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China Yongxin Pharmaceuticals: a Puzzling Pharmacy Chain in China

|Includes:CVS, China Yongxin Pharmaceuticals, Inc. (CYXN), WBA

China Yongxin Pharmaceuticals Inc. (OTC:CYXN) operates wholesale and retail pharmacy chain in the Northeast region of People’s Republic of China. The company was founded in 1993 with its headquarter in City of Industry, California. It currently operates 93 retail stores, and has been profitable for many years. With an aging population, rising living standards and the rapid growth of the healthcare sector in China, this company seems to be positioned for a healthy long-term growth. I will do an analysis on its financials to see if now is the right time to invest.

Value analysis

Between 2006 and 2008, its revenue had grown from ~$39M to ~$59M. However, it dropped to ~$47M last year mainly due to its strategic shift from wholesale to retail. Despite the shortfall in revenue, Yongxin was able to grow its net profit from ~$4.9M in 2008 to ~$5.2M last year which boosted a net profit margin of ~10%. The growth in net profit was mainly due to an increase in the portion of higher profit margin retail sales. With ~35.1M share outstanding at the end of 2009, the company has a market cap of ~$25M which gives it a price to sale ratio of ~0.5 and a P/E <5. Compared to giant pharmacy chains like CVS caremark (NYSE:CVS) and Walgreen Co. (WAG); Yongxin looks like a deep value stock.

Recent private equity transactions

Since last August CYXN has been trading between ~$0.3 and ~$0.8. However, the company had a couple of private equity sales in the last few months at prices substantially lower than the open market price. In January, it issued $700K worth of secured convertible notes bearing 10% interest with a conversion price of $0.20 per share. See SEC filing here. Then, in April, it sold 5,890,500 shares of common stock to certain undisclosed investors at a price of $0.20 per share for an aggregate of ~$1.2M. See SEC filing here. Why the company sold those equities at ~60% discount to its stock on the open market is really beyond me. I think the company is still lack of shareholder transparency and stringent corporate governance. Despite the attractive valuation, this really gives me pause in investing in the company.

Potential opportunities and risks

CYXN is in an industry with tremendous amount of growth potential and its current valuation is very attractive. Insiders own ~20% of the company, but their interest doesn’t seem to align with public shareholders as evidenced by the recent equity transactions. Aside from its founders, none of its board directors own any share of its common stock. And the fluctuation in its revenue numbers in the last several years also makes me a bit nervous. The management hasn’t given any outlook for fiscal year 2010 yet. I think I will wait until its Q1 announcement to see if the management can generate any growth in sales, thus gives me confidence in investing in the company.



Disclosure: No position at time of writing.
Stocks: CYXN, CVS, WBA