stocklad

ChinaBio Week in Review: A Victory for Traditional Chinese Medicine

For Sinovac, not only were Q2 earnings outstanding - almost double the best Sinovac has done before - but there is additional embedded earnings that can't be reported at this time.

That comes from the H1N5 bird flu vaccine that the company stockpiled for the Chinese government.

We know from the financials that the company received $9.6M from the Chinese government, and it recorded an increase of about $2.0M for long term inventories. The difference is probably the amount of profit the company would have made if they had actually delivered the H5N1 vaccine and taken the $9.6M into revenue.

After tax and minority share, that might equate to something in the neighbourhood of $.08/ fully diluted share in earnings. Add that to Q2's already high earnings and you get a pretty great number.

By the way, the company will have to take the $9.6M into revenue at some point, either when deliveries are made or when the expiry date of the vaccine comes around.

Either way, management is building a pretty great company and should be congratulated for their work so far. SVA is becoming a premier vaccine company.

China Sky's Weight-Loss Patch Has a Questionable Future

Great news! China Sky One just received a renewal of its license for the production of its proprietary Sumei Slim Patch from Heilongjiang Provincial FDA, which will be effective through April of 2013.

And...the company announced that over 7,000,000 slim patches have been sold since the beginning of 2008.

That equates to sales of approximately 13,000 slim patches on average each day, 7 days a week, since January 2008.

That's pretty impressive. Kudos to CSKI managment, staff and distributors!

China Sky's Weight-Loss Patch Has a Questionable Future

Asensio also, while commenting on the potential size of the Sudanese market, failed to mention the possible size of the South Korean market. It's this kind of oversight which works against his credibility as a writer of "articles".

China Sky's Weight-Loss Patch Has a Questionable Future

This is a rehash of an old “article” posted 22 April 2009 on Seeking Alpha by a short seller named Cabeza Howe.

The counter argument was provided on Seeking Alpha on 30 April 2009. Here’s the link.

seekingalpha.com/artic...

The important thing here is not the stale article itself, but the timing, which coincides with a drop in price yesterday. Obviously, the shorts need to put out something to try to start a momentum change.

That’s ok by me. If they succeed to drive the price down a bit and they make a few dollars, so be it. The long term trend in company fundamentals is well established. Revenue and earnings are growing at a very strong rate, the portfolio of drugs now stands at about 100 (with new approvals coming weekly), the pipeline of new drugs is robust, cash and working capital are solid and debt is non-existent. The company is expanding internationally and will be entering the field of stem cell storage soon.

To bet against that is just foolhardy, in my opinion.

There is something amusing here, nonetheless. Asensio has claimed in the past that he doesn’t trust company information, but then he uses it as the basis of his argument. Odd, perhaps?

China Biotech in Review: Entering a New Phase?

It seems that Asensio is trying to complain about something, but the result of the posting is to broadcast a lot of good news about China Sky One.

China Sky One makes many generic drugs. That the company has received production approval for yet another one is rather good news.

That China Sky One has announced first year sales will be $0.5 million for the new drug is relevant, interesting and meaningful.

One would not expect China Sky One to announce profit potential; that they provided revenue potential is quite welcome. It means they are trying to keep investors informed.

China Sky One gave a clear explanation of its inventory levels at the last conference call. No one of intellect would expect them to provide any additional details during a news release about a new drug approval.

That China Sky One has good margins makes it one of the more compelling investment propositions out there. Q1’s 100% revenue growth and 67% fully diluted earnings per share growth doesn’t hurt either.

In short, Asensio's is telling us that China Sky One put out a good news release, one of several over the past year. In fact, they seem to be coming out at the rate of about one every two weeks.

It's been a while since we've had news of an acquisition. Let's hope we get one of those soon too. Or possibly news of a dividend...

China Sky, Takasima and Massage Chairs: A Tangled Web

I just made the statement that institutional interest is increasing. In this regard, I looked up the numbers 5 weeks ago and found that institutions owned, at that time, 14.1% of the outstanding shares. That has now risen to 16.8%. Here are the latest numbers from NASDAQ:

CSKI CSKI
China Sky One Medical, Inc. NASDAQ-GM


Institutional Holdings Description |



Company Details
Total Shares Out Standing (millions): 17

Market Capitalization ($ millions): $244

Institutional Ownership: 16.8%

Price (as of 5/28/2009) 14.74


Ownership Analysis # Of Holders/ Shares

Total Shares Held: 56/ 2,790,827

New Positions: 18/ 293,008

Increased Positions: 39/ 671,588

Decreased Positions: 12/ 185,798

Holders With Activity: 51/ 857,386

Sold Out Positions: 4/ 28,914

China Sky, Takasima and Massage Chairs: A Tangled Web

It's time to put my money where my mouth is in terms of China Sky One...

