO had proposed to increase its 2011 audit fee from $200,000 to $610,000, which management felt was too sizeable and unjustifiable.

The Audit Committee of the Company then appointed Albert Wong Co. ("AW") as its new independent registered public accounting firm on August 4, 2011. AW was previously engaged as the independent registered public accounting firm for the Company for the years ended June 30, 2008 and 2009, and resigned on June 28, 2010.

"We look forward to welcoming back Albert Wong Co. as our new independent registered public accounting firm and working with them. They were with us when we went public and we have been pleased with their level of service and expertise. Because of Albert Wong Co.'s familiarity with the Company and its operations, we do not believe that our year end audit will be unduly delayed by the change in auditors in any way," said Mr. Chen Wang, Chief Executive Officer of the Company.

Rodman and Renshaw on VALV                      5/16/2011

F3Q11 Update: Results above Expectations, Reiterating Market Outperform

Shengkai Innovations (“Shengkai”, Ticker: VALV, Market Outperform) delivered yet another strong performance in F3Q11. Total revenue jumped 83.2% YoY to $26.6 million, above our Street-high estimate of $25.2 million as well as Street consensus of $25.0 million. Gross profit increased 76.0% YoY to $15.2 million, beating our estimate of $14.7 million. Non-GAAP net income came in at $10.0 million, or $0.27 per diluted share, easily beating our respective estimates of $8.5 million and $0.22 as well as Street consensus of $8.6 million and $0.22.

At the end of the quarter, Shengkai had cash and cash equivalents of $50.5 million, accounts receivable of $13.0 million, and no debt.

F3Q11 Highlights and Discussions

Core businesses as strong as ever

Shengkai’s core electric power business continued to be the most important revenue driver, growing 76.4% YoY to $15.6 million and accounting for a little over 58% of the company’s total revenue. Even more encouraging, 19% of the electric power revenue came from new customers, suggesting continued marketing outreach and increasing product acceptance. Revenue from petrochemical and chemical industry increased 67.2% YoY to $8.5 million, accounting for about 32% of the company’s total sales and significantly improving from the 24% revenue percentage in the previous quarter. We continue to believe this sector represents the most important growth driver for the company in the near to medium term considering ceramic valves’ unique functional advantages over metal valves in petrochemical and chemical industry.

FY2011 guidance reaffirmed

Shengkai reiterated its revenue guidance for F2011 (ending in June 2011) of between $93.0 million and $95.0 million, but raised its non-GAAP net income guidance from the previous $30.0 - $32.0 million to between $31.0 million and $34.0 million. In light of the company’s current state of operation and the continued capacity expansion, we believe it should have no problem fulfilling this guidance.

Risks

Major risks to our rating and price target include macroeconomic risk, existing and potential competition, business execution risk, limited number of key personnel who hold the proprietary trade secret that is essential to the company's competitive advantage, as well as the political and regulatory risks related to operating and investing in China.

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This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

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Third Quarter Results:

• Revenues increased 83.2% year-over-year to a quarterly record of approximately $26.6 million;
• Revenues from the electric power segment increased 76.4% year-over-year to approximately $15.6 million;
• Revenues from the petrochemical and chemical segment increased 67.2% year-over-year to approximately $8.5 million;
• Gross profit increased 76.0% year-over-year to a quarterly record of approximately $15.2 million with a 57.0% gross margin;
• GAAP net income was approximately $27.2 million, or $0.73 earnings per diluted share, compared to a net loss of approximately $35.3 million, or $1.54 loss per share, in the third quarter of FY2010;
• Non-GAAP net income was approximately $10.0 million, or $0.27 non-GAAP earnings per share after adjusting for non-cash share-based compensation and changes in the fair value of instruments;

The Company reiterates its guidance for the fiscal year ending June 30, 2011 with revenues expected to range between $93 million and $95 million. The Company raised its expectation of Non-GAAP net income, which excludes the non-cash change in the fair value of instruments and share-based compensation costs, from between $30.0 million and $32.0 million to between $31.0 million and $34.0 million, representing year-over-year growth of 72% - 75% and 58% - 74% on revenues and non-GAAP net income, respectively. These targets are based upon the Company's current views on operating and market conditions, which are subject to change. The Company will periodically update this guidance.

