Accounts Receivable Prevent China Pharma from Being a Great Value Play

Mar.19.09 | About: China Pharma (CPHI)

China Pharma Holdings, Inc. (NYSEMKT:CPHI) said its 2008 revenues climbed 54% to $51 million. Net income (excluding foreign exchange) rose 39% to $17.8 million, producing a net margin of 35%. Net income would have been even better, but the company’s tax rate rose from zero in 2007 to 9% in 2008.

Over the course of the year, China Pharma produced operating cash flow of $6.5 million, ending the year with $6.9 million of cash. Unfortunately, increasing accounts receivable numbers have been the price for expanding its top line so quickly. The company said it ended 2008 with $15.9 million in accounts receivable, a sizable increase from $5.4 million a year earlier.

As we have pointed out in the past, increasing accounts receivable allow for high net income, but cause a very negative effect on cash flow. Despite its profitability, China Pharma Holdings was forced to float a $10 million secondary offering of shares last year to keep operating.

The company pointed out that its higher revenues came from improvements in existing products rather than from newly introduced products. Its cold remedy PuSen OK increased 77%, Alginic Sodium Diester rose 76%, Granisetron climbed 60%, and Clarithromycin was up 57%.

Earnings per share were 44 cents. That gives China Pharma Holdings a price/earnings ratio of just about 3 on a company that grew 54% last year. Its cash level may be slightly low, but not absurdly so. This makes China Pharma Holdings an excellent value play, the only problem being its perennial problem with accounts receivable, a significant fly in the ointment. The company has 40.2 million shares outstanding, giving it a market capitalization of only $49 million – less than one times revenues.

The company also touted four significant milestones during 2008:

  • Began clinical trials of a a third generation Cephalosporin antibiotic combined with a bacterial-enzyme inhibitor;
  • Approved to begin production of Tiopronin Enteric-Coated capsules for hepatitis B;
  • Started clinical trials of Candesartan, a treatment for hypertension;
  • Completed expansion of dry power production line.

Disclosure: none.