Four Undervalued Chinese Pharmas

by: China OTC Player

By Platinum Tiger

While many U.S.-listed Chinese small caps have flourished so far this year with an average first quarter gain of 19 percent, one sector, pharmaceuticals, has been relentlessly punished by investors. The eight pharmaceutical stocks listed in our RCS index have lost on average 25 percent of their value since they peaked on January 15. Only one of the eight - nutraceutical producer Nutrastar (OTCPK:NUIN) - is in positive territory for the year. Several, like Lotus (OTCPK:LTUS), Sinobiopharma (OTC:SNBP) and Tianyin (NYSEMKT:TPI) are down by more than 20 percent, and one, Jiangbo (OTCPK:JGBO), has shed nearly half its value in the past three months. I believe several of these stocks are now deeply oversold and merit serious investment consideration.

With such a huge performance gap between pharmas and other sectors, one might be tempted to conclude that the entire Chinese pharmaceutical industry must be rapidly going bankrupt. But the truth is health care in general, and pharmaceuticals in particular, are booming. Steady government expansion of access to health care services and improving patent enforcement have translated into a rapidly growing market with long-term profit opportunities. With 20 percent of the world's population and a mere 2 percent share of the global drug market, the sector is still in the early stages of its maturity cycle.

So why has there been so much bearish pressure on these stocks? Recent earnings announcements have been mixed, and competition has led to pricing pressure for some companies. But as the industry continues to consolidate, I expect competitive pressures will ease, and many of the companies in our index will present attractive acquisition targets for larger pharmaceutical players.

One stock with great potential upside is Jiangbo. Now trading at well below the value of its $100 million in cash holdings, with a forward PE of only about 2x, this is one of the most undervalued companies I have seen. The stock has been battered recently, dropping over 25 percent in the past two weeks despite a complete absence of negative news. The company is a steady money maker with solid prospects, but for reasons that are unclear to me, investors have treated it as though it's going out of business. Many comparable companies are trading for 3 to 5 times as much as Jiangbo; it could double in price and still be undervalued.

Before long, selling pressure is bound to diminish and small cap Chinese pharmas will turn around. I recommend picking up shares in a few of these stocks for a short- to mid-term cyclical rebound.

Disclosure: Positions in JGBO.OB, LTUS.OB