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American Oriental Bioengineering, Inc. (AOB)

Roth Capital Conference

February 20, 2007 5:30 pm ET

Executives

Wilfred Chow - VP, Finance

Presentation

Wilfred Chow

I would like to welcome everyone to our company presentation right now. The presentation today is to people who know our company, including our business, our products, the markets that we are in, and the financial performance as well as our growth strategy.

Before we get started, I would like to share with you this slide about forward-looking statements. This presentation may contain, in addition to historical information, forward-looking statements within the meaning of Federal Securities laws.

So with that out of the way, I would like to start with our company overview. AOB is a 12-year old company, profitable and a rapidly growing company. We manufacture and distribute plant-based pharmaceutical and plant-based nutraceutical products. And our major current market is in Mainland China.

2005's revenue are approximately $55 million. The revenue for 2006 is expected to be around $106 million to $108 million, which represents 95% growth. Our organic growth was 75% in the first nine months of 2006. We have very attractive profit margin. Our gross profit margin is around 66%. Operating margin and net profit margin were in the 33% and 27% range, respectively.

Last year EPS was $0.31. And on January 14, 2007, our company reiterated our guidance for the fourth quarter 2006. EPS for the full year of 2006 is expected to be at least $0.45. And AOB is generating free cash flow from operation for the first nine months of 2006 towards approximately $17 million.

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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We also have close to $61 million in net cash to support our growth and acquisition strategy. With the current market price, our market cap is around $770 million.

So, why invest in AOB? We have significant market opportunity in front of us. Chinese economy expected to grow over 8% annually. Growth in sales and marketing in China outpaced the global GDP by more than 4%. We have the ability to identify complementary and accretive acquisitions to augment our organic growth.

Acquisition is always our strategy to fill our growth. And currently, the acquired company will contribute more significantly in 2007. We offer diversified product portfolio. Our products include drugs treating viral infection, respiratory infection, bed-wetting incontinence and gynecological illnesses. We also offer a variety of nutraceutical products with soybean peptide base as energy booster.

The extensive distribution network working with us was over 100,000 distributions going throughout China. And this includes hospitals, clinics, pharmacies, and retail outlets. We are currently actively enhancing presence into rural China.

We have a very experienced and proven management team. They have been together for over 12 years. And we have in depth, knowledge and operational experience in the Chinese economy. We also have displayed consistent financial performance. For the last three years, revenue CAGR is 74%, net income CAGR is 83% and EPS CAGR is 44%.

So, we have recently moved our headquarters from Harbin in the North to Shenzhen in the South. Shenzhen is situated right next to Hong Kong, is the fast growing city and is one of the China's leading centers of business. We have three manufacturing facilities, two located in Harbin and one in Hezhou.

And here's a brief overview of the markets that we are in. Annual growth rate in China pharmaceutical market exceed 15% per year in the last few years. Demand for better drugs is driving this market and it will increase as the country modernizes and provide healthcare to population of 1.3 billion of the people. Additionally, the macro demographics of inquisitive age, wealth, population growth, and consumer health awareness are all driving sales.

In 2005, the total expenditure on medicine in China reached $36 billion. We estimated that approximately $15 billion was attributed to traditional Chinese medicine. Expenditure on nutraceutical product approximated $6 billion in 2005. And we also see a trend that more and more people prefer to use [green powder] with less side effects. China is a critical and important market that no one can ignore.

The industry situation is a very highly fragmented industry. There are over 2,000 TCM companies in the market. It is to the benefit of AOB as we see numerous consolidation opportunities. And they currently manufacture and distribute plant-based pharmaceutical product and plant-based nutraceutical product. Pharmaceutical product currently account for approximately 70% of the revenue and nutraceutical product at around 30%.

The way we segregate pharmaceutical products and nutraceutical products is pharmaceutical product requires China State FDA approval, while nutraceutical product do not need China FDA approval but only local government agency approval. And pharmaceutical products can be sold through a doctor prescription or over-the-counter and nutraceutical products are mainly over-the-counter.

And here are some of our top selling products in fiscal 2006. Our current top selling products are Shuanghuanglian Injection Powder, that's the far left corner. This product accounts for approximately 25% of our sales. Please keep in mind that this is a highly seasonal product, which is strongest in the fourth quarter. And this is an FDA approved prescription product, which was approved over 12 years ago. This is a leading antiviral injection effective against severe respiratory diseases. What makes this product unique is other similar drugs are usually in oral-taken form. However, this product can be injected directly into the body to improve efficacy. This product's first nine months 2006 sales grew over 60% compared to the same period last year.

