American Oriental Bioengineering Q3 2007 Earnings Call Transcript

Nov. 5.07 | About: American Oriental (AOBI)

American Oriental Bioengineering,Inc. (AOB) Q3 2007 Earnings Call November 5, 2007 4:30 PM ET

Executives

Bill Zima - Integrated CorporateRelations

Tony Liu - Chairman & CEO

Wilfred Chow - SVP of Finance

Lily Li - COO and CFO

Analysts

Gur Roshwalb - Piper Jaffray

Catharine Luv - CIBC World Market

Julie Chen - Brean Murray

Shaumo Sadhukhan - Lotus Partners

Randy Saluck - Modest RockCapital

Operator

Good day, ladies and gentlemen.Thank you for standing-by and welcome to the American Oriental BioengineeringInc. Third Quarter 2007 Financial Results Conference Call. At this time allparticipants are in a listen-only mode. Following the presentation, we willconduct a question-and-session. Instructions will be provided at that time foryou to queue up the question.

I would like to remind everyonethat today's conference is being recorded. I would now like to turn theconference over to Bill Zima with Integrated Corporate Relations. Please goahead sir.

Bill Zima

Thank you everyone and welcome tothe AOB's third quarter 2007 conference call. On our call today is Tony Liu,Chairman and Chief Executive Officer; Ms. Lily Li, Chief Operating Officer andChief Financial Officer; Wilfred Chow, Senior Vice President of Finance; Hong Zhu,Vice President of Investor Relations; Jun Min, Vice President and Director;Binsheng Li, Director and Chief Accounting Officer and [Jiang Sheng], ChiefScientific Officer.

Before we begin, I would like tomention that this conference call may contain in addition to historicalinformation, forward-looking statements about AOB within the meaning of theFederal Securities Law.

Forward looking statementsincludes statements concerning plans, objectives, goals, strategies, futureevents, our performance and underlying assumptions and other statements thatare historical in nature. These forward-looking statements are based onmanagement's current expectations and are subject to risks and uncertaintiesthat may result in expectations not being realized, and may cause actualoutcome to differ materially from the expectations reflected in theseforward-looking statements.

Potential risks and uncertaintiesincludes products, service, demand and acceptance, changes in technology oreconomic conditions, the impact of competition on pricing, the impact ofgovernmental regulation and other risks contained in the report filed by thecompany with the SEC.

All such forward-lookingstatements whether written or oral, whether made or by on behalf of thecompany, are expressly qualified by the cautionary statements and othercautionary statements, which accompany the forward-looking statement, becauseforward-looking statements are subject to risks and uncertainties we cautionyou not to place undue reliance on these statements. Forward looking statementthat are made during this conference call speaks only as of this date and allwritten and oral forward-looking statements are qualified by such statements.For more information on this matter, we encourage you to review the company'smost recent 10-K filing.

With this said, I would now liketo turn the call over to Tony Liu and [Jing Dai], who will translate on behalfof Tony. Go ahead Tony.

Tony Liu

[Translated]

Good afternoon everyone. Welcometo our third quarter 2007 conference call. I would like to provide you withadjusted overview of our business. Wilfred Chow will then take you through ourfinancial results for the third quarter and Lily Li will conclude our preparedremarks by discussing our third quarter results and our outlook for the fourthquarter and the reminder of the year. And after that, we will be very happy toanswer any of your questions.

Overall, our results for the thirdquarter were strong and continue to reflect our commitment to serving the needsfor plant-based pharmaceutical and nutraceutical products in China. Our results reflect theongoing dedication and commitment from our entire organization and I thank allof our employees for their hard work over the past quarter.

We continue to take the necessarysteps to build with leading fully integrated plant-based to pharmaceutical andnutraceutical business in Chinaone that is dedicated to improving the health and wellness of Chineseconsumers. Our strategy of organic and acquisition-led growth has resulted insuccessful revenue improvement and has increased our market share and branchsegments in China.

The pharmaceutical business andregulatory environment continues to improve as the government agencies takenoff their controls of an orderly market. Our ability to adapt quickly to thechanging environment and rebound quickly to market trends provides AOBO with astrong advantage at least to our competitors.

