It is all too easy to react with doom and gloom to the retreat (some drastic) of the share prices of the Chinese OTC stocks. Some investors are fleeing from what they perceive as the start of the bubble burst. But that is an oversimplified picture. Some stocks have held up extremely well amid this turmoil. China Organic Agriculture (OTC:CNOA), for example, started last week at $1.55 and is currently trading well above $2. China Recycling Energy (NASDAQ:CREG) has gained over 55% in just 5 trading sessions.
Clearly, there are great stories out there. But what is more important, this overall correction (which is great for the exuberant market) presents wonderful buying opportunities all round. What I would like to focus on for this week is stocks with solid financials that make great long-term investments for the risk averse. At the top of that list is China Pharma Holdings (NYSEMKT:CPHI).
CPHI develops, manufactures, and markets generic and branded pharmaceutical products that treat a wide range of conditions, including infections, hepatitis, vascular and nervous system ailments and related diseases. Its drug portfolio, in contrast to the many listed pharma companies in China, is light on traditional Chinese medicine. Instead, the company has a wide range of antibiotics for infection control, as well as its increasingly popular drug called PuSenOK, which treats flu and cold.
The company's current strategy is to identify generic drugs that have large established markets and improve upon them through its company's R&D. CPHI is able to obtain 3-year protection under Chinese law for these improved generic drugs. CPHI's main (100% owned) subsidiary is Helpson Bio-pharmaceutical, a company headquartered on Hainan island in China. Helpson has consistently been voted as one of the best enterprises by the province's Economic and Trade Bureau.
Current Price: $2.90
52-Week Range: $1.30-$4.24
This is a beloved stock, as evidenced by the fact that it is currently the top rated Chinese stock (OTC or otherwise) at The Motley Fools China CAPS page. For good reasons too. The company has demonstrated consistent and rapid growth for at least its past five quarters, essentially since its listing in mid 2006. It has a competent and conservative management team, and for FY 2007, its financial results have been outstanding, with tremendous momentum:
Q3 2007: Revenues grew 65.4% yoy; Net income grew 80.7% yoy; EPS grew 68.6% yoy
Q2 2007: Revenues grew 115.6% yoy; Net income grew 81.7% yoy; EPS grew 69.5% yoy
Q1 2007: Revenues grew 52.8% yoy; Net income grew 46.6% yoy; EPS grew 47.5% yoy
The amazing thing is, this was all done without acquisitions or dilution of earnings. The current shares outstanding stands at 37.2m, the same number as at the beginning of this year. There are some warrants out there, but these amount to no more than 3% of total shares on conversion.
With the problems at SFDA over and with the company's strategy of focusing on improving generic drugs taking hold, this is a great looking company going forward. If there's any concern at all, it is that the company has been on a search for an investor relations firm, and despite urgings of its shareholders, hasn't made a move. I suspect once this happens, the great story that is the company will finally be fully revealed to the investment community.
Of course, all the above is irrelevant if the stock is trading at a ridiculous multiple, except it isn't. This is a proven high growth stock, and yet it is eminently affordable:
EPS: (FY06) 0.25 [LTM] 0.34 (FY07) 0.40*
P/E: [LTM] 8.5 (FY07) 7.3
*Based on COP estimates .
Compare this to the LTM P/Es of comparable non-OTC Chinese pharma stocks: American Oriental Bioengineering (AOB) - 18.9x, China Shenghuo Pharmaceutical (KUN) - 20.9x, Tongjitang Chinese Medicines (NYSE:TCM) - 40.8x, and SCR - 20.8. It is even cheap compared to pharma stocks traded OTC: (OTCPK:AIDA) - 52.5x, (OTC:CKGT) - 12.8x, (OTCPK:CSKI) - 13.6x, and (OTC:CYXI) - 11.5x. I think this is a unique buying opportunity. I'm long and looking to buy more.
Investment Risk: Moderate.
Bottom Line: Accumulate.
My Position: Long.