Cease-Enuresis Soft Gel and Patch, this product currently accounts for 24% of our total sales. And it is also has a bit seasonality with the strongest quarter in the fourth quarter. This product is significantly formulated to help alleviate bed-wetting and incontinence for both children and women. And this product is so far the only China FDA approved product for these particular purposes. The Soft Gel is a prescription product, while the Patch is over-the-counter. Sale of this product during the first nine months of 2006 grew over 120% compared to the same period last year.

Jinji Series of products, these line of products are available over-the-counter and is to treat gynecological inflammation and infection. Jinji was amongst the top three brand names in China. And this product has over 30 years of history. It became part of our company product portfolio offering in May 2006 through our acquisition of a company called GLP. This product currently accounts approximately 11% of our sales during the first nine months of 2006. And we expect see it will have a bigger contribution to our total revenue in the future quarters.

As many of you may know, there has been press record mainly focusing on corruption in China FDA. The Chinese Government is scrutinizing many drugs approval that occurred between '99 to '02. We are very confident that this scrutiny does not apply to our company. Most of our products were approved 15 to 30 years ago.

And the majority of our nutraceutical products sales are from the soybean peptide series. This series of products come in various forms. It comes in tablet, powder, [pep beverage]. We have Soybean Coffee as well. The current contribution of this product to our total revenue is around 24%.

Peptide is to promote overall world wealth and well-being. This product is switching amino acids and is non-cholesterol, very easy to digest. And it's a good energy booster protein source. And the product during the first nine months of 2006 grew approximately 80% compared to the same period last year.

So, one of the key drivers of our high growth is the extensive distribution network. We currently have more than 100,000 distribution points throughout china selling our products. For distribution point, as I said before, it means clinics, hospitals, retail outlets, and other pharmacies.

We are currently working on devoting more distribution in rural area and all internal sales force is working on maintaining and expanding the coverage throughout China.

And brand reinforcement is one key element for growth. We recently hired Ms. Ni Ping, a famous China celebrity and TV presenter, as our spokesperson to promote our GLP products and we also do TV ads on other OTC products as well.

And with respect to our acquisitions, our fund raising, we are under the promise of seeking acquisitions, where we can generate similar type of return as we have done in the past. The acquisition enrollment for AOB is as good as it has ever been. There are over 2000 TCM companies in the industry and no real leader focusing on plant-based pharmaceutical products. But the Chinese government is gradually privatizing state-owned enterprises. They are selling off state-owned enterprise to lower their financial burden. But they are generally privatizing company with good operational history, so that a new owner will carry on with the business.

The profit here is the liquidation of asset, but privatization would be ultimate aim that would build a company that can support local employment and that can generate net income going forward.

AOB is in a unique position to fit in this M&A activity in China, based on a couple of reasons. We believe, we have sufficient capital resources. We have strong connections in the industry. We have track record in integrating and acquiring business. And we have our operational synergy, giving an advantage over other foreign financial investors, pursuing the same opportunity in China.

We have several internal criterions for selecting acquisitions, and these include accretive, profitability and growth potential. We focus on branding and compelling core products. We concentrate on revenue growth potential and also the margin expansion potential.

In September 2004, we acquired a company called HSPL, which we are very proud of. We paid approximately $7.1 million, which is onetime net asset. We significantly grew HSPL from a $4 million company to a $16 million company. And we also improved its gross margin from 40% to 60%. Our investment will be fully paid back in less than two years, and this a case study to our acquisition strategy and we look forward to replicate this story in a larger scale.

And in April 2006, we acquired a company called GLP. We paid approximately $24 million approximately for $2.3 million of net assets. The company is focusing on women's health and their factory product Jinji Series is used to treat gynecologic inflammation. And together in the acquisition, we acquired a portfolio of 66 products.

We also recently announced the launch of a new women's health product from the Jinji Series, which we acquired through this transaction and we are actively branding and distributing through our network in [quarterly] 2007.

And the following slide shows our financial performance, our revenue CAGR for the past few years 74%, net income CAGR, 83%, and our EPS CAGR, 44%.

More financial highlights, fourth quarter financial guidance revenue is around $37 million to $39 million, up at least 87% from Q4 '05. In the recent announcement, we are going to report our fourth quarter earning on March 12. Then following up there will be a conference call aftermarket.

The average DSO for 2005 was 43 days and for the first nine months of 2006 was 37 days. This is relatively low for a Chinese company. The other financial highlights are, net cash of $61 million and total debt of approximately $11 million.