We have completed twoacquisitions recently that have improved our product lines and broadened ourdistribution reach. During the third quarter, we closed on the Changchun XinanPharmaceutical Group acquisition, and after the close of the third quarter wecompleted the acquisition of Guangxi Boke Pharmaceutical Company. Lily, willprovide you with greater details on each acquisitions and their synergies withour existing business.

Overall, we are on the right pathfor continued growth in all areas of our business. We thank you for yoursupport, as we continue to pursue a strategy that will position AOBO as aleading company in the plant-based healthcare industry.

I’ll now turn the call over toWilfred who will review our financial results for the third quarter.

Wilfred Chow

Thank you, Tony. For the thirdquarter net sales increased 61% to $43.5 million compared to $27.1 million inthe prior year's period, driven by increased selling and distribution effortswithin our three key product categories.

Sales of our plant-basedpharmaceutical product increased to 78% to $35.5 million compared to $19.9million in the third quarter of last year. Among our two PBP productcategories, our Prescription segment increased a healthy 44% to $15.6 million andour OTC segment increased 120% to $19.8 million.

Our prescription product salescontinue to be fueled by the Shanghuanlian injection powder and Cease Enuresisgel while our over-the-counter product were driven by continued strong sales ofour Jinji products.

The third quarter sales of ourplant-based nutraceutical product increased to 12% to $8 million compared to$7.2 million in the prior year. This increase reflects continued growth of ourpeptide series of products.

Gross profit for our thirdquarter increased to 73% to $30.7 million compared to $17.7 million in theprior year. Gross profit margin for the third quarter increased to 510 basispoints to a 70.5% compared to 65.4%.

This increase in gross margin wasprimarily due to the further improved operating efficiencies and a stabilizedpricing environment for our leading over-the-counter and prescription products.

Selling and marketing expensesincreased to $5.86 million or 13% of sales in the third quarter compared to$2.2 million or 8% of sales in the prior year as the company continued toincrease the number of employees and compensation to support overall revenuegrowth. Additional Selling and marketing expenses were related to an increasein our sales force.

General and administrativeexpenses increased 1% to 9% of sales compared to 8% prior year due to ourincreased general and administrative activities to support our sales growth.Third quarter advertising expenses increased to $6.9 million or 16% of sales upfrom $3.6 million or 13% of sales last year. This percentage is consistent withour first half of 2007 advertising expenditures.

Operating income for the thirdquarter increased to $14 million compared to $9.4 million in the comparablequarter last year.

Operating margin was down likelyto 32.1% from 34.5% in the prior year third quarter. As we continue to investin the business by ramping up our salesforce and increasing our advertisingbudget.

Net income increased 58% to $11.9million or $0.16 per diluted shares, compared to $7.6 million or $0.12 perdiluted share in the prior year period.

The income tax rate for thecompany in the third quarter decreased to 17% compared to 20% in the prioryear. This lower income tax rate was a result of increased revenue coming fromour GLP subsidiaries, which enjoy a 0% tax rate for the first two yearsbeginning with the close of this acquisition in April, 2006.

Looking at the balance sheet, ourcash position increased to $170.6 million compared to $108.4 million at the endof second quarter 2007. This is primarily due result of our equity offering,which closed on July 3rd, for 9.3 million shares at a price of $7.99.

Total liability at the end of thethird quarter was $47.2 million compared to $28.4 million at the end of thesecond quarter. Third quarter revenue increased to $15.3 million compared to$12.1 million at the end of second quarter.

Accounts receivable was $15.3million compared to $11.9 million at the end of the second quarter. Cash flowfrom operation increased to $27 million compared to $15.1 million in the prioryear, primarily due to our increase in net income.

Our working capital increased to$175 million compared to $114 million at the end of the second quarter of 2007.

Overall, we are pleased with ourfinancial results. We have achieved a respectable growth, which throughexisting product line as well as through acquisitions. Our acquisition havequickly become integrated itself not only to our incremental revenue, butprovides synergy to us grow the entire business group and enhance the productoffering, and broaden distribution channel as well as increased geographicpresence. And now, I would like to turn the call over to Lily.