There’s no question that CSKI’s growth is very strong, but what is the fair value of the company’s stock?

For comparison purposes, I looked through the component companies of the Halter Index to find some other pharmaceuticals in China. I added a few more I’m aware of to arrive at the list below. I avoided OTC companies, because their valuations are really out to lunch right now. Next, I decided upon a few metrics that might be interesting and went to Reuters to pull together some information. The cash/share and debt/share figures I calculated myself from the latest issued financials.

Here’s the chart (I hope it comes out all right; there's no preview button on this website), then I’ll talk a bit about the data before trying to put a value on China Sky One.


Co ..… Rev Incr* …. EPS Incr* …. TTM P/E .… Cash/Sh …. Debt/Sh …. Guidance

AOB …. +18.85% …. -24.90% ....... 8.42 ………. $0.99 …..… $1.70 ……… none
CHBT .. +32.50% ….. -3.49% ….… 10.69 ………. $3.89 …….. $1.35 …….… none
CSKI … +100.06% .. +67.44% ….… 7.52 ….…… $2.97 .…... $0.00 ….. rev up 40%**
KUN .… +23.42% .. -246.68% ….….. n/a …….... $0.05 ...… $ 0.65 ……… none
SCR …. +12.13% …. -54.53% .....… 11.25 ……... $2.00 ….…. $0.17 ……..… none
SSRX .. +23.67% …. -18.76% ……. 35.49 ….…… $5.25 …….. $0.00 … rev up 21-26%
SVA ..… -25.91% …. -98.51% ……. 18.31 …….… $0.54 …….. $0.24 … rev up 18-29%
TCM .… -35.88% … -536.73% ……... n/a ……..… $2.47 ….... $0.60 …….… none

* Revenue Increase and EPS Increase are for the latest reported quarter over the same quarter of the prior year.
** Excludes acquisitions
Note: Per share amounts are per ADS amounts for some companies

If I’ve made any errors, I’d be happy to correct them.

Basically, I did this chart to see if there was something that would indicate what a reasonable price/earnings multiple might be for CSKI. The companies in this chart are all over the map when it comes to market valuations, but the data is quite interesting.

Let me say before making some points that I realize the information isn’t perfect. I know a couple of these companies better than the others and I am aware of specific circumstances for each that would influence valuation. Nevertheless, let’s see what we can glean from the data:

1. Most of the companies are growing revenue right through the recession, although none are even close to CSKI.

2. None of the companies has earnings per share (EPS) growth, except CSKI which is outstanding.

3. Other than SSRX, China Sky One has the most unencumbered cash (cash minus debt in this case).

4. Only a few of the other companies feel comfortable giving guidance during the recession but, of those that do, CSKI is projecting the highest revenue growth. (BTW, they are on track to meet their guidance.)

5. CSKI has the lowest P/E of the bunch. A couple of companies had negative trailing twelve month (TTM) earnings, so they can’t be counted. Of the remaining companies, the average P/E is 16.83. Personally, I don’t look much at averages, but the number is interesting.

Based on my experience with pharmaceuticals, I would say that a decent company with a reasonable pipeline of future products and 10-15% growth would garner a P/E of at least 15. CSKI’s pipe is robust and its growth – historical, current and expected – far exceeds the 10-15% range. In a decent market, I would give it at least an 18-20 P/E. Under these market circumstances, I’d think a 15 P/E would be reasonable, if not a little on the modest side.

To this, I would add unencumbered cash. I know some people who would add unencumbered working capital, but let’s be conservative.

This leads to the following valuation:

Fair value = ($1.96 trailing twelve months EPS x 15 P/E) + $2.97 cash = $32.37.

I should be clear in stating that this is not a sell point, IMHO, but a reasonable valuation based on current market conditions.

Expect this valuation to go up over the coming months. If guidance comes to fruition, then the value might be something like $37.00. With another acquisition, we might see something in the order of $40.00-$45.00 within a year. The company has said they can foresee continued growth over a five year period.

Anyway, these are my thoughts on the valuation issue. When the shorts tell you that the price has topped out at some arbitrary figure, you might want to think about the longer term.

It’s no wonder that the institutions are slowly increasing their positions in China Sky One Medical.

Regards

i22

China Sky, Takasima and Massage Chairs: A Tangled Web

This latest article from Asensio was posted on Yahoo! five days ago.

