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Daniel J. Riner
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I am a contrarian deep value investor, seeking the best risk-adjusted investments wherever they can be found.
  • Tianyin Pharma: China's First Pfizer? 3 comments
    Mar 21, 2013 2:48 PM | about stocks: TPI

    Note: I originally wrote this article in the end of Febraury 2013, so be mindful as to my price recommendations.

    Dear Reader,

    Before, I go into my stock suggestion today, I want to make a couple musings about my recent time in China. Almost everything here is diametrically different than what I am used to back in the States. Not that this is a bad thing, but it does make for one great culture shock your first week here. One of the best things about living in a country like China is that you get to see how people think and act from a different angle. The common polite phrase to say in Beijing is literally "Have you eaten?" (for those that know the pinyin; "Chi le ma?"). This is the equivalent of asking "Hey Bob, how are you doing today?" You see, everything here is centered around needs and if you have had them taken care of yet, especially if it is a family member or a close friend. This is also why you do not see many charities in the Middle Kingdom. If someone is unlucky in life, the common thought is that a family member or a close friend should pick up the slack. Although many of the political leaders are prima-facie commies here, they aren't exactly for the cradle-to-grave welfare policies that they embraced during their former Maoist years. In fact, Zhou Enlai and Deng Xiao Peng did a lot to change things starting in 1974 with Zhou's introduction of what are commonly known as the 'Four Modernizations' and Deng's implementation of those ideas, two years after Zhou passed away in 1976. The Four Modernizations are:

    1) Agriculture

    2) Industry

    3) Technology

    4) Defense

    These 'Modernizations' were specifically intended to make China a great and self-reliant economic power by the 21st century. As you already know, the China of today has become a centrally-planned economy within the context of a communist government that is still heavily influenced by traditional Confucian values of duty and obedience. The reason I illustrate this is because there are a lot of investment applications that naturally flow from this foundation. A recent poll found that the nation's top issues in order are health-care, employment, income-gap, and air/water pollution.[1] At least three of the four modernizations are related to all of the top issues facing China.

    In addition to this foundation, former President, Hu Jintao, initiated a 2010 goal of doubling per capita nominal income and GDP by 2020 will be another driving force for my recommendation. Although China's growth is phenomenal compared to the West, a significant portion (perhaps as high as 15-20%) of the GDP numbers created by China are fictitiously contrived through the dozens of infamous 'ghost cities' to the vast expansion of alternative and uneconomical energy sources, such as solar power, that they pour money into in order to pad their growth data. There are also certain hindrances that investors should be aware that have the potential to cause bumps in China's economic highway. You see, when Mao decided to forcefully take all of the land away from those evil farmers and essentially declare it as property of the State, he made a bylaw that those who purchase residential houses or apartments could only have the title to that property for 70 years. The original batches of leases handed out in 1949 will be coming due by the end of this decade. It will be a fork in the road for China to either change its policy towards a more free-market, growth-proven strategy or to continue with the status quo. I believe this to be one of the more important fulcrums in their future, as Professor Niall Ferguson of Harvard has cited that one of the "6 killer Apps" that helped to create the growth of the West was our system of Private Property[2]; starting after the failure of communes in Plymouth Colony, circa 1622.[3] Only if politicians were a little like William Bradford, we might, just might, get results when it comes to fundamental budget reform.

    In addition, all of this growth won't come without side effects. To grow at this rate, you need more energy. China along with India will capture nearly 93% of the net growth in coal demand going out to 2030.[4] Not that I have a vendetta with coal, but it comes with some smoggy consequences that tend to create harmful lung-penetrating, blood absorption particulates less than 2.5ppm. Here is a picture I snapped while riding the bus last January 13, during the worst recorded pollution levels in China's history (compares with England in the 1800s). Levels reached 900[5] micrograms per square meter and many detection instruments don't go above 900 micrograms, so it may have been worse! The World Health Organization recommends an average 24 hour exposure of 25 micrograms.[6] As a reference, Beijing has had an intraday average of 194 micrograms per square meter since January.[7]

    (click to enlarge)

    As you can see (pun intended), the visibility index was perhaps 50 meters that day. To give you an idea of how bad it was; when I looked up at the sun, it had no luster and it could have been mistaken for the moon. Now, I am not suggesting we all jump up and donate money to the nearest Greenpeace center. Far from it. I believe the solution to my stock suggestion is in the murky photo above. Perhaps, I have tipped you off by now.