Lily Li

Thank you, Wilfred. We werepleased to see revenues in the third quarter increase from a strong secondquarter. We continue to execute on our strategy with a strong emphasis on theOTC business. We believe our increasingly diversified product portfolio, marketposition, marketing strategy, trusted brand name, and growing distributionnetwork, all contributed to our performance.

Our revenue growth in the thirdquarter was attributed to the following factors. First, new products launchessuch as Yi Mu Cao. Second, our existing product lines continue to grow due tothe strength of our marketing strategy. And third, as a successful consolidatorof businesses, we seek growth through acquisitions.

As we discussed on last quarter'sconference call, our flexibility allowed us to respond to slowing growth in theprescription business over this year by deploying more resources towards ourOTC business. This quick response allowed us to effectively grow the OTCbusiness in the second and third quarter. To further our growth in the OTCbusiness, we also launched new products like our Yi Mu Cao product line, whichhas been our growing contributor to our OTC revenue base. This is also a highermargin product with the significantly growing revenue opportunity. Yi Mu Cao isan excellent example of our ability to launch our product and build it into animportant piece of our business.

Our existing product lines arealso growing based on our unique marketing strategy and we will continue tostrengthen the market position for our core product.

The Shuanghuanlian product lineand the Cease Enuresis Gel contributed significantly to the growth in ourprescription product category this quarter. And so that is our more matureproduct can be significant contributor.

Additionally, our GLPacquisition, which had contributed to our result for five quarters, is nowfully integrated and is a significant contributor to our organic growth. Webelieve the Jinji series from GLP is a great example of our management team'sability to successfully integrate acquisitions, leverage our existinginfrastructure and after full year of comparisons begin to show true organicgrowth.

As I have mentioned, the bulk ofour focus remains on OTC business, as the prescription business has beensomewhat more challenging this year, we believe AOBO is in a position of acompetitive strength in the prescription market. Government regulationscontinue to be tight with regard to the pharmaceutical business, as companiesmust need more stringent requirements for drug approvals, as a result it nowtakes longer for drug to be approved.

We believe this is a positive forour pharmaceutical business as we now have a sufficient portfolio of productsthat are already approved by the State FDA. Therefore, we do not need to submitnew drug application in order to market our product.

We have in our portfolio approvalof over 300 approved quality healthcare products, which we can selectively drewthis products up based on timing, synergy and margin opportunities. This is ourstrength over competitors in this challenging environment.

Our increased focus on our OTCbusiness has been a positive step for the company's overall performance. Duringthe third quarter, we continue to increase our presence in the healthcaresector with existing and new over-the-counter products. Our Jinji brandrepresents a significant opportunity for us and we are beginning to realizerespectable flow of revenue from the Jinji product line.

We are also pleased by thecontribution from our nutraceutical product and continue our focus on expandingthe number of location that distributes this product. Nutraceutical productsremains a important contributor to our revenue and grew 12% year-over-year.

AOBO has solidified its positionas an aggressive brand consolidator in China's health-care market. We havesuccessfully executed the integration of several acquisitions that leverage oursolid marketing sales distribution and management. We believe our experience;consolidating trends will continue to be a significant competitive advantagefor our growth going forward.

As we have previously announced,in the third quarter, we closed this acquisition of Changchun XinanPharmaceutical Group Company, CCXA. The purchase price was approximately $28.5million and we financed that acquisition with cash.

CCXA was a privately ownedbusiness, primarily serving the rural health care market with more than 100pharmaceutical products in its portfolio. We believe some of the products fromthis business will be highly complementary to our existing Jinji product line,while CCXA products cover both the prescription and OTC market.

The majority of the sales comefrom the rural market which is also a key area of focus for our business. Andwe will help us to penetrate those markets with our existing product line aswell. In 2006, CCXA was profitable and it generated approximately $9 million inrevenue with approximately 25 products contributing to the overall revenue.