FY2011 Q2 Financial Highlights and Recent Developments

• Revenues increased 78.4% year-over-year to approximately $22.4 million;

• Revenues from the petrochemical and chemical segment increased 71.4% year-over-year to approximately $5.3 million;

• Gross profit increased 79.6% year-over-year to approximately $13.3 million with a 59.2% gross margin;  

• Net income was approximately $14.9 million, or $0.42 earnings per diluted share, compared to a net loss of approximately $22.2 million, or $0.98 loss per share, in the second quarter of FY2010;

• Non-GAAP net income was approximately $8.5 million, or $0.24 non-GAAP earnings per share after adjusting for non-cash items including stock compensation expense, share-based compensation, and gain resulting from changes in the fair value of instruments; and

FY2011 Six Month Financial Highlights

• Revenues increased 67.2% year-over-year to approximately $39.5 million;

• Revenues from the electric power segment increased 65.4% year-over-year to approximately $27.2 million;

• Revenues from the petrochemical and chemical segment increased 82.1% year-over-year to approximately $10.6 million;

• Gross profit increased 63.8% year-over-year to approximately $23.2 million with a 58.7% gross margin;  

• Net income was approximately $41.8 million, or $1.18 earnings per diluted share, compared to a net loss of approximately $25.0 million, or $1.12 loss per share, in the second quarter of FY2010; and

• Non-GAAP net income was approximately $14.7 million, or $0.42 non-GAAP earnings per share, after adjusting for non-cash items including stock compensation expense, share-based compensation, and gain resulting from changes in the fair value of instruments.

Mr. Chen Wang, Chairman and Chief Executive Officer of Shengkai Innovations commented, "We are very encouraged by continued significant revenue growth in all three of our business segments and rising profitability at the same time. After the inauguration of our new facility in September, we have already successfully reached full capacity for the single month of December. However, this is just the beginning of our next phase of rapid growth. As the market is embracing new materials with superior performance over traditional metal products, we may continue to see robust demand from electric power, petrochemical and coal chemical sectors. In particular, as China's industrial and urban development continues in the Central and Western regions, demand for our ceramic valves from the petrochemical sector may become one of our fastest growing areas."

Rodman & Renshaw on VALV                               02/11/2011

F2Q11 Review: Another Strong Quarter 

Shengkai Innovations (“Shengkai”, Ticker: VALV, Market Outperform) reported strong F2Q11 results. Total revenue reached 78.4% YoY to $22.4 million, a bit lower than our estimate of $23.5 million but in line with Street consensus of $22.3 million. Gross margin expanded 40bps YoY and 120bps sequentially to 59.2%, beating our expectation of 58.2%. Non-GAAP net income came in at $8.5 million, or $0.24 per diluted share, surpassing our respective estimates of $7.5 million and $0.21 as well as Street consensus of $7.4 million and $0.21.

F2Q11 Highlights and Discussions 

Core electric power business stayed strong: Shengkai’s bread and butter electric power segment continued to be the primary revenue contributor and growth driver. During the quarter, revenue growth from the electric power sector accelerated to 84.5% YoY, compared to the 43.6% YoY growth in F1Q11. The segment contributed 71.4% of total revenue, compared to 65.1% in F1Q11 and 68.8% in the same period of last year, suggesting the company’s continued strength in this industry sector. Sales from petrochemical and chemical industry registered a 71.4% YoY growth and contributed $5.3 million revenue, translating to 23.7% of Shengkai’s total sales. While the growth slowed down a bit compared to the last quarter mainly due to capacity constraint, we continue to expect the petrochemical and chemical sector will be the company’s main growth driver in the near to medium term future considering the large and growing demand from this industry.

Gross margin improved: Gross margin expansion was mainly driven by product mix shift. During F2Q11, Shengkai had more larger-sized valves orders that commanded higher ASP than the previous quarters. Management indicated that it intended to focus on the sales of larger-sized valves in the future. In this regard, we expect gross margin will remain relatively stable for the remaining of 2011 and 2012, around the range of 58-59%.

