China Pharma Holdings: An Intriguing Chinese Pharmaceutical Play

| About: China Pharma (CPHI)

Microcap traders have hit home runs in a number of Chinese pharmaceutical and biotech companies, such as American Oriental Bioengineering (AOB) and Tiens Biotech (NYSEMKT:TBV). Reader J.Z. has alerted me to another intriguing Chinese pharmaceutical play — China Pharma Holdings (NYSEMKT:CPHI). 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.


CPHI.OB 1-year chart