Some of these products includeMubao, a blood circulation enhancer for treatment of PMS. Kanguzensheng tabletis for osteothyte treatment. Yakangling, a plant-based prescription that treatsgingivitis and Manbao, a plant-based male sexual drive enhancer.

Our strategy for CCXA is to builda portfolio product and position them based on quality and a reasonable pricefor the one month that CCXA contributed to AOBO revenues. We generated $1.2 milliondollars in revenue, which was slightly above our expectations.

We expect to leverage existingdistribution channels while expanding our marketing efforts. And we believe wehave the resources to grow CCXA's business at and above market average rate byoffering quality products to new markets at reasonable prices. Additionally,after close of the third quarter, we closed on the acquisitions of Guangxi BokePharmaceutical Company in an all cash transaction, valued at $36.5 million,located in the city of Nanning in Guangxi province of China.

Boke was a privately ownedcompany that manufactured and distribute plant-based pharmaceutical,nutraceutical and personal care products, marketed primarily in China.The majority of these products have been sold over the over-the-counter.

In 2006, Boke generated revenuesof approximately $12 million and was profitable. The acquisition will beaccretive to our business in the fourth quarter. Boke's lead revenue generatingproduct and AOBO's initial area of focus for integration is a line ofnationally recognized nasal products designed to alleviate nasal congestion andthe sinus relief, like Jinji. This line is part of our brand series withproducts available in various forms, including spray, tablet, capsule andgranule form.

Our strategy in the coming yearis to make Boke's nasal spray one of the leading brands in the nasal spraycategory. As we successfully integrate Boke's leading products into ourmarketing and distribution network, we intent to develop several other Bokeproducts.

Boke has a salesforce thatexceeds 500 individuals and an expansive distribution network of primarilypharmacies throughout China.We believe that a portion of the Boke's distribution network can expand AOBO'stotal points of presence in China.Furthermore, we believe that AOBO can bring some innovative marketing ideas toBoke's product line that will enable us to cajole that business.

By both CCXA and Bokeacquisitions and similar to the prior acquisitions such as GLP, we also see thepotential to improve operating efficiency, add greater structure to the productline and implement a more beneficial pricing strategy. A part of this effort,we intend to infuse CCXA and Boke into AOBO's corporate culture and will “incentivize”their employees to improve productivity and efficiency to each business.

We are excited about theremainder of the year and about 2008 and believe we are very well positionedfor more [test] compelling growth going forward for several reasons. Our broadproduct line allows us to tap into several different types of markets andtherefore enables us to better withstand competitive, regulatory or economicpressure.

We continue to benefit from astrong distribution network and that we remain committed to getting our growingproduct lines to the most effective point-of-sale, which include hospitals,clinics, and pharmacies, as well as supermarkets, fitness centers, andpharmacies.

Our geographic presence alsocontinues to grow as we begin to penetrate the rural markets through the CCXA'sacquisition. Importantly, we are also focused on improving profitability fromall our distribution points.

We maintain a strong sales forcecomprised of more than 2,000 professionals, as well as an extensive network ofindependent distributors. This strength and geographic breadth of our revenuegenerating sales force allows us to most effectively penetrate markets. Weremain committed to keeping our finger on the pulse of the market and oursignificant presence allows us to better understand and meet the needs of theconsumer as well.

We remain firm in our convictionthat our management team and our operating platform are the best available toexecute on our plan to grow both organically and through acquisition, as weincrease brand awareness, introduce new products and leverage our strengths.

Regarding our financial guidancefor the full fiscal year 2007, we now anticipate total revenue of approximately$160 million, which represents a year-over-year increase of 45.2%. This fullyear guidance includes approximately $8 million in revenues from theacquisition of CCXA and Boke. For the full year, we anticipate diluted earningsper share of approximately $0.16 based on an estimated weighted average dilutedshare count of 72 million for the full year.

