China Pharma Holdings: An Intriguing Chinese Pharmaceutical Play

Microcap traders have hit home runs in a number of Chinese pharmaceutical and biotech companies, such as American Oriental Bioengineering (AOB) and Tiens Biotech (TBV). Reader J.Z. has alerted me to another intriguing Chinese pharmaceutical play — China Pharma Holdings (CPHI.OB). China Pharma develops, manufactures, and markets Chinese and Western bio-pharmaceutical products for treating infections, hepatitis, vascular disease, CNS, and other conditions.

With roughly 40.9M shares outstanding [37.23M at the end of last quarter plus 3.76M registered for issuance upon exercise of warrants], CPHI has a market cap of approximately $55.2M at today’s closing price of $1.35. The balance sheet is clean, with $2.95M in cash and equivalents, no long-term debt, and short-term notes amounting to less than half of its receivables.

Last quarter, China Pharma earned $2.4 million [up 46.6% year-over-year] on revenues of $7.2 million [up 52.8% year-over-year]. A substantial part of the growth came from two newly-introduced products: hepatocyte growth promoting factor and ozagrel sodium [representing 8.5% and 10.7% of revenue, respectively]. In the earnings release, China Pharma also reaffirmed its full year guidance for 2007 of 30% increase over 2006 net income of $8,587,086. By my calculations, that amounts to $11.16M, or just over 27 cents per share.

Now for the caveats: First, despite progress in most operational metrics, CPHI was operating negative cash-flow last quarter due to ballooning receivables and inventories. While this is not abnormal for a growing business, it needs to be watched very closely. If the receivables need to be written off, CPHI will be adversely affected.

Second, J.Z. indicates that $600k of the first quarter revenues were attributable to one-time gains on technology sales, although I can’t seem to find that information. Third, the technical picture is not good. After a breakout and spike upwards last fall, CPHI has retreated steadily even after what appeared to be a solid first quarter report. I am concerned that perhaps the sellers know something I don’t.

Bottom line: Despite a good first quarter report and reaffirming 2007 guidance, China Pharma shares have been pummeled mercilessly. If the company reports even a decent second quarter, I expect shares to bounce up to $1.80 or higher.

DISCLOSURE: Long CPHI.OB.

CPHI.OB 1-year chart

Comments

[max petrisek:]

The China Pharma group have taken a beating. CPHI did also as U stated.

2007 Aug 08 07:10 AM

[Karl Francis:]

I am also holding this one.

Q1 accounting is somewhat bizarre. The revenues from the sale of some pharmaceutical formulas were recorded as other income. The accumulated and apparently partly capitalized development costs for those formulas were recorded as operating costs. That resulted in a strong increase in operating costs and a decrease in income from operations y/y.

Inventories have been better managed compared to Q1 2006. The inventory to sales rate has come down.

Receivables are a problem for many pharmaceutical companies in China. One reason is that Chinese hospitals take a lot of time – sometimes more than a year - to pay their bills. But trade receivables to sales have improved y/y. The strong growth of total receivables has to do with the fact that the money from the sale of the formulas was expected in Q2.

If I recall the Q1 CC correctly, management has promised to grow organically without capital increases in the foreseeable future – so no further dilution. The last capital increase was in February at $1.70/share - 5%-10% below the market price then. The promised annual earnings should mostly arrive in Q3 and Q4. I conclude that the yet to be released Q2 earnings will be uninspiring.

If earnings materialize as promised and if the company can continue growing earnings by 20% to 30% in coming years (the strongly growing market should make that possible), we have a potential 3- or 4-bagger here in the next 2 years. By any metric, the current market price is a bargain.

Another completely beaten down and dried up Chinese pharmaceutical stock with even more potential in my view is CHBP, btw.

2007 Aug 08 11:21 AM