Recent equity financing helped alleviate capacity bottleneck: In December 2011, Shengkai completed secondary public offering with net proceeds of $17.5 million. The company plans to spend approximately $30 million on CAPEX to expand annual capacity (based on one shift) to 30,800 units from 24,000 units. The additional capacity is expected to come online in F2Q12, and should alleviate Shengkai’s capacity constraint to some degree.

FY2011 guidance reaffirmed: The company reiterated its guidance for F2011 (ending in June 2011) with revenue between $93.0 million and $95.0 million and non-GAAP net income between $30.0 million and $32.0 million.


Notice Regarding Privacy and Confidentiality: 


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

We are offering 2,456,800 shares of our common stock at $5.50 per share. Shares of our common stock are currently traded on the NASDAQ Global Market under the symbol “VALV”. On November 18, 2010, the closing sale price of our common stock was $7.00 per share. As of November 18, 2010, the aggregate market value of our outstanding common stock held by non-affiliates was approximately $40,538,155, based on 23,191,165 shares of outstanding common stock, of which approximately 5,791,165 shares are held by non-affiliates, and a per share price of $7.00, based on the closing sale price of our common stock on November 18, 2010.

Rodman & Renshaw on VALV

F1Q11 results above expectations 

Shengkai Innovations (“Shengkai”, Ticker: VALV, Market Outperform) announced F1Q11 results that largely exceeded our expectations. Total revenue increased 54.6% YoY to $17.2 million, above our estimate of $15.8 million and Street consensus of $17.0 million. Gross profit increased 46.6% YoY to $10.0 million, higher than our estimate of $9.1 million. Non-GAAP net income, excluding stock-based compensation expenses and changes in fair value of derivatives, came in at $6.3 million, or $0.18 per diluted share, higher than our respective estimates of $5.5 million and $0.15. They also compared favorably with respective Street consensus of $5.8 million and $0.16. At the end of the quarter, the company had $21.7 million of cash and cash equivalents (including restricted cash) and no debt. 

F2011 outlook maintained 

The company also reiterated its guidance for F2011 (ending in June 2011) with revenue between $93.0 million and $95.0 million and non-GAAP net income between $30.0 million and $32.0 million. 

F1Q11 highlights and discussions 

Arguably the most significant development that took place during F1Q11 was the launch of commercial production of Shengkai’s new plant in September. The company completed the construction of the new facility in June and all the existing equipment and facilities from the old plant were moved to the new plant by mid-September. Thus increased shifts in the old plant (before the move) and the launch of the new plant were the major drivers behind the above-expectation revenue performance. In terms of revenue segmentation, while Shengkai’s bread and butter electric power sales remained strong with $11.2 million of revenue that represented 43.6% YoY growth, the company’s new focus area of petrochemical and chemical sector generated a very strong performance. The $5.3 million sales (or 35% of total sales) represented a 94.2% increase from a year ago. We continue to expect the petrochemical and chemical sector will be the company’s main growth driver in the near to medium term future. 

The company also appointed BDO China Li Xin Da Hua as its new independent auditor during the quarter. At a time of heightened scrutiny on small cap Chinese companies regarding their financial reporting and accounting quality, we believe this auditor upgrade should provide Shengkai with increased credibility in the U.S. investment community.

Reiterating Market Outperform rating and $13 price target 

We continue to view Shengkai as an attractive growth story supported by robust market demand and ambitious capacity expansion. The strong F1Q11 results further strengthened our conviction. Thus we are reiterating our Market Outperform/Speculative risk rating and price target of $13. The $13 price target is based on Shengkai shares trading at 15x our FY2011 diluted EPS estimate of $0.87, representing a PEG ratio of 0.3. The 15x multiple is in-line with Shengkai’s international valve manufacturer peers’ current multiple average.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

REF:011707RR-MN

• Non-GAAP net income for the first quarter of FY2011, was approximately $6.3 million, a 54.9% increase from non-GAAP net income of approximately $4.0 million for the same quarter in FY2010.

