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

| About: China Pharma (CPHI)

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.