    At any rate, I believe there are significant opportunities within certain pharmaceutical manufacturing companies, particularly those companies that have a strong line-up of respiratory and immune-building medicine in their portfolio line-up. Respiratory diseases and disorders are a constant problem in China. According to the World Health Organization and CDC, chronic respiratory disease, also known as Chronic Obtrusive Pulmonary Disease (COPD) is the second leading cause of death in China.[8][9] Additionally, trachea, bronchus, lung cancers, and lower respiratory diseases are among the top ten leading causes of death in China.[10] Although most studies are careful not to pinpoint any blame on the 800 lb. gorilla in the room, it is glaringly obvious that pollution is one of the leading causes of infections and diseases in China. In fact, one researcher calling for more transparent pollution data to be released says that his outpatient clinic experiences 10% higher traffic volume on hazy days.[11] There are other factors that outside observers should take note of. For instance, despite estimates from the WHO that 50% of Chinese males smoke, there is little difference between prevalence rates of COPD among men and women in China. This fact points to the 800 lb. gorilla in the room.

    Conversely, China is a very health conscious nation, as it was the first nation credited with discovering tea and then export it as a medicine to Japan and India between 1000 and 1100 AD.[12] Teas of all varieties flow like water in China and everyone has a thermos sized canteen by their side all day. Tea is so popular here, that there was a famous 'tea bubble' that coincided interestingly enough with the Global Housing Bubble in 2007. Prices went to $150 between 1999-2007 for a pound of this black fermented, aged gold, called Pu'er Tea. Manufacturers and entrepreneurs became millionaires and people quipped "it is better to save Pu'er than to save money".[13] If you know how the housing bubble turned out, you know how this fermented pseudo black gold turned out. Here is a quote to sum it up, "Everyone was wearing designer labels", said Zhelu, 22, a farmer who is a member of the region's Hani minority and uses only one name. "A lot of people bought cars, but now we can't afford gas so we just park them."[14] Nonetheless, with or without the tea bubbles, the healthy drinking preferences and lifestyle choices among Chinese is an indication that they are more likely to consume modernized TCM (Traditional Chinese Medicines) and conventional pharmaceutical medicines to help improve their health and ward of illnesses.

    What is a TCM you ask? Traditional Chinese Medicines are a broad based category of herbal medicines, exercise, acupuncture, and massage. However, the particular TCM we will be discussing today is specifically the medical herbal remedy. TCMs represent approximately half of the products TPI (the stock I am suggesting today) has in their product portfolio, with the other half comprising generics and macrolide Active Pharmaceutical Ingredients (NYSEMKT:API). 75 percent of drugs in China are generics. TCMs compose around 11 percent of the total pharmaceutical market, which gives it an opportunity for growth. The modernized aspect of TCMs is the scientific application of integrating herbal medicines into pill, liquid, or capsule form to readily treat or prevent illness or disease. This is what we know as alternative medicine in the West.

    Additionally, as incomes rise, their awareness of the importance of personal health will only increase as is the case in most nations that experience significant income growth. It is my assumption that higher incomes will ultimately lead to more health-conscious preferences and purchases when it comes to nutrition and prevention of diseases.

