American Oriental Bioengineering Keeps Growing Despite Bad Moves

American Oriental Bioengineering (NYSE: AOB) found itself, once again, defending one of management’s initiatives. Last week, AOB said it had closed a $70 million purchase of buildings and land in Beijing. Unfortunately for AOB, the release said the site and its facilities would be used as a “Convention and Training Center.” Critics jumped all over the wording, charging that AOB was abandoning its very profitable and growing drug business in order to begin holding conventions.

To clarify matters, Tony Liu, Chairman and CEO of the company, positioned the purchase as a way to “centralize” its management in Beijing, calling the facilities “multi-functional,” which sounds both more sophisticated and less specific than “convention center.” The cash, he pointed out, generates a negative real return.

Investors, however, would be more interested in whether the $70 million could be better used to make acquisitions that would enhance AOB’s profits. At the end of Q3, AOB reported $220 million in cash and $126 million in debt. Liu also argued that the large facility would help AOB secure government grants and low-interest loans.

American Oriental has a history of announcing initiatives that investors find dismaying. The company made its public debut via a reverse merger, then announced a large secondary, which included shares held by Liu. After Barron’s ran a negative story about the offering and AOB itself, the secondary was reduced in size and price, and it did not include any of Liu’s holdings. Last summer, AOB announced it would acquire a $550 million drug distribution company for $110 million. Although the distribution company was large, it may not have been profitable, and it certainly wasn’t as profitable as AOB’s drug products. In the end, AOB bought another, much less expensive drug distributor and a drug development company. Also in 2008, the company announced a $30 million stock buyback program. The next day, AOB said the buyback would be financed by a $115 million convertible note offering that will further dilute the holdings of existing shareholders.

Despite these disconcerting moves, AOB remains undeniably profitable and growing. During the first nine months of 2008, AOB increased its revenues by 65% to $168 million. Net income (before a large currency gain) jumped 42% to $39.8 million. Among other remarkable feats, that puts net income at 24% of revenues.

Recently, AOB raised its forecast for 2008 revenues to $250 million. That means the company expects a blockbuster $82 million Q4, its cold and flu portfolio reaping the benefit of the seasonal upswing. T

The company’s new real estate holdings will have to add a lot of benefit to perform up to these levels. For the record, AOB said it purchased 5.4 acres of land with 14,615 square meter of building space.

AOB produces both OTC and prescription products.

Following the announcement of the $70 million real estate buy, shares of AOB sold off. They have dropped $2.29 or 35% from their $7.29 price before the announcement to $4.75 currently. That puts the price much closer to the bottom of its 12-month range of $4.05-$12.28 than the top. At this price, AOB has a market capitalization of $372 million.

Disclosure: none.

Comments

[JSbalaban:]

I wouldn't touch AOB due to their poor business decisions. The only thing that saves them is China's still relatively robust economy. AOB may have 82M in profit in Q4, but shareholders wont see much of that due to AOB's continued diluitive deals. Want a good pharma that grows as organically as possible and is a real cash cow for their size? Take a look at CSKI. For me, that's the one to own CSKI will double before AOB gives you 50%.

JBB

Jan 14 07:56 AM

[gillet01:]

They bought the building in Beijing for two reasons, niether could be stated in a press release. First, it alleviated "concerns" the central chinese government had about how "chinese" this company was. This is directly related to the subsequent announcement that AOB will be the beneficiary of a number of Gov't incentive programs, including tax breaks.
Second, this will be their new de facto headquarters, they will not officially make it the headquarters since they would lose a large tax benefit were they to move, hence "conference center".




On Jan 14 07:56 AM JSbalaban wrote:

> I wouldn't touch AOB due to their poor business decisions. The only
> thing that saves them is China's still relatively robust economy.
> AOB may have 82M in profit in Q4, but shareholders wont see much
> of that due to AOB's continued diluitive deals. Want a good pharma
> that grows as organically as possible and is a real cash cow for
> their size? Take a look at CSKI. For me, that's the one to own CSKI
> will double before AOB gives you 50%.
>
> JBB

Jan 14 10:58 AM