Seasonality and acquisitionintegration can cause our quarterly comparisons to fluctuate. As a result, weare focused right now on full year 2008 results and we truly expect that on anannualized basis an organic revenue growth rate of at least 30%, which includesall product lines managed by AOBO for at least four quarters, which leads thekey to achieving those targets and to remain focused on the OTC sales strategy,which we began emphasizing more strongly in the wake of [consumer's orders]this year about the prescription market. Our flexibility at that time allowedus to quickly move resources to the OTC product and we believe this shift willcontinue going forward so that we can optimize growth and the profitabilityoverall.

We remain committed to our threecore business categories and we expect that our prescription and nutraceuticalsegments will continue to increase sales on year-over-year business with themajority of our revenue growth coming from our over-the-counter products.

Finally, I would like to addressthe issue of our acquisition strategy. We planned to continue to makeacquisitions that are accretive and are the best possible use of our cash andthat will add long-term value to our business. We believe that we have found inCCXA and Boke two of the bestpossible acquisitions to integrate into AOBO and we will continue to exploreadditional acquisitions that can provide us with a further increased the scaleand branding.

We are still seeing some greatopportunities in the marketplace and although we have seen a recent uptick inpurchase prices, we believe the pool of available target companies willcontinue to increase. With $170 million in cash on our balance sheet as of September 30, 2007 andapproximately, a $130 million in net cash, after the completion of both recentacquisitions, we continue to be ready to capitalize on any attractiveacquisition target. We are constantly evaluating potential acquisitions and weremain steadfast in our desire to bring shareholders the best value.

In closing, let me reiterate thatwe think the remainder of 2007 is going to be a very exciting time for thecompany as we begin to realize the benefits of our integration skills andexperience. We believe that our new product line, our flexible business modeland our strong financial position enables us to capitalize on the broad arrayof opportunities by quickly advancing to changes in the marketplace to generateinternal growth, and by growing our business through opportunistic and welltimed acquisitions.

We have a lot of work to do inthe last quarter of this year and plan to continue to identify new ways tocapture market share, increase our visibility, and improve our profitability,including new product launches, branding efforts, business integration andacquisitions.

That concludes our prepared remarksfor today. Operator, we are ready to take some questions.

Question-and-Answer Session

Operator

Thank you ma'am, today'squestion-and-answer session includes both a Mandarin and English translator.Please ask your question in English and allow additional time for translation.(Operator Instructions) We will take our first question from Gur Roshwalb with PiperJaffray.

Gur Roshwalb - Piper Jaffray

Thank you very much, for takingmy questions. Good evening and a good quarter, there.

Tony Liu

[Translated]

Hi, good evening.

Gur Roshwalb - Piper Jaffray

Could you please breakout theacquisition revenues for this quarter for CCXA, if any were discussed. Therewere any?

Tony Liu

[Translated]

You mean the acquisition revenuefor the fourth quarter, right?

Gur Roshwalb - Piper Jaffray

No I mean from the third quarter,are there any revenues for the…

Tony Liu

[Translated]

For the third quarter theacquisition revenue, right?

Gur Roshwalb - Piper Jaffray

Yeah.

Okay. [FOREIGN LANGUAGE]

Wilfred Chow

I will take this question. In thethird quarter, we recorded $1.2 million revenue from CCXA. So that is theacquired revenue that we recorded in the third quarter.

Gur Roshwalb - Piper Jaffray

Thank you.

[FOREIGN LANGUAGE]

Gur Roshwalb - Piper Jaffray

How much of this will grow? Youthink it’s available through extending your distribution network to ruralmarkets through your product lines of Jinji and the other successful productlines?

[FOREIGN LANGUAGE]

Tony Liu

[Translated]

Yeah. I'll take this question,and then we would like to open queue. In fact, we have been trying to expandour distribution point in the past. After the acquisition of CCXA and Boke, wehave then increased the distribution points by about 30%.

Gur Roshwalb - Piper Jaffray

Thank you. What do you attributethe continued strength of prescription product growth given the greater focusyou've had on the OTC business results?

[Translated]

Could you please repeat yourquestion?

Gur Roshwalb - Piper Jaffray

Okay. To what do you attributethe continued strength in prescription product the Shuanghuanglian powder andCease Enuresis Gel? How can they continue to grow strongly, or to why they aregoing strongly given the greater focus on the OTC business away from theprescription products?