    I am sure everyone has heard of the rise of the middle class story in China to create enough disposable income to fuel substantial domestic demand. China is expected to have 130-200 million more people migrating from rural areas to cities over the next decade, on top of the 680 million that now live in cities (about 51.3% of the population).[15][16] Incomes are purportedly rising; Deloitte in 2009 found that China's urban and rural disposable income per capita was 17,175 RMB and 5,135 RMB, respectively, up 8.8% and 8.2% over the prior year and up more than 9 fold since 1990.[17][18] That same Deloitte study found that China is poised to overtake Japan as the world's second-largest pharmaceutical industry by 2020; "Driven by strong economic growth, increasing urbanization and the demands of an aging population".[19] As of 2010 China is the seventh-largest pharmaceutical market. Below is a graphic showing China and other top pharmaceutical market CAGRs between 2000-2005 (blue) and 2005-2010 (green):

    (click to enlarge)

    -Source Link

    And here is a look at the future of projected total Pharmaceutical market CAGR rate, by sales in China:

    (click to enlarge)

    -Source Link

    Well, now that I have given you some fodder to feed on, I will announce the recommendation that I hinted at earlier. After doing my research and due diligence, I think a significant opportunity is presented to investors within Tianyin Pharmaceutical Co. (NYSE: TPI).TPI with its 1200 employees and 3 operating facilities has a core business focused on researching, manufacturing, and selling pharmaceutical products in China. TPI (formerly known as Viscorp, Inc.) was established under the laws of Delaware in August 2002 and like many Chinese listed ADRs, is the result of a reverse merger of a shell company based in the British Virgin Islands. Its operations are headquartered in Chengdu, Sichuan Province, just north of Yunnan Province in Central China. It is a small cap company that is currently trading at a discount to cash on the balance sheet with a market cap of $21.7 million, zero LT Debt, and a book value per share of $3.16 as of February 19, 2013. Among other bullish reasons, TPI boasts a healthy mixture of institutional ownership relative for small caps at 19% of the total 29.33 Million Shares Outstanding, with Pope Asset Management and Renaissance Technologies (of James Simons fame) leading the way; 5,105,165 (17.4% of total shares) and 390,400 (1.33% of total shares) shares owned, respectively. TPI's last closing price was $0.74, a 76% discount from BV. From their most recent 10-Q, as of December 30, 2012:

    "We are engaged in the development, manufacturing, marketing and sale of patented biopharmaceutical, modernized traditional Chinese medicines (mTCM), branded generics and other pharmaceuticals in China. We currently manufacture and market a portfolio of 58 products, 24 of which are listed in the National Medical Reimbursement program, including the patent protected Ginkgo Mihuan Oral Liquid (GMOL) and a series of drug candidates that target various high incidence healthcare conditions in China." -10-Q Source

    When it comes to investing in small cap companies vulnerable to market volatility and systemic risks it is important to have a well-qualified management team. I will quickly highlight the CEO, CFO, COO, and Director of Sales, the core engine of TPI. I believe in managers that know their business and market and have some sort of expertise in the field. The CEO, CFO, and COO of TPI exude sage-like qualities. CEO and Chairman, Dr. Guoqing Jiang, M.D., PhD., was the former CEO of Kelun Pharmaceutical Group, a $700 Million per year Revenue generation machine that oversaw 7,000 employees. Dr. Jiang has led TPI since 2003 and in addition to the 19% institutional ownership I cited above, Dr. Jiang has considerable skin in the game, with over 25% of total shares owned, or 7.43 Mn shares owned out of the 29.33 Mn total shares outstanding. Not only does Dr. Jiang have relative working knowledge in the industry, he has run former, larger companies, and composes a significant amount of shares in TPI. The CFO, Chief Business Development Officer and Director, Dr. Jiayuan Tong, M.D., P.hD., is the former Head of China Healthcare Investment Banking at ROTH Capital Partners, biotechnology analyst at Rodman & Renshaw, and a former Senior Research Fellow at the University of California Irvine. Dr. Tong holds a Ph.D in Neurobiology and Behavior and earned his M.D. from Peking University, the number one University in mainland China and 37th in the world according to The Times Higher Education.[20] He also holds 2 patents and has published 3 articles on Nature. Dr. Tong has been on a buying spree, going from 0 shares to purchasing 134,026 shares, approximately .5% of total outstanding over the past 13 months. The COO, Tao Yang, has over 20 years of experience in sales and marketing and is a former sales training specialist for AstraZeneca and Bayer; two companies with significant development plans in the Chinese pharmaceutical realm. Director of Sales, Dr. Daqiao Zhang holds an MBA from Macau University and has held various Senior Marketing and Sales positions at other publicly traded pharmaceutical companies; Simcere Pharmaceutical Group (NYSE: SCR) and Nanjing Medical Company (SHSE: 600713). Dr. Zhang has purchased a healthy 184,999 shares over the last year. Taken together, the management team at TPI owns a total of 7,746,249 shares or 26.41% of the total shares outstanding. Altogether, the institutionals and insiders represent approximately 46% of the total shares outstanding. A quote by Peter Lynch sums the recent buying spree by management pretty succinctly, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."