This is one of a number of articles about China Sky One, written in a journalistic style, but lacking in journalistic content. They are obviously written by someone who spends a lot of time doing research to unearth questions, without spending time researching the answers.

It’s too bad they don’t know how to use the telephone and ask questions at conference calls because the company has been quite willing to provide answers to all questions asked.

Now, on to the articles themselves…

The first article I read was from Cabeza Howe on Seeking Alpha (7 April 09) and it tried to cast doubt on CSKI’s requested extension to the filing date for their annual report. As we found out later, the only thing driving this issue was an accounting clarification. Mr/Ms Howe cited some additional concerns, which I’ll list together with my comments:

a) Eager management – This is not a negative, but a positive.

b) Gift of shares – This is a personal matter between the donor and receiver.

c) Change of auditors – This is a good thing and to be expected by a company growing so quickly. That the company is standing pat with its current reputable auditor is also a good thing.

d) 2006 restatements – Many companies make restatements. This was a major one from the point of view of its impact on net income, but the adjustments were all non-cash in nature, the biggest one being whether or not to capitalize certain R&D costs. The second biggest one dealt with the reclassification of the value of warrants. None of this would bring into question the actual operations of the company.

e) 26 year old director – It’s interesting how things change over the years. When I was younger, it was often said “Don’t trust anyone over 30.” Now apparently, the opposite is true. This is just a non-starter as an argument.

The next article was again by Cabeza Howe (22 April 09) and it listed a few issues:

a) Slim Patch complaints mean that Slim Patch is a Rip Off – Since then we’ve found out that the products which were the subject of complaints were in fact fraudulent products manufactured and sold illegally by unrelated third parties. Also, we’ve seen information that the patch was 76.9% effective in clinical trials conducted in a hospital setting. I highly recommend you read the following posting on Seeking Alpha for more details:

seekingalpha.com/artic...

b) Violation of Advertising Standards – Also see above link

c) Questionable Financial Control – The company has grown revenue from just $8M in 2005 to $92M in 2008; of course there are going to be some control issues. The question is: Is CSKI dealing with all that growth responsibly? Based on their hiring of competent international auditors, dealing with issues as they become known, being open with shareholders and hiring PriceWaterhouseCoopers (PWC) to help them make improvements, I would say that they’re doing just fine. (By the way, what Howe doesn’t say is that we should be celebrating such magnificent growth.)

The next article was the one I referenced in the link above. That was quite a breath of fresh air.

Next up was an article by Mr/Ms Asensio (8 May 09) dealing with inventory reporting, suggesting that inventories were just too low. The company dealt with this issue at its last conference call by explaining how it manages supply and distribution to keep inventory levels as low as possible. This is a sign of good management, in my opinion.

The next piece was done by Asensio (15 May 09) and dealt with margins and inventory levels. Once again, these issues were dealt with at the conference call. BTW, the margin issue related to the fact that Mr/Ms Asensio thought that the margin on contract sales should have been significantly lower than on the company’s own products, hence an anomaly when the first quarter margin didn’t change much from previous quarters. Instead of picking up the phone or asking a question at the conference call, he/she wasted everyone’s time with this issue. Thankfully, someone else asked the question at the conference call and the issue was put to rest. Hint: the margins on the two types of products were very close.

At this point, I should stop and point out one investor’s reply to this Asensio article. A poster named China Expert said…

“Manuel, I know you've done good work in the past, but this one will be a tough one. You're going to have to sit and wait this one out for a long time. There is no Chinese company that you can't pick apart and find a few things that don't add up. CSKI is one of many. I suggest you short a portfolio of them. If the $48.8 million in cash is "really" in the bank and this company is debt free and generating real "free cash" than I don't see a bullett that will "finish" this company. I really don't care whether the products work or not, to be honest, I've spend thousands of dollars at my local CVS on medications that seem worthless. Check out the most recent "Consumers Report" on all those infomercials gimmicks being sold in our country. About 90% are worthless. Is China any different than the U.S. in selling worthless things to their consumers ? NOT !...... I predict you will be short this one for a long time, splitting hairs when your voicing concerns ! I personally like more "substance" in a good "short". Like a broken clock which is right twice a day, you may be right eventually. For now, the "red flags" of caution are simply not as glaring as you make it out to be. There is another small Chinese pharma company out there that is actually now paying a cash dividend and actually buying back their own shares. If CSKI does this, your going to be in a heap of trouble with your position. ......Postion: None”

I suggest that the shorts pay careful attention to this poster’s remarks.