Lily Li

The product name that youmentioned are Shuanghuanglian powder?

Gur Roshwalb - Piper Jaffray

Shuanghuanlian powder.

[Translated]

Unidentified CompanyRepresentative

What powder, Shuanghuanlian gel,Okay.

[FOREIGN LANGUAGE]

Lily Li

I will take this question.

[Translated]

In fact, at the first quarter,due to the macro environment we adapted and adjusted our product developmentstrategy and were focused on the OTC products. In fact, from the results of thethird quarter, we can see that the adjustment of our product developmentstrategy has been proved very successful.

In fact, the sales of OTCproducts account for 45% of order sales and the prescription products accountsfor 36% of order sales and so we can see the adjustment is very successful andit has successfully increased our margin and in fact even though we are nowfocusing on the OTC markets, we still see increase in growth of prescriptionmarkets and that's what we have anticipated.

As we have mentioned in the firstand the second quarter conference call the prescription products have beenwitnessing growth and especially the revenues from the key products that youhave mentioned the Shuanghuanglian injection powder and the cease enuresiscapsule, in fact they have seen 35% of growth.

Gur Roshwalb - Piper Jaffray

Thank you, and my lastquestion. How do you expect the cost ofintegrating the acquisitions to affect your net margins in 2008?

[FOREIGN LANGUAGE]

Tony Liu

Based upon our past acquisitionexperience, at the beginning of the acquisitions, in fact the gross margin ofour company will be affected by those newly acquired enterprises due to theirprevious low gross margin or low production efficiency. And so, in fact, theacquisition has to a certain extent, affected the gross margin of our companythat as per the net margin in the future. I don’t see any big influence.

Gur Roshwalb - Piper Jaffray

Thank you very much for taking myquestions.

Tony Liu

Thank you

Operator

And we'll next question comes [CatharineLuv] with CIBC World Market

Catharine Luv - CIBC World Market

Hi. Good afternoon, Tony, Lily, Wilfred, and all.Congratulations on the quarter.

Lily Li

Hello, Catharine.

Catharine Luv - CIBC World Market

Hi, my first question, I justwant to get some clarification on your guidance. Does your EPS guidance includeforeign exchange gains?

[FOREIGN LANGUAGE]

Wilfred Chow

The guidance that we have on theEPS is based on the net income on the income statement, divided by theestimated weighted average share count. If you are referring to the foreignexchange gain as part of the comprehensive income, that is not included in thecalculation of the EPS.

Catharine Luv - CIBC World Market

Okay. Great. Thank you. Yeah, Iam afraid I want to continue to follow up on one of the questions asked before.I would like to get a sense of the product gross margin for CCXA and Bokeacquisition. I understand in the initial stage of the integration, we probablyshould expect a decline in gross margin of those products, as Lily justmentioned. But going forward, do you feel the gross margin should come backlike 70% end of this quarter, could you give some color on that?

[FOREIGN LANGUAGE]

Catharine Luv - CIBC World Market

Okay, great. Thank you.

Tony Liu

[Translated]

For the short-term, to certainextent, the gross margin will be affected by the new acquisition, but for thelong-term we are trying to improve the gross margin of those acquiredenterprises to the existing level of AOBO, and we are very confident aboutthat. And in fact, the gross margin is affected by many factors such as theproduct line, the production efficiency, and acquisition. But, I want toreiterate that we are very confident that we are able to improve the grossmargin of those newly acquired enterprises to our existing level.

Catharine Luv - CIBC World Market

Okay. My final question is inregard to your acquisition strategy going forward. And from the past twoacquisitions, it seems the company is really trying to shifting to the OTCmarket. But, I am just wondering, because you have significant presence in therural hospital area.,I am wondering like going forward would your acquisitiontarget more focused on OTC or it will be balanced between OTC and prescription?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

Okay, just now Lily said we wantto reiterate the criteria that we use to evaluate our target of acquisitions.The first criteria, we want to acquire companies that have good products,meaning their products are very competitive. That is within what the governmentpolicy encourages and these are innovative products. Or the target companieshave some distributor channels or other assets that can be complementary to ourbusiness. Or the target company has some R&D resources that can be verybeneficial for our company to further realize our marketing strategies. And ina nutshell, I want to say we want the target companies to be accretive to ourexisting business and only after we come to this conclusion then we willconsider buying such companies.

