American Oriental Bioengineering: Underwhelming Q3 Earnings

American Oriental Bioengineering (NYSE: AOB) a Shenzhen-based manufacturer and distributor of plant-based pharmaceutical and nutraceutical products, reported its earnings for Q3 2007 after the bell Monday. The company reported revenues of US$43.5 million for the third quarter, up 60.7% from the same quarter last year. Gross profits rose 73.3% to US$30.7 million for a gross margin of 70.5%. Net income for the third quarter was US$11.9 million for a net margin of 27.4% or US$0.16 per diluted share.The company reported that revenues rose due to growth in sales of its plant-based pharmaceutical [PBP] products, which grew 78.4% to US$35.5 million. The company also reported strong sales of its prescription drug lines, led by prescription products Shuanghuanlian and the Cease Enuresis Gel. Within the PBP lines, prescription products accounted for 44% of sales, with the remainder as OTC sales. On the conference call the company reiterated the importance of increased sales and higher margins of its OTC products.

Plant-based nutraceuticals brought in US$8 million in revenues or 18.4% of the total, representing an increase of 11.7%. The increased sales were a reflection of improving demand for the company's soy peptide supplements. Operating margin decreased to 32.1%, from 34.5% in the prior year's third quarter, due to additional costs including a larger salesforce and higher advertising budget.

The company also reported completing two previously announced acquisitions, those of Changchun Xinan Pharmaceutical Group and Guangxi Boke Pharmaceutical Co. Tony Liu, Chairman and CEO, stated:

Our overall results for the third quarter demonstrate the achievement made through the execution of our two pronged strategy, which is to expand our business performance through organic growth and acquisitions. We expect this strategy will continue to bring us further opportunities down the road.

For the full year 2007, AOBO anticipates revenue of approximately $160.0 million, a 45.2% increase compared to prior year revenue of $110.2 million. This guidance includes approximately $8.0 million in revenue from CCXA and Boke. For the full year, the Company anticipates diluted earnings per share of approximately $0.60, based on an estimated weighted average diluted share count of 72.0 million for the full year.

On the top line, revenue growth was above the 54.2% growth reflected in the analyst consensus. Earnings growth rate of 27.4% was slightly shy of the YOY analyst estimate of 29.3%, but EPS beat third quarter expectations of US$0.15. Full year EPS guidance of US$0.60 is in line with current expectations.

Overall , the company seems to be executing on its plan of diversifying its product portfolio further in both the prescription and OTC market, and growing through targeted acquisitions that will be quickly accretive to earnings.

Investors will be watching margins closely, due both to materials cost increases that have occurred across the Chinese pharma industry as well as costs incurred in consolidating recent and future acquisitions. The company will need to demonstrate an ability to squeeze greater operating efficiencies and margins out of its acquisitions in order to keep moving forward on its business plan. Also, new quality-related regulations from the Chinese government have the potential to increase operating costs for all Chinese pharma manufacturers.

AOB shares had risen as much as 91% since the August low, reflecting a high level of investor expectations. Prior to the release, AOB shares rose US$0.30 or 2.26% to US$13.58 in a down market for Chinese stocks. In the aftermarket shares fell 7.2% to US$12.60 and remain under pressure today.

Disclosure: none

Comments

[doodler]

Why are the earnings "underwheliming&q...

[Robin_BoyWonder]

Cause he forgot to take his anti-depressants today...

[Valdar]

It really bugs me when someone writes a 'startling' headline and then the headline isn't backed up by the story at all. AOB seems to have mostly met expectations. I expect better journalism than this out of SeekingAlpha.

[Valdar]

Actually, if you look at Timothy Roe's site, "Life Science: China", the headline (for the exact same story) is simply "AOB reports Q3 Earnings" rather than something sensational. Looks like it may have been the SeekingAlpha editors that "punched up" the headline (with a misleading perspective)

[Timoth J.Roe, MD, MBA]

Valdar, you got it right. Editors tend to edit, and its their name on the banner.

AOB's report was solid, and with compared to the reports of several other US traded China pharmas this quarter, they may end up being one of the best of the bunch.

In my opinion, the level of expectations was too high. They had a big run from the summer lows, and share price was right at their historic high prior to the report. The key tell was the 2.2% rally on the day of the report. For AOB to break through to a new high under those conditions they needed to beat on all metrics and raise guidance.

Despite these short term factors, the company is doing a good executing well on its business model. Maintaining guidance for this quarter despite strong performance may well be a smart strategic move. Next quarter should be seasonally strong, and if the acquisitions can be fully integrated quickly there should be an additional boost to both top and bottom lines.

This may position the company for a better earnings beat next quarter. I always like companies that underpromise and overdeliver. With a little share price backing and filling near the old high, this company looks good for next quarter.

[slim]

yes, this makes more sense than the headline. The company AOB is growing fast and is consistently profitable. There are some other chinese companies that are following in AOB's path. I have lots of interest in these.