    Before I get into the financial details of TPI, I also wanted to affirm my decision of a company this small. After making my decision of targeting a company in a high growth industry with healthy underlying economic fundamentals, I used a couple other stock screeners. First, I took a macro view of choosing between small cap and large cap stocks. I made my decision to filter out large cap stocks because of the evidence that suggests the long-term annually compounded returns of small caps enabling investors to not only beat the market but to significantly increase their rate of return in excess of what other indices like the S&P 500, Dow, or any other comparable benchmark offers. The evidence appears to be even stronger for emerging market small cap companies. If we make a simple comparison of a small cap Index fund such as the Fidelity Small Cap Discovery Fund,[21] over the last ten years we find that its returns exceed all indices including the Russell 2000, S&P 500, and the Dow[22]. If one were to invest $10,000 on January 31, 2003 into the Fidelity Small Cap Fund, it would have turned into $35,479 before fees and taxes, as of January 31, 2013; a compounded annual return of 13.5%.[23] Compare that to $10,000 invested into a couple large cap indices and a small cap index, the S&P 500, Dow, and Russell 2000 over the same time period[24] would have turned into $17,695, $17,396, and $24,746, respectively. Put another way, you would have ended up with 100.5%, 104%, and 43.4% more money at the end of the 10 year period if one would have put their money in the small cap fund versus the benchmark indices. At this point, it is crucial to understand that there are far fewer analysts reviewing small cap stocks, which for simplicity purposes I will consider under $1 Billion market cap. In fact, according to NYU Finance Professor, Dr. Aswath Damodaran, the average number of analysts covering small cap companies is 4.[25] Compare that to the average number of analysts covering large cap companies, 23,[26] and you can see there is a high probability of far less information being publicly available according to Dr. Damodaran. This creates opportunities to invest in companies that are not being properly valued by the Street.

    This is why it is vital to not only be diversified with the increased risk of small caps, but to do your due diligence and to be sure you are investing in a company with a well-qualified management team with sage like expertise in navigating the high variability of quarterly revenue and earnings in small companies. It is why I have provided an additional filter to help with my decision. This filter is used by Buffett and was originally produced by his mentor, Benjamin Graham, it is called the Net Current Assets Value per share (NCAVPS).[27] I favor the NCAVPS metric because it is not only straight forward, but it is more rigorous than some of the other measures, such as book value per share. You simply take the current assets, subtract out total liabilities, and then divide by the shares outstanding. TPI's NCAVPS as of December 30, 2012 is $1.16. Further, Graham only considered stocks trading at 66% of their NCAVPS to be indicators of further analysis and investigation. TPI passes this test as well as it is trading at 63% of its NCAVPS.