The next article was by Asensio (20 May 09) and its main point that PWC should have been hired as the company’s auditor instead of just a consultant. This goes against the grain of former posts suggesting that there had been too many auditor changes. The company had already addressed this issue at the conference call by stating that they have a perfectly good auditor, that this auditor had been accepted by large independent shareholders and that the big four auditors had shown no interest in taking on the company in the prior year.

The latest article is the one posted on this board today. It relates to an apparently tangled web of contacts that suggest some non-arms length dealing and then tries to question CSKI’s audited revenue numbers. Personally, 10 minutes after reading the article (five days ago), I’d forgotten just what it was about; it was that clear. I’ve no doubt the company will address this latest salvo at some point, but the question in my mind is: Does it really matter?

Each and every point raised by various “journalists” has been dealt with. The company has been open and forthright about its operations time and time again. In a way, I suppose we should thank these individual complainers for raising their issues. The company’s responses thereto have made them one of the most transparent and open I’m aware of. Nevertheless, it is getting a little tedious to have to deal with their complaints every time CSKI issues one of their many good news releases.

Does all of this seem like the two “journalists” are trying to stop an avalanche by throwing snowballs at it? It does to me. In fact, when I think about this from a bottom line perspective, I keep coming back to the following: If the cash on the books is real, then the earnings have in fact happened. I think the auditor would agree.

China Sky Confusion: Management Is Flying in Circles

BTW, I think we're about due for another acquisition! No acquisitions are including in that rather lovely 2009 guidance ... AND ... there were three acquisitions last year.

Like I said, this is the wrong company to short.

China Sky Confusion: Management Is Flying in Circles

I was going to write something to refute Mr/Ms Asensio's issues, but that's been done rather nicely above. All the anti-CSKI points have been addressed and what we are left with is just a little puff of smoke. The last one, hopefully.

Talk about picking the wrong company to short. Revenue has gone from $8Million to $92 Million in just 3 years. Earnings has gone from $2 Million to $29 Million in just 3 years. Very positive cash flow. No debt. $2.97/share in cash. $4.01/share in working capital. The company pays attention to its shareholders ... AND ... the best two quarters of the year are coming up.

This is such an impressive company.

China Sky's Reported First Quarter Earnings Raise More Questions

I like the fact that the company took extra time during the Q1 2009 conference call to address all questions from shareholders, including those issues raised over time by the author of the above article.

I thought the company’s answers were clear and thorough. For example, the company’s answer on the inventory issue showed that they judiciously manage inventories via their contracts with suppliers, distributors and sales agents. Their answer on the gross margin question showed that margins on (previous) third party sales were only 2% less than those for its own products. In terms of growth, it came from acquisitions and the numerous product approvals/expansions clearly identified by the company in its many press releases over many, many months. The governance issue is really not an issue and, to the best of my knowledge, there actually aren’t any accounting issues at all. The auditors are well respected and were accepted by major investors some time ago.

So, what are we left with to dislike about the company? Not much, apparently. It would seem that all this short selling analyst has left in his arsenal is that he has cast aspersions on China Sky One without having actually contacted the company or visited its operations.

Personally, it wouldn’t surprise me to see the short attacks stop in the near future. They’ve run their course. The arguments have been made and refuted. Any further accusations in the face of the evidence might turn out in the end to be libellous.

Of course, the biggest single weapon in a short selling analyst’s arsenal is the psychology of attaching the stigma of an “irregularity” or “investigation” to a company so that investors will shy away from its stock by either not buying it, by liquidating their existing positions or by shorting it themselves. I would think we’ve seen enough results and explanations to show convincingly that the company has real products, real growth, magnificent earnings, no debt and a lot of real cash on hand.

Callers on the conference call complimented the company on its results, commended the company for its openness and stated that they would be adding to their positions. I think these callers have got it right.

The current market price in my opinion is dirt cheap and hasn’t factored anything in for the company’s pipeline or the potential from the upcoming stem cell bank. One of the conference callers pointed out that a couple of Chinese stem cell related companies sell for a multiple of 70x earnings. Of course, CSKI will never be a pure stem cell storage company, but at some point the potential of this aspect of its operations should get recognized.

