Karl Francis

China Pharma Reports Improved Collection of Accounts Receivable

Amex listing requirements: If the market cap exceeds 50M (that is the case), the minimum share price is $2 (standard 3). We are close!

China Pharma Delivers on Improved Financials Promise

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.

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

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.

China Pharma Holdings: An Intriguing Chinese Pharmaceutical Play

I am also holding this one.

Q1 accounting is somewhat bizarre. The revenues from the sale of some pharmaceutical formulas were recorded as other income. The accumulated and apparently partly capitalized development costs for those formulas were recorded as operating costs. That resulted in a strong increase in operating costs and a decrease in income from operations y/y.

Inventories have been better managed compared to Q1 2006. The inventory to sales rate has come down.

Receivables are a problem for many pharmaceutical companies in China. One reason is that Chinese hospitals take a lot of time – sometimes more than a year - to pay their bills. But trade receivables to sales have improved y/y. The strong growth of total receivables has to do with the fact that the money from the sale of the formulas was expected in Q2.

If I recall the Q1 CC correctly, management has promised to grow organically without capital increases in the foreseeable future – so no further dilution. The last capital increase was in February at $1.70/share - 5%-10% below the market price then. The promised annual earnings should mostly arrive in Q3 and Q4. I conclude that the yet to be released Q2 earnings will be uninspiring.

If earnings materialize as promised and if the company can continue growing earnings by 20% to 30% in coming years (the strongly growing market should make that possible), we have a potential 3- or 4-bagger here in the next 2 years. By any metric, the current market price is a bargain.

Another completely beaten down and dried up Chinese pharmaceutical stock with even more potential in my view is CHBP, btw.