    Now, back to the fundamentals of TPI and its financials. I think TPI offers a strategic competitive advantage in its lineup of products. As, I mentioned earlier, it is my belief after the macro analysis of China's fundamental situation (i.e. its growing and large aging population, growing incomes, increased urbanization, increased consumer health preferences, and the effects of a growing nation that needs more cheap energy) in addition to my micro analysis of a financially sound small cap company led by an all-star cast of managers that will give us a significant return on investment. From the Management's Discussion and Analysis of the most recent 10-Q, TPI's revenues are expected to grow between 7.75% and 14.29% over the course of fiscal 2013 (June 30, 2013) to a fiscal year-end total between 75-80 Million $USD. I believe the lower band to be pretty conservative and the higher estimate to be more accurate. I suspect the low estimate is the result of TPI's managerial reaction to the regulatory changes in the healthcare framework of China, implemented through the ongoing 12th Five Year Plan, beginning in 2011. If it weren't for this plan, TPI's revenues would most likely still be growing at a staggering CAGR of 30%-42%, like it did between 2008-2011. 2011 was the year that a lot of the healthcare reforms impacted the Life Sciences and Health Care (LSHC) companies across the board. Many of the programs implemented were price controls (typical of governments that fear societal unrest) and an implementation of a Basic Medical Insurance plan that was supposed to cover 90% of the population by 2011. Most of these added costs have ravaged the Chinese Pharmaceutical Industry in the last 2 years in terms of higher operating cost margins because of decreased revenues, ultimately impacting net income and EPS guidance. However, there is a beneficial side to the decrease in TPI's stock price over the last 2 years, from its high of $4.78 in January 2010. Below is a chart for reference of TPI:

    (click to enlarge)

    This gives major outside competitors a chance for M&A activity at discounted prices. There are a growing number of large MNCs that are investing into China because of the low labor cost for R&D and potential for high returns; Pfizer, which has invested a record $500 Million into Chinese Pharmaceutical and healthcare companies, employs over 4,000 people in China. In March 2011, Pfizer announced the relocation of its R&D facility in Groton, Connecticut and moved its anti-bacterial research facility to Shanghai. GlaxoSmithKline is setting up one of its largest research centers in Shanghai and will be recruiting 50 to 100 of the top international scientists and employ more than 1000 researchers at the new facility by 2017.[28] Other notable large multinational pharmaceutical companies with R&D research facilities in China are AstraZeneca, Eli Lilly, Roche (of Switzerland), and Bayer (of Germany). Here is a look at the M&A activity over the last six and half years by deal value, courtesy of Deloitte:

    (click to enlarge)

    As you can see, the bulk of deals are done with companies between the $15-$100 Million range. TPI happens to be in that sweet spot, sitting at a current market cap of approximately $22 Million.

    Through my DCF analysis I have determined that TPI in a base- case scenario could turn current annual revenues of $70 Million as of the last fiscal period, June 30, 2012 to $170 Million by June 30, 2017; a CAGR of 19.4%. This will be due to a combination of factors that management has highlighted including:

    1) Continuation of increased market penetration of its flagship product, GMOL (Gingko Mihuan Oral Liquid). As of the mrq, GMOL represents approximately 37% of $17.6 Mn in total sales.

    2) Ramp up in production of its 87% owned JCM (Sichuan Jiangchuan Pharmaceutical Co.) 240 ton per year facility, which currently produces a core product by Sales, Azithromycin (API) of 10 tons per month.

    3) Gradual stabilization of generic medical sales.

    4) Steady TMT (Chengdu Tianyin Medicine Trading Co. Ltd) product distribution of its existing organic product portfolio, which currently contributes about $3-$5 Mn of sales per quarter. As of the mrq, this represents between 17% and 28.4% of total sales.

    5) QLF (Qionglai Facility) relocation and smooth transition of production capacity and upgrade of GMP standards.

    6) Process optimization at all core production facilities that are currently operating on a 24 hour per day schedule at 90% capacity.

