China Biologic Products (CBPO) is a biopharmaceutical company engaging in the research and production of plasma-based pharmaceutical products in China. Followings are 6 reasons to buy CBPO:
1. Strong Fundamentals
The company’s sales increased from $4 million in 2002 to $119 million in 2009. Next 12 months forward P/E is only 6. Among 202 companies in Biotech industry, China Biologic’s 5-year long-term growth rate is ranked 10th out of 202, and return on equity is ranked 9th. Followings are comparisons between China Biologic and other major players and similar size companies in the biotech industry:
Amgen Inc. (AMGN)
Biogen Idec Inc (BIIB)
BioMarin Pharmaceutica (BMRN)
Cambrex Corp (CBM)
Celgene Corporation (CELG)
Genzyme Corporation (GENZ)
Ligand Pharmaceuticals (LGND)
Gilead Sciences, Inc. (GILD)
Techne Corporation (TECH)
China Biologic Products (CBPO)
CBPO Rank / Biotech Industry
66 / 202
2. Robust Chinese Economy
On Oct 18, China's central bank surprised everyone with its first increase of interest rates in nearly three years. As the world economies continue their road to recovery, the risk of a faster-than-expected increase in interest rates rises because of inflationary pressure that inevitably accompanies economic recovery. China’s rate hike might be a good sign that the Chinese economy is on solid footing and is continuing its recovery.
3. High Growth Industry
The blood plasma industry in China is still in the early development stages compared to western counterparts in the industry. The current annual growth rate is 15% to 20% in the industry in China.
4. High Barrier to Enter into China's Plasma Market
It is extremely difficult to apply for launching new plasma collection centers. China Biologic used to have only one operating subsidiary, Shandong Taibang. By the end of 2008, with the acquisition of Guiyang Dalin and a 35% equity interest in Xi'an Huitian, China Biologic became the largest non-state owned company in China's plasma industry.
5. Strong Brand Recognition
China Biologic has been on the market for a long time. Its predecessor, Shandong Institute of Biological Products, was founded in 1971. It competes with few local companies as well as western companies in China such as Baxter (BAX). When I was in China early this month, I heard that sometimes hospitals have to chase them to get China Biologic’s products.
6. Low Correlation with Markets
The following chart from Yahoo shows that China Biologic’s correlation with the S&P 500 (SPY) or iShares FTSE Xinhua China 25 Index (FXI) is very low. It gives investors a good chance to diversify their investments.
Click to enlarge
Two Major Concerns – High Short Ratio & Insider Sales
China Biologic has a sky high short ratio. Shares short increased from August 30’s 823k to September 30’s 942k. Keep in mind that this is a small cap company with a market cap of $272 million and float shares of 5.5 million only.
On Aug 31, 2010, a major shareholder sold more than 10% of its holdings. One week later, on Sep 7, 2010, China Biologic’s CEO also sold around 20% of his shares.
Benjamin Graham drew a sharp and classic distinction between investment and speculation: “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”. Buying anything that is a collectible, has no cash flow, and is based only on a future sale to a greater fool – even if the purchaser is not a fool – is speculating, according to an article titled “Opportunities for Patient Investors” published in the Financial Analysts Journal Sep/Oct 2010 issue.
Given China Biologic’s recent insider sales and high short ratio, is its data too good to be true? Nonetheless, I increased my position on China Biologic to 2% of my portfolio, based on its strong fundamentals (single digit forward P/E, high growth, low debt and positive cash flows, etc).
Disclosure: long CBPO
Disclosure: long CBPO