Catharine Luv - CIBC World Market

Okay. Thank you very much.

Lily Li

Thank you.

Operator

And we will take our nextquestion Julie Chen with Brean Murray.

Julie Chen - Brean Murray

Hi Lily and Tony and Wilfred howare you?

Lily Li

Hi Julie.

Wilfred Chow

Hi, Julie, we are [fine].

Julie Chen - Brean Murray

I have a few questions, so stillin terms of operating efficiency if I were to look at CCXA and Boke for nextyear, can I view them very similar in terms of the potential revenuecontribution very similar to GLP or is that not the model I need to look at?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

In fact, the acquisition of GLPhas been proved to be very successful and based upon our past experience andthe historical records, we are now trying to give outlook towards that newaction for Boke and CCXA. But, we currently we cannot give you very accurateassessment for this two companies, but we are very comfortable that theacquisition of Boke and CCXA will be very effective.

Julie Chen - Brean Murray

Thank you, Jing, Next question ison GMP. The China'sFDA came out with a new GMP standard that's going to be effective January 1,2008. With this new standard, how can we you look at what the impact might bein 2008 through this financial statement overall. Is there any OPEX impact, iswhat I am trying to figure out, or is there any other additional operationalimpact that will bring?

[FOREIGN LANGUAGE]

[Translated]

In fact, on the October 29, theGMP certification standard has been implemented and the pilot implementationstarted a year ago, and they have conducted very deep studies and researches into these new standards and we don’t think it will affect the hardware, the hardenvironment. And in fact according to this new standard, greater efforts willbe made for the acquisition especially regulation and control. The regulationand control related to the software, such as training of staff, theirqualification and production records will be more frequent and stronger. And I thinkthis new standard is a good news to AOBO. In fact, AOBO has been strictlyfollowing this new standard and I think the new standard will help the marketto develop towards a very good direction. In terms of the increment on thefinancial statement of our company, I don't see any increment.

Catharine Luv - CIBC World Market

Thank you. My last question is onstaffing, with acquisition of Boke and CCXA and potentially with thatacquisition coming on in a pipeline. In terms of staffing, how should we thinkof staffing is not an issue in terms of potential weakness for the company isaccompanied proactive looking at staffing, finding the right personal to ensurethat the transition will be smooth or is there any other activity is going tomake sure that this is a smooth transition?

Lily Li

[Translated]

In fact the management of AOBO iswell strengthened, the group is very stable and there are about 50 seniormanagement personal who have been absolutely working in various fields and theyhave been playing very important roles. And they have stably contributedsignificantly to our company. And in terms of talent selection, we have twomethods, one is the internal promotion, those people and staff who are veryfamiliar with our businesses and who have been trained and developed by ourcompany will be promoted to some key position. And another method is theexternal recruitment and in fact training has been playing a key role in AOBO.For the past three quarters in 2007, a lot of work has been done and a lot of inputhas been made in training. And in terms of the cost that you can see, thetraining cost of our company increased by 50% and so we are very confidentabout the staffing and management team and of course a lot of work has beendone.

Catharine Luv - CIBC World Market

Thank you very much.

Tony Liu

[Translated]

In terms of the starting for CCXAand the Boke--after the acquisition of these two companies was completed, infact, we have maintained the written off management team and the team is verystable. Currently, all the major managements are still working in these twocompanies. And we have adjusted this staffing in these two companies from asper the financial staff according to the requirement of USA SEC and internalcontrol we strengthened our management efforts for financial staff.

Another factor related to thepersonnel and staffing adjustment is about the enterprise culture. In fact, wehave tried to integrate these two companies into culture of AOBO, so that theycan adapt themselves to the requirement of the public company and currently theoperation of these two companies is very successful and we are very confidentabout the staffing of these two companies.

Catharine Luv - CIBC World Market

Thank you very much.