    In the same DCF analysis I have also determined that a return to the five year operating cost margin of 80.62% would be likely. The quarters since the new Five-Year Plan was implemented and the relocation of one of its main operating facilities, Qionglai Facility (QLF), has caused an abrupt increase in manufacturing costs that I believe will stabilize to the lower 5 and 10 year averages before the plan was introduced, due to synergies and developments at these new facilities, which will conform to the new GMP (Good Manufacturing Practice) policies. Operating Income Margins in my model will also stabilize close to but not quite the 5 year average of 19.84%, to 18.46% over the forecasted fiscal years to 6/30/2017. My more conservative estimate of operating income will be due in my opinion to an increase in raw material prices over the coming years. This will produce an operating Income of $32.9 Mn and a net income of $23.86 Mn, giving TPI an EPS of approximately $0.43 by fiscal 2017. This represents an EPS CAGR of 13.28% by fiscal 2017. The Pharmaceutical and Drug Industry in China currently has a P/E ratio of 50.21, out of the 176 firms measured by Dr. Damodaran, using the most recent data available. The current P/E of TPI is 3.5. I think 50 is a very high P/E for TPI but it does give you some indications that TPI is undervalued relative to their peers, especially if TPI grows earnings at a CAGR of 13.28% over the course of the next 5 years. A respectable 13 P/E for this sort of earnings potential would put TPI around the $5.50 a share range by fiscal 2017. Now, it does seem like a huge jump in price, but the street is currently valuing TPI at depressed levels. If you recall from earlier, TPI is trading below cash on the balance sheet of $25.4 Mn and at a steep discount to the Net Current Asset Value per share. In order to get the sort of valuation I speak of by 2017, TPI should focus on its core products and ramping up sales of its low-volume, high-margin products out of its portfolio. These low-volume products are high margin because they are not on the Governments EDL (Essential Drug List) or NMRL (National Medical Reimbursement List) lists that enforce price controls; nevertheless, the current core products in TPI's portfolio are:

    1) Gingko Mihuan Oral Liquid (GMOL); Patent Protected

    · Uses: Coronary Heart Disease, Cardiovascular Disorders

    · Sales: $6.5 Million (mrq)

    2) Mycophenolate Mofetil Capsules (NYSE:MM)

    · Uses: Renal Transplant (suppress graft rejection after transplantations)

    · Sales: $2.2 Million (mrq)

    3) Azithromycin Tablets (AZI)

    · Uses: Upper & Lower respiratory tract infections and other bacterial infections

    · Sales: $1.0 Million (mrq)

    4) Qingre Jiedu Oral Liquid (QR)

    · Uses: Upper respiratory, fever, cold, inflammation

    · Sales: $0.8 Million (mrq)

    5) Qianlie Shule Capsules (QS)

    · Uses: Relieve symptoms of chronic prostatitis

    · Sales: $0.38 Million (mrq)

    GMOL's patent runs through 2026 and could be extended with it currently being reformulated as a capsule from its present liquid form. This is a net bonus because liquid formulation has significant bottling and storage costs. The reformulation to capsules will also improve gross margins on GMOL to 75% (currently 65%). These core products represent 62% or $10.88 Million of TPI's total revenue of $17.6 Million as of December, 30, 2012, compared to a representation of total revenue of just 41% a year earlier. Three of the top five products are geared towards that 800 lb. gorilla I alluded to earlier. The game changer of higher than expected sales and EPS in my opinion will be if TPI can develop existing products from the pipeline that can gain patent protection or retain a license agreement with a larger domestic rival or MNC that have more efficient distribution channels. In addition, Azithromycin is an effective macrolide Active Pharmaceutical Ingredient that seems to hold a lot of potential in the respiratory illness sector for China as it is among the Top 50 prescription drugs by global sales. It was essentially an antibiotic first made famous by Pfizer licensing the product from a small Croatian pharmaceutical firm called Pilva in the 1980s.[29] Now it is a generic medicine that companies like TPI have taken advantage of through diversifying their Modernized TCM portfolio with a blend of Western generics. I also believe the patent protected Gingko Mihuan offers an interesting opportunity for a large Western-based MNC to license it, as GMOL would offer a far different product that has virtually no market share in any of the developed nations, further diversifying their own product portfolio. I think the Traditional Chinese Medicines would have an appeal to the younger and possibly older generations that tends to be more diabetic and on the outlook for healthier alternatives. That is just conjecture on my part though.

