China Pharma Delivers on Improved Financials Promise

Earlier this week, China Pharma Holdings (CPHI.OB) told investors to expect a better than 60% increase in its Q1 revenues and net income (year over year). Not surprisingly, the company made good on its promise. Revenue was up 62% at $11.7 million, gross profits climbed 76% to $5.8 million, and net income rose 77% to $4.2 million. Earnings per share were 72% higher at 11 cps.

The company makes pharmaceuticals and nutritional supplements. China Pharma attributes much of its improved performance to its growing list of new drugs. During 2007, it launched two new products, Alginic Sodium Diester, a treatment for stroke, and Granisetron hydrochloride, a drug given to counteract the nausea and vomiting caused by chemotherapy. Bumetanide, a diuretic given to patients suffering from heart failure, will be launched in 2008.

Existing products also contributed to the growth. Cold remedy Pusen OK produced $1.9 million of revenue, about 16% of the total and an increase of 99%. A single distributor signed a contract for $5.6 million of Pusen at the beginning of 2008. Other existing drugs reported increases between 23% and 198%.

China Pharma continues to enjoy a favorable tax rate. Its “tax holiday” cuts the usual taxes by 50% through 2010 and results in a 9% rate for this year.

The major negative in this otherwise positive report is the increase in accounts receivable, which were already high but which grew bigger during the quarter. This issue was discussed on the Seeking Alpha blogsite (link).

China OTC Player pointed out that China Pharma’s Accounts Receivable grew from $18.6 million to $24.8 million. The article did not specify that this growth was in just the three months of Q1 and that the net change, $6.2 million, was equal to more than 50% of the revenues reported by China Pharma. On top of the accounts receivables is $3 million of written-off bad debts, which grew by $600,000 from the end of 2007.

Various respondents to the China OTC Post have attempted to ratchet down the alarm caused by the increase in Accounts Receivable. Their arguments are: 1) the Accounts Receivables are up just 32% while sales climbed 62%, and average days outstanding on the Accounts Receivable are lower, and 2) the company sells mainly to hospitals, which are famous for being slow payers, though they are considered ultimately good for the money.

The latter blogger also makes the point that China Pharma’s situation – strong growth, slow collections – makes its effect felt most immediately in terms of available cash. The balance sheet bears out the truth of this statement as the cash levels of China Pharma dropped from $1.8 million at the end of 2007 to just $700,000 at the end of March, despite the large profit reported in the quarter.

These are all good points. China Pharma must somehow strike a balance between making its products readily available and stuffing the distribution channel in an attempt to drive up quarter-over-quarter revenues. We’ll have to watch to see whether the Accounts Receivable numbers begin to moderate in the future as payers catch up to the increase in sales. If not, it’s a bad sign.

Disclosure: none.

Comments

[Karl F.]

Regarding the bad debt issue:

The amount of bad debt is determined with a formula that quantifies an increasing percentage of receivables as bad debt in function of the age of those receivables. There is apparently no bad debt otherwise defined.

Management has repeatedly stated that it is confident of collecting that “bad debt” on the balance sheet sooner or later. So far this has been the case, resulting in recurring extraordinary income contributions.

[TechKim]

All this excitement about accounts receivables possibly turning into bad debt. Basically from what I can gather together. It is the Chinese Government Hospitals that are slow in paying. All the while it is the Chinese Government that is growing the medical service distribution network to a 100% level. American hospitals are basically famous for allowing their vendors to wait nearly six months to be paid. Is it very much different in China? I doubt that CPHI is the only medical supplier that has an account receivable backlog.

[TechKim]

All this excitement about accounts receivables possibly turning into bad debt. Basically from what I can gather together. It is the Chinese Government Hospitals that are slow in paying. All the while it is the Chinese Government that is growing the medical service distribution network to a 100% level. American hospitals are basically famous for allowing their vendors to wait nearly six months to be paid. Is it very much different in China? I doubt that CPHI is the only medical supplier that has an account receivable backlog.

[TechKim]

In addition to my comment.

The negativity has not been fully addressed in regards to the accounts receivables.

I am at least addressing the reason. I am also addressing what I believe is behind the backlog. I also believe I have relieved some of the negativity.


If you were a new investor! Would you also not want to know why this company has $24m in accounts receivables and not in the bank?

A new investor could look at the $24m as earnings of $0.60 per share or as $0.60 per share of bad debt.

I for one WANT to believe that the $24.8m in accounts receivable backlog is as good as money in the bank.

[ChinaMart]

The bottom line on ARs in these Chinese pharma micros is how it affects DSO (Days Sales Outstanding). In the case of CPHI, they're increasing and are now at an average of 191 days compared to 184 days last Q).
And, (although this will sound to some like spam), LTUS.OB (Lotus Pharma)for comparison has a much more favorable DSO average of about 90. This tells me that LTUS is converting their ARs into cash at a faster rate, and more successfully than CPHI.

[TechKim]

additional comment. I would also tend to whole heartly believe that the upcoming conference will severly address the accounts receivable backlog and how it is being resolved. I would also tend to believe that once the company clearifies some of these issues that the share price will grow. I would suggest adding shares before the conference.

Conference Call

China Pharma will host a conference call on Tuesday, May 6 at 10:00 am EDT to discuss first quarter 2008 results. To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: [phone] International callers should dial [phone]. The conference pass code is 32765641.

If you are unable to participate in the call at this time, a replay will be available on Tuesday, May 6, at 12:00 pm EDT, through Tuesday, May 13. To access the replay, dial [phone]. International callers should dial [phone]. The conference pass code is 89227480.

This conference call will be broadcast live over the Internet and can be accessed by copying and pasting this link into your web browser: phx.corporate-ir.net/p...- eventDetails&c=145... A replay of the call will also be available on China Pharma's website www.chinapharmaholding... for 90 days.

[ACEMAN]

China Pharma is a fools game and y'all know it when you are arguing over capex and reimbursements. The real play in pharma in China is the deal with Novartis (NVS) the mega-pharma Swiss multinational and this is where you can make your money safely and soundly as NVS will be introducing huge covered patents and pharma-teck know-how to the China pharma industry for concessions and a piece of the action. Think analogy is to the supply side of iron-ore, steel, oil and ag commodities that China needs to build up its urbanization. New cities also need western style drugs, medicines and basic pharma delivery systems still very much at a third tier level throughout China. Novartis has received the concessions and jt. ventures to make it all happen.

[RUFCrazy]

yeah Novartis is a great really exciting way to make 5% - 10% on your money if things work out - WHOO HOO!!!

We're looking at making like 50%+ with a basket of these China plays. CPHI is one of mine and is WAY undervalued especially if they are suiccessful collecting their AR's...