Operator

(Operator Instructions). We'lltake our next question from Shaumo Sadhukhan with Lotus Partners

Shaumo Sadhukhan - Lotus Partners

Hi, can you explain theadditional money that was spent this quarter on advertising and which productyou were primarily targeting with the increased advertising?

[FOREIGN LANGUAGE]

Unidentified Company Representative

In the first quarter, theadvertisement expenditures increased to 16%, in fact the increasedadvertisement expenditure is closely related to our adjustments from theprescription products to OTC products. In particular, we conducted lot ofadvertisement efforts for the Jinji product in order to build our productsbrand and increase the sales. And in fact, this enhanced advertisementexpenditures can help strengthen our brand, develop the brand and serve for theother series of product and I think this kind of influence is necessary. It iscommensurates with our overall strategy.

Shaumo Sadhukhan - Lotus Partners

The additional advertising, isthat for Jinji capsule or is that for Jinji, Yi Mu Cao primarily?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

In fact, both Jinji series and YiMu Cao products and in fact half of the advertisement expenditures were usedfor the GLP products and from the financial statements you can see it has beenvery effective.

Shaumo Sadhukhan - Lotus Partners

The advertising expenditures thatyou are making, is it primarily for growth now or growth in the future or is itcombination of both of those?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

In fact, the advertisement inputis not just for the short-term specific product. It is designed for the seriesof products and the brand building of our company. For example, take Jinjiproduct as an example. We want to develop Jinji products into the number onebrand for women medicine, and also, this advertisement includes a design tobuild the position of AOBO as the leading company that produces the plant-basedproduct.

Shaumo Sadhukhan - Lotus Partners

And the additions that you aremaking to your sales force right now, is that to prepare for the acquisitionsthat have been made with CCXA and Boke or is it because you expect that thoseaddition to the sales force will help sales of existing AOBO products?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

In fact, the increased staff ofAOBO is appropriate for our strategy and is designed for both the acquisitionsand the organic growth of our company. And the increase of the sales force, infact, is designed on the one hand consolidate the existing market channels whohave better contact with those distributors and the wholesales lines and on theother hand it is designed to expand the existing channels.

Shaumo Sadhukhan - Lotus Partners

One final question, in terms ofthe acquisitions that you’ve done the last two GLP, you went from $10 millionto $40 million plus in sales. Now same with HSPL you went from you know $5million or $6 million of sales to more than $25 million of sales. Can you talkabout whether the potential of the two new acquisitions, given enough time, isto be able to do some more things?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

In fact, Boke has only been quitefor about 20 days and for CCXA only more than a month. So I cannot be veryspecific about them, but I can assure you that we are working for thatdirection.

Shaumo Sadhukhan - Lotus Partners

Okay, thank you.

Lily Li

Thank you.

Operator

We'll take our next question fromRandy Saluck with [Modest Rock Capital]

Randy Saluck - Modest Rock Capital

Hi, most of my question has been answered.But it was a strong quarter and the long term story seems pretty impressive tome. I know you've touched upon this before, but I want to go back and may be,ask you about your pipeline for acquisitions and sort of what plan is inthinking in terms of making additional acquisitions. I am not [roistering] upthe criteria as much as what the pipeline looks like and what's the timing?

[FOREIGN LANGUAGE]

Lily Li

[Translated]

In fact, as for the acquisitionstandards I have mentioned, the company that are complementary to our companyand have innovative products and can expand our distribution channels andprovide strength and research efforts. Then all of those companies will be thetarget of our acquisition efforts. And currently we are actively evaluating thegood potential companies that meet these requirements. But as for the specificnumber of acquisition, I cannot give you the exact number now. The targetacquisition companies are defined I will update you.

Operator

And that does conclude ourquestion-and-answer session. At this time I would like to turn the call backover to our management for additional and closing remarks.

Lily Li

Thank you, everyone forparticipating in this quarter's conference call. We are looking forward to updateyou in the next quarter's conference call. Thank you everyone.

Operator

That does conclude today’sconference. Thank you for your participation. You may disconnect at this time.

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