    Among some of the major risks that I would keep an eye on are the government regulations set forth from the 12th Five Year Plan by China's government. Here is a quick and dirty look at the three stages of the plan:

    1) Initial Stage: 2009-2011

    · Increase medical insurance coverage to more than 90% of Chinese Population

    · Allocate RMB 850 Billion to Chinese healthcare industry

    2) Second Stage: 2011-2016

    · Issue Essential Drug List

    · Promote public online bidding of essential medications

    · Restructure the fractured drug distribution network

    · Expand health clinics and other fundamental healthcare organizations

    · Offer rural and urban inhabitants uniformed disease prevention control

    · Narrow gap between basic public health service between urban and rural population

    3) Final Stage: 2016-2020

    · Enhance government subsidies to resolve conflict of interest issues

    · Diversify the ownership structure of healthcare providers and encourage private capital to operate non-profit hospitals.

    This plan is one of the main concerns to TPI's management as they believe further price controls are possible. The impact of the price controls seems to have used most of its ammo between 2011 and 2012 as metrics such as earnings are up sequentially over the last quarter and 6 months ended December 30 2012. However, the overall impact of price controls is clearly shown on TPI's financial statements as total revenue in fiscal year-end 2011 (June 30), went from $95 Mn to $69.6 Mn by fiscal year-end 2012; a 26.7% decrease. Furthermore, there is reason to believe that additional price reductions are possible. The Ministry of Health (NYSE:MOH) of China stated that their top priority for 2011 was to reduce patients' cost. The National Development and Reform Commission (NDRC) reduced prices of 82 drugs by an average of 14%; this was the 28th deduction in prices since the 1990s. As a positive result of all this, it does appear that it increases the chances of acquisitions as companies look to synergize and cut costs, while trying to deliver innovative and collaborative R&D. In fact, TPI's development and growth strategy is to garner exclusive rights and ownership through Intellectual Property upon SFDA (the Chinese version of the US FDA) approval of its pipeline drugs that are in a strategic partnership with research institutes. Part of TPI's growth initiatives are R&D collaboration partnerships with highly prestigious research institutions such as China Pharmaceutical University, Sichuan University-affiliated West China Center of Medical Sciences, and Shaanxi University of Chinese Medicines. These research opportunities allow TPI to cut down on R&D costs and provide additional products to be added to its portfolio of 58 medicines; 24 of which are on the National Medical Reimbursement List. Currently, TPI has 10 products in the pipeline, pending SFDA approval.

    The potential in the product pipeline is one of the key reasons I am bullish on TPI. Should a few of the 10 pipeline drugs get approved by the SFDA sometime in 2013, TPI can quickly expand manufacturing production capacity by 200% with an additional $10 Mn Capex increase at the new QLF facility. With $25 Mn cash on hand to satisfy short-term loans totaling $6 Mn, I am confident that TPI could quickly spend the required $10 Million for increased production capacity without delay from time wasted on financing. Also, the flagship product, GMOL, has a patent that runs through 2026 which could be extended with the new reformulation to capsule from liquid. This represents TPI's only true patented drug. However, TPI has a de facto patent for most of its products because once a drug has been approved by the SFDA in China, there is a five-year exclusivity period, whereby the SFDA will not approve any comparable drug formulas. It is a mystery that a company with so much potential and value is selling at a 76% discount to book and under cash on the balance sheet, along with its strong institutional and insider holdings.

