There has been much debate recently as to the future of the Chinese economy. Famous hedge fund manager Jim Chanos has publicly come out saying he will short the Chinese economy.
While I believe the Chinese real estate market and domestic stock market are overvalued, I think the Chinese companies trading on the U.S. exchanges are screaming buys. Buffett talked about feeling like “an oversexed man in a brothel” in the mid 1970s because he was so excited about the cheap prices in U.S. stocks; I feel the same about stocks in China right now. No one can predict market fluctuations; I just buy when stocks are trading at a huge discount to their intrinsic value.
While I am not sure of the future in the markets in the next year or even two years, I am certain that these companies are exceptional buys for the long term investor.
As I discussed in my previous article, leaders in the pharmaceutical industry have a similar winning business model: a strong nationwide sales and distribution network, strong research and development capabilities and access to capital.
Skystar Biopharmaceuticals (SKBI) appears to be the perfect Buffett-like company. They have a sustainable competitive advantage with little competition in the veterinary health industry. They are currently the only large corporation in this field that is not a state owned enterprise. Skystar also has two important Buffett traits, a high return on equity and high profit margins of 55% and 42% respectively. This shows that they are not in a heavily competitive industry; profit margins and ROE are low in competitive industries. Skystar has a P/E of 5.96 while it has grown revenue from 6 million in 2005 to 26 million in 2008, and will have substantial revenue growth in fiscal 2009, with estimates between 44-46 million. Skystar also has a strong balance sheet with no long term debt.
Biostar Pharmaceuticals (BSPM.OB) is poised for exceptionally strong growth over the next year. They are expanding their sales outlets from 3,512 to 10,000 sales outlets by the end of 2010. If they reach their estimates, they will have net income growth of at least 100% in fiscal 2009. Biostar’s most important drug, the Xin Aoxing Capsule, used for the treatment of Hepatitis B, has a near monopoly. The drug is the only OTC approved drug of its kind in China, and has 93% efficacy with a cost of pennies on the dollar in comparison to other global competitors. There may be as many as 130 million people in China with hepatitis B, so the target market for this product is huge. They could as much as triple revenues in 2010, and are trading at a p/e of only 8.
Biopharm Asia is involved in the planting, manufacturing, distribution, and retail sale of a large line of health care products. It is trading at a p/e of only 4.42, and grew net income from 5.5 million to 14.4 million from 2007-2008. This company is expanding rapidly and priced as if it was going nowhere, in these situations, it does not make sense not to buy.
Weikang Bio-Technology Group (WKBT.OB) is another Chinese pharmaceutical company that appears extremely undervalued. They engage in the research, development, manufacturing, marketing, and sales of Traditional Chinese Medicine in China. We believe that a lack of investor awareness is one of the primary reasons for this substantial undervaluation.
A valuation comparison of these Chinese companies to their US counterparts is shocking. Pfizer (PFE) has not grown since 2006 and is trading at a p/e of 13. Walgreens is at a p/e of 16, and has grown revenues from 47 to 63 billion. Sanofi Aventis has had no substantial revenue growth from 2006-2009, yet is trading at a p/e of 14. In China we have companies growing at 30% or greater growth rates, and trading for p/e ratios of less than 8, while in the U.S. we have companies with 0-5% growth rates trading at p/e ratios of 13-16.
The Chinese companies clearly present better value for the intelligent investor. There are a few reasons why this undervaluation happens. Two primary reasons are that these companies are unknown to investors and that they are in China. Investors are afraid of Chinese stocks. They are worried about companies in China because of conflicting opinions about the future of the Chinese economy. This creates an incredible financial opportunity for those who do their research. While I agree that the real estate market and domestic Chinese stock markets are overvalued, many of the Chinese companies trading on US markets or the OTC exchange are extremely undervalued.
Other companies in the Chinese pharmaceutical industry worth watching are CKGT.OB, CSKI, RHGP.OB, and CPHI. This industry is exploding with undervalued companies; investors would be well served to do some serious research.\