I will show you some of the recent events. This is an exciting moment in the company's history. We transferred to list on the NYSE on December 18 and AOB became the first Chinese healthcare company to list on that exchange. And we recently enhanced our Board of Directors, Mr. Zhang Boqing, brought approximately two decades of PRC and CSRC experienced to our company. CSRC is the equivalent of SEC in China. We recently announced a new product launch, which will extend our leadership position in the women's health market.

In a recent press release also, we mentioned that two of our products were selected to be included in a China PRC sponsored program, the PRC is going to provide R&D support for future export market.

Other significant event will be to move our office to Shenzhen and 2006 is going to be the first year that we are going to have a management expectation report of the internal control of our business on our Form 10-K and the auditor is going to form their opinion on that.

So management, we have a very cohesive, experienced management team. The management has been working together for over 12-years. We have a very global Board of Directors. We currently have five independent Directors, three from the U.S. including senior partner from Deloitte & Touche and China members of the Board including Directors of the CSRC and the Deputy Governor of Heilongjiang province.

CEO currently is Tony Liu and COO is Lily Li and Acting CFO is also Lily. Management currently owns approximately 29% of the outstanding shares.

To conclude my presentation today is an investment summary, with the tremendous opportunity in China pharmaceutical and nutraceuticals market, and we will continue to grow our company organically, but at the same time looking for complementary and accretive acquisitions. We offer a very diverse product range right now that will lower our concentration risk. With our extensive distribution network in China, we can leverage any new product and new acquired business product through the network and drive sales.

The consistent financial performance has proven the ability of this management team and internal goal of the company is to become the leader of plant-based pharmaceutical company within China, within five years and to be the global leader in the future.

And the company is confident and working towards this achievable goal. And thank you for your time on this presentation.

Question-and-Answer Session

Unidentified Audience Member

[Question Inaudible].

Wilfred Chow

Yeah, over-the-counter products can do advertisement in China, for prescription you cannot. We have been using a celebrity to promote our product, since we acquired a company called GLP, the Jinji capsule product. The promotion has been very successful, in less than five months after we acquired the company, we recorded $8.2 million revenue from that company alone.

In January 2007, we introduced a new product, within the Jinji Series product. This is also targeting women's health. This product is called Jinji. And this product is for PMS. The market potential of this product is going to be huge because this product is not going to be of any specific indication. The volume of this product is going to be significant. It can be a significant product in our 2007 revenue.

Unidentified Audience Member

[Question Inaudible]

Wilfred Chow

I would like to respond to your question in two ways. The corruption is not a new thing in China. There is corruption in all fields, not only in healthcare industry. There are corruption in banks, in construction industry and healthcare. The recent news in the newspapers is more related to the ex-director, ex-FDA being retained because he is directly linked to some of the corruption scandals that occurred in [Southern] China. This is not going to affect the company in particular, but we believe this is going to impact the industry overall. First of all this is not in particular because all our drugs were approved long time ago. We are branding drugs over 15 to 30 years of history. But the scandal is going to impact first of all of confidence of the consumer in consuming drugs. And the impact is going to delay the drug approval processes. It's not going to be a one-time impact. It's going to have a pretty long-term impact in the industry overall. But we always have a healthy and constructive approach. We would like to operate in a clean environment, in a more healthy and independent environment, which is good for strong financial and good company like us.

Unidentified Audience Member

Okay. I just wanted you to give us a little color on your acquisitions team. How are they coming along? How many companies you've got in the pipeline essentially that you are looking at? And also, what you are organically growing in new products like in case of acquisition done from the (inaudible)?

Wilfred Chow

First of all, we don't preferably say our expectation of our organic growth, and mainly after that situation. But we have confidence in the ability to grow our company organically through our historical self-consistent financial performance. We did have a 12-people team last year. We added more people into our acquisition team. We are very actively looking into acquisitions. A couple of companies have been shortlisted to be our acquisition is a true sighting. I just can't guarantee on the timing of the acquisition, but there will be acquisition coming. Our current capacity is good enough for us to grow for another two-three years. No major material capital expenditure has to be invested in this part.

Unidentified Audience Member

[Question Inaudible]

Wilfred Chow

That occurred in September 2006.

Unidentified Audience Member

[Question Inaudible]

Wilfred Chow

That was a very critical step for us to grow our company on the net distribution platform and we will continue to build that platform with our own sales person. The impact of that acquisition immediately will have a direct contribution to the OTC part of the revenue because we will have more shops selling our OTC products.

Unidentified Audience Member

[Question Inaudible]

Wilfred Chow

That's both. Yes.

Unidentified Audience Member

Can you give us an idea of the time it takes to get a new product through your FDA?

Wilfred Chow

We currently don't have a very strong R&D team to do the internal FDA approval process for ourselves. We acquire product from other company.

Thank you.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

Read all investor conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

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