    This leads me to my buy price recommendation and exit strategy. Since there are no analysts covering TPI, it offers investors an opportunity to buy at extreme discounts as the stock has been trading in these depressed valuations for over a year now without upward pressure from analyst price targets, giving investors free roam. I would structure my first tranche of TPI anywhere between $0.70 and $0.72 a share. This would offer the investor willing to buy in layers the ability to average on price dips. With a stock like TPI at such a discount it is easy to justify buying at current levels without any major financial solvency issues.

    My exit point would be based off the stock rising above and beyond its Net Current Asset Value per share of $1.16. At that price it would still be trading at a 63% discount to book value, but offers investors a cool 54% return assuming an average purchase price of $0.75 a share. I would not recommend selling all vested shares at $1.16, if it reaches this price target over the forecast period, but rather suggest taking some risk off the table. At that point you could sell 75% of the shares you own to recoup your investment and take a free ride on the rest. However, TPI would still be at a big discount in my opinion and selling 75% of your shares is a large proportion to liquidate at one time. Another alternative would be to sell a third of your shares to pocket some profit while taking some risk off the table. I am under the opinion that one should minimize risk as much as possible, and depending on how fast TPI were to climb higher, it would be a prudent level to start peeling shares. I have arrived at the buy price range of $0.70-$0.72 as it is a level that gives investors a significant margin of safety. Current cash and cash equivalents on the balance sheet as of December 30, 2012 are $25.4 Million. Current market cap is approximately $22.3 Million. Market capitalization won't exceed the cash on the balance sheet until the current share price rises above $0.86 a share. With that thought in mind, TPI is a strong buy at current prices. If you think about it, you are essentially purchasing cash for free. At a $22 million market cap you are given $0.10 per share for free, as cash and cash equivalents equal $25 Mn (3 million/29.33 million shares).

    In summary, TPI is a company that I believe to be trading at a significant discount and a stock that can represent a powerful potential future return on investment not only because I believe it to be a solid company, but the Yuan is becoming a more globally recognized currency in the face of continued dollar devaluations, as China continues its stunning gold purchases to back its Yuan. The Yuan is only going to get stronger against the backdrop of QEternal. In addition the interest rate risk of the dollar is the most significant threat to the dollar's hegemony. A simple rise and reversion back to the mean of say 6% on Treasury Bonds would result in $1 Trillion plus payments just on interest on the debt alone per year. This is in addition to $1 Trillion plus deficits a year in the government's annual operations. It is obvious to one that with these risks there are plenty of rewards to be found by diversifying oneself in currency terms through gold and gold proxy currencies like the Yuan, undergirded by a healthy, growing economy. TPI's earnings power is based in Yuan as its core operations are conducted in Chengdu, China. I hope you enjoyed my assessment and I appreciate the time you have taken to read this rather lengthy review. Until next time, happy investing!

    Best Regards,
    Daniel J. Riner

    Disclaimer: Investing involves risks and this article is meant to inform readers about a potential investment. Do not take my advice as a guarentee of return.









    [9] (page 12)








    [17] (page 1)


    [19] (page 10)


    [21] Fidelity Small Cap Discovery Fund considers companies with less than $5 Bn market cap as small cap.

    [22] (Chart Comparison Tool using SPY, DIA and .RUJ as proxies for the indices)

    [23] My Excel Calculation

    [24] For my calculation of the SP500, Dow, and Russell 2000,

    [25] (Page 14)

    [26] (Page 14)




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Comments (3)
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  • Jason Tillberg
    , contributor
    Comments (1293) | Send Message
    Good job.
    28 Mar 2013, 01:24 PM Reply Like
  • Daniel J. Riner
    , contributor
    Comments (160) | Send Message
    Author’s reply » Hey, thank you Jason. I really appreciate the compliment.
    29 Mar 2013, 04:40 PM Reply Like
  • cjboro
    , contributor
    Comments (10) | Send Message
    On its way now
    18 Feb, 02:42 PM Reply Like
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