China Pharma's Q1 Impressive, But Collection Problems Are Worrisome

Q1 2008 versus Q1 2007:

- Revenues increased 62.0% from $7.2m to $11.7m.
- Gross profit increased 76.0% from $3.3m to $5.8m.
- Gross profit margins up from 45.6% to 49.6% (industry average is in the 30s).
- EBIT up 152.2% from $1.8m to $4.7m.
- Net income up 76.5% from $2.4m to $4.2m
- Net income (allowing for forex adjustment) up 129.1% from $2.6m to $5.9m

Comments: Excellent quarter. The company was able to achieve great growth momentum while keeping a close lid on costs.

Other highlights:

- Sales of PusenOK (flu/cold med) up 99%, partly because of the severe snow storms
- Buflomedil hydrochloride (cerebrovascular drug) up 198%
- Gastrodin (anti-convulsant) sales increased by 70%
- Cefaclor (antibiotic) sales increased by 64%
- Neurotrophicpetide up 54%
- Andrographolide (anti-inflammatory) up 23%

Comments: The company is now building a very impressive portfolio of drugs. Its strategy of commercializing OTC drugs that have potentially large markets is paying off, with PusenOK leading the way.

SFDA matters:
- Bumetanide received production approval in January 2008
- Three other drugs currently awaiting production approval
- One drug entered the technical evaluation phase

Comments: As reported before, SFDA is back in business, and this appears to be benefiting CPHI greatly.

Other Comments: The only thing I worry about (and this is no small matter) is the ever increasing Accounts Receivable, which mushroomed to $24.8m from $18.6m. We know that the company has had issues collecting from its larger institutional clients, but this is out of control. And this is already accounting for $3m worth of bad debts. Unfortunately, unless this issue is addressed head on, the company's stock price is not going to go anywhere fast, despite its stellar results.

My Position: Long.

Comments

[intelligence]

ACCOUNTS RECEIVABLE UP ONLY 32% VERSUS SALES UP 62%-A VERY GOOD SIGN--AVERAGE DAYS OUTSTANDING FOR ACCOUNTS RECEIVABLE IS DOWN--A GOOD SIGN--DO THE MATH--SAME IS TRUE FOR BAD DEBTS--DOWN AS A % OF SALES

[Karl F.]

Accounts receivables: CPHI is selling mostly to hospitals, known as very slow but safe payers.
Because of the strong revenue growth, the best way to look at the receivables issue is to compare receivables to cumulative sales of the last ten months. I think that that ratio hasn't improved nor deteriorated significantly.

The key problem is that the company's payment terms combined with its fast growth causes cash problems.

[Hanknmosul]

Is anyone aware of a comment made by the CEO in a past press release or CC hinting that efforts would be made in 2008 to have the company moved to NASDAQ? Seems I remember seeing that somewhere...TIA