• Non-GAAP earnings for the quarter ended September 30, 2010, were $0.18 per diluted share, compared to $0.14 per diluted share, for the quarter ended September 30, 2009. Please see the table below for a reconciliation of GAAP financial information to non-GAAP financial information.

Mr. Chen Wang, Chairman and Chief Executive Officer of Shengkai Innovations commented, "We opened the new fiscal year with a strong quarterly result and a new manufacturing facility to meet the strong demands from our customers, in particular those within the petrochemical and chemical sectors. Our ceramic valves have been quickly recognized by Chinese oil majors and we believe the market potential remains strong for ceramic valve applications. We have also made strides into the domestic coal chemical space and international power generation markets. With the completion of our new manufacturing facility, we are now able to unlock the production capacity bottleneck we have historically been faced with to meet rising market demands for our highly durable ceramic products. We are seeing a stronger fiscal year ahead of us to create greater shareholder value."

Business Outlook

The Company reiterates its guidance for the fiscal year ending June 30, 2011 with revenues expected to range between $93.0 million and $95.0 million, and non-GAAP net income, which excludes the non-cash change in the fair value of instruments and share-based compensation costs, between $30.0 million and $32.0 million, representing year-over-year growth of 72% - 75% and 53% - 64% on revenues and non-GAAP net income, respectively. These targets are based upon the Company's current views on operating and market conditions, which are subject to change. The Company will periodically update this guidance.

• Revenue was approximately $54.1 million, an increase of 37.8% year-over-year.
  
• Gross profit was approximately $32.2 million, and gross margin was 59.5%.
  
• Excluding the non-cash share-based compensation costs resulted from (i) incentive stock options granted to independent directors and management staff, and (ii) the return of escrowed common stock to Mr. Chen Wang, our chief executive officer, pursuant to the Securities Escrow Agreements resulting from the financings completed in 2008 (usually known as "Make Good "), non-GAAP operating income was approximately $23.7 million, compared to approximately $17.9 million for FY2009.
  
• Non-GAAP net income for the FY2010 was approximately $19.6 million, up 44.0% year-over-year, or $0.571 per diluted share as compared to $0.367 in FY2009. FY2010 non-GAAP net income was derived after adjusting for the aforementioned non-cash shared-based compensation costs of approximately $19.0 million in total for both stock options and return of Make Good shares, and changes in fair value of warrants and conversion option of preferred stock, namely derivative instruments, for approximately $56.9 million.
  

    Mr. Chen Wang, Chairman and CEO of Shengkai Innovations commented, "We are very excited to report another strong fiscal year witnessed by the robust growth from the petrochemical and chemical sectors. Our ceramic valves have been recognized by Chinese oil majors and we believe the potential is deep for ceramic valve application in these sectors. We have also made strides into the domestic coal chemical space and international power generation markets. With the completion of our new manufacturing facility which was fully operational in September, 2010, we are now able to unlock the production capacity bottleneck to meet rising market demands for our proprietary ceramic products. We are seeing a stronger year ahead of us to create greater shareholders' value."

During the conference call this morning, management provided FY2011 guidance. The company expects

• Total revenue will be in the range of $93-$95 million.
  
• Non-GAAP net income will be between $30 million and $32 million. Accordingly, we are adjusting our estimates.

Shengkai Innovations Completes the Construction of New Manufacturing Facility:

The construction of the new manufacturing facility, which is expected to replace the current factory in the Tianjin Jinnan Development Area, was completed in June 2010. Since then, the company has been undergoing installation of equipment and machines, and trial production is being conducted prior to full-scale operation. Upon full operation of the new facility, Shengkai expects to increase the total annual capacity to 24,000 units of ceramic valves, from current production capacity of 7,500 units.

Mr. Chen Wang, Chairman and Chief Executive Officer of Shengkai Innovations, remarked, "Thanks to the high quality and durability, our ceramic valve products have been well received by power generation, oil and petrochemical, metallurgy and other industries in China and overseas. With the new facility coming online, we expect our capacity bottleneck to be unlocked and in doing so we plan to quickly ramp up our production to meet rising demand, particularly from the oil and petrochemical sector. We are confident this fiscal year will be an even stronger year."