Based on Q1 results and conference call details, I’ve updated my reasons for liking the company. Here they are…

Product Related
- Large and diversified portfolio of approximately 100 products including:
… Patches, the main one being the slim patch which has been shown to be 76.9% effective in clinical trials
… Creams, ointments, drops and sprays
… Diagnostic kits
… Injectibles
… Tablets and suppositories
- Nine drugs in for SFDA approval
- Company-controlled sales force of 1,300 people as well as third party distribution
- Three acquisitions in 2008
- Expansion into prescription drugs (greater than 15% of products now)
- Expansion into Western medicines and biotech products (about 10% of products at this time)
- Large commitment to R&D spending
- Strong and expanding drug pipeline including 9 in early stage development and 12 in clinical trials. A couple of them with big potential are:
… Sudden cardiac death early exam kit (revenue potential of $20+ Million)
… Breast Lesion drug (revenue potential of $146.2 Million)
- Management that is pleased to open its facilities to shareholders

Financial
- Annual revenue growth from $8M to $92M since 2005 and 100% year-over-year growth in Q1 2009. More importantly, Q1 2009 sales from the company’s own products rose 162% over Q1 2008 (third party sales were discontinued at the beginning of Q1 2009), which means that the company’s core business is soaring
- High gross margin of 76%
- Reasonably controlled expenses
- Annual earnings growth from $2M to $29M since 2005 and year-over-year growth of 87% in Q1 2009.
- Annual earnings per share growth from $.19 to $1.87 since 2005 and year-over-year growth of 67% in Q1 2009 notwithstanding a large R&D investment.
- Cash on hand of $49M, or $2.97 per basic share.
- Working capital of $66M, or $4.01 per basic share
- No debt
- Judicious inventory management
- Reasonable level of accounts receivable
- Strong cash flow which should be able to fund 2009 CAPEX

Future
- Strong 2009 guidance of $128M-$130M revenue and $38M-$39M net income
- Guidance doesn’t include acquisitions
- Management is predicting continued growth over the next five year period
- The company can easily afford to commence payment of a dividend, if it so chooses

Let me close off this listing of positives for CSKI by stating that the company appears to be driven to be successful, as is obvious from their press releases. Over the last year (by my count on 10 May 2009), they issued 17 drug/pipe related releases, plus 4 related to distribution agreements/export arrangements, 1 for an acquisition, 1 for a guidance increase, 2 for a change of market for the stock (OTC to AMEX to Nasdaq) and 2 for scientific recognition. That’s about one positive news release every 2 weeks.

Disclosure: I am long on CSKI and I don’t concern myself with the day to day stock price movements. This is such a lovely long term growth story.

China Sky's Reported Inventory Belies Its Stated Earnings and Sales

Good points, User 223026 and China Expert. Q1 2009 results just came out and, as anticipated, they're outstanding. A few quick points:

1. Cash is now at $2.97 per share, which means China Sky One can afford more acquisitions and a dividend without dilution.

2. Working capital is now at $4.01 per share (with no long-term liabilities!)

3. Revenue was up 100% over Q1 2008.

4. More importantly, sales from the company’s own products rose 162% over Q1 2008 (third party sales were discontinued at the beginning of Q1 2009), which means that the company’s core business is soaring.

5. Fully diluted earnings per share were up 67%, even with that large increase in R&D expenses.

6. That big jump in R&D expenses should result in sustainable growth well into the future.

This is just so very impressive. Kudos to CSKI management!

China Sky's Reported Inventory Belies Its Stated Earnings and Sales

The formatting of my point form reasons for owning the stock didn't quite turn out as intended. Let me try again.

Here are most of my reasons (for owning the stock), in point form:

PRODUCT RELATED
- Large and diversified portfolio of approximately 100 products including:
..... Patches
..... Creams, ointments, drops and sprays
..... Diagnostic kits
..... Injectibles
..... Tablets and suppositories
- Many drugs in for SFDA approval
- Company-controlled sales force as well as third party distribution
- Three acquisitions in 2008
- Expansion into prescription drugs
- Strong and expanding drug pipeline including:
..... Sudden cardiac death early exam kit (revenue potential of $20+ Million)
..... Breast Lesion drug (revenue potential of $146.2 Million)
- Management that is pleased to open its facilities to shareholders

FINANCIAL
- Revenue growth from $8M to $92M since 2005
- High gross margin of 76%
- Reasonably controlled expenses
- Earnings growth from $2M to $29M since 2005
- Earnings per share growth from $.19 to $1.87 since 2005
- Cash on hand of $40M
- Working capital of $58M
- No debt
- Judicious inventory management
- Reasonable level of accounts receivable
- Strong cash flow which should be able to fund 2009 CAPEX

FUTURE
- Strong 2009 guidance of $128M-$130M revenue and $38M-$39M net income
- Guidance doesn’t include acquisitions
- Management is predicting continued growth over the next five year period
- The company can easily afford to commence payment of a dividend, if it so chooses

China Sky's Reported Inventory Belies Its Stated Earnings and Sales

Perhaps a more apt reply to this article would be “Much Ado About