Shengkai Innovations (VALV) reported its fiscal Q2 results on February 11, ahead of our and consensus estimates. Q2 revenue grew 78% YoY and 30% QoQ, driven by increased capacity and continued penetration into the electric power and petrochemical markets. Q2 gross margins improved due to increased sales of large size ceramic valves. Excluding this factor, we believe ASP and margins should have remained stable. The balance sheet was strengthened further due to the recent public offerings in addition to strong operating cash flow. VALV’s new facility, which came on line in September, has reached full designed capacity at the end of December as planned. With part of the newly raised capital, we expect the company to increase its designed capacity from 24k units to 30.8k units in 1H of FY12. We expect the company to use its remaining capital to develop new ceramic material and new valve products. Management reaffirmed its FY11 guidance, which indicates 72%-75% revenue growth and 53%-64% non-GAAP net income growth. We expect continued growth into FY12, driven by robust demand and expanded capacity. We continue to like the name for its unique technology, large market potential, strong profitability and cash flow generation. Shares are trading at 6.5x our FY11 EPS estimate, which we believe is undervalued. We reiterate our Buy rating and $13 price target, which is 14.6x our FY11 EPS.