Source: PR Newswire (July 27, 2010)

Investors should be aware that on June 3, 2009 Shengkai Innovations filed an S-1 for up to $25 million.

USE OF PROCEEDS:

"Unless otherwise indicated in a prospectus supplement, we intend to use the net proceeds from the sale of the securities under this prospectus for general corporate purposes, including expanding our products, and for general working capital purposes. We may also use a portion of the net proceeds to acquire or invest in businesses and products that are complementary to our own, although we have no current plans, commitments or agreements with respect to any acquisitions as of the date of this prospectus."

We were beginning to become excited about the story again due to 2011 analyst estimates. While we are still fairly optimistic, as it appears that proceeds could eventually be used for accretive purposes, this development adds the common dilution wrench into the mix that is taking place in the China Hybrid sector.

Highlights for the Third Quarter FY2010 and Recent Developments:

• Net revenue was approximately $14.5 million, an increase of 45.8% from the third quarter of FY2009.
• Gross profit was approximately $8.6 million, an increase of 38.6% from the third quarter of FY2009.
• Net income was approximately $3.4 million, or $0.095 per diluted share.
• Non-GAAP net income for the third quarter of 2009, after excluding non-cash share-based compensation expense of approximately $2.2 million, was approximately $5.6 million, or $0.156 per diluted share, an increase of 57.8% from net income of approximately $3.5 million, or $0.117 per fully diluted share in the third quarter of FY2009.
• New manufacturing facility in Tianjin is expected to be completed and begin formal production by the end of June 2010.
• Approved to list on the NASDAQ Global Market.

Shengkai Innovations Inc has been a company we have flip flopped on. Much of our uncertainty arose from potential liquidity needs and possible weak EPS comparisons on the horizon. 

It turns out that we recently stumbled upon a Rodman & Renshaw report that has shed some light on the SHE story. It confirms our belief that the next two quarters may be unexciting on the EPS front.

However, EPS will increase dramatically in 2011...

Also, as many investors had postulated, it appears that the company will not require funds for its current expansion plan:

The construction of Shengkai's new state-of-the-art manufacturing facility is scheduled to be completed by June of this year. However, the production ramp-up process could start as early as later this month. The new plant will be able to increase annual single-shift production capacity from the current 7,500 sets to north of 24,000 sets.

We are also impressed that Rodman has been conservative in its estimates:

We would like to highlight our conservative approach in our diluted EPS estimates. In light of Shengkai’s recent trading history and our positive outlook, we believe the company’s outstanding warrants are likely to be deep in the money going forward. Thus in our share-count and EPS estimates, we are taking full consideration of the potentially dilutive effects of the company’s preferred stocks and warrants.

The current unknown is the company's need to tap financial markets for additional capacity expansion.

We expect the company will continue its torrid growth trajectory through further expansion of capacity. By fiscal year 2012, we estimate that Shengkai will realize $202 million in revenue and $72 million in net income, up more than 400% and 500% from their respective levels in fiscal 2009.

 Long-term investors should be happy with these developments.

We have removed SHE from the GeoBargain list. We had originally coded SHE as a GeoSpecial on December 21, 2009 at $5.00 and a GeoBargain on February 12 at $8.78. After further due diligence and the fact the stock has had a nice run since December we are taking, what we hope be, a short hiatus from this story: 

• GeoBargains require that a company grow its EPS by at least 30%. While this has been the case for the last two quarter we are unsure if the SHE can continue this pace without expanding capacity, which might require financing. SHE has reported EPS of between $0.12 to $0.15 for the last four quarters and is going up against similar comparisons during the next two quarters. Until we get a clear indication of the company’s plans to boost growth we believe that some prudence is warranted.
• Convertible securities exist which could lead to significant dilution. Although, upon conversion, they would provide the company with cash it could use for expansion. Clarity is needed on this issue as well as on how much of these securities are included in the share count.

We will attempt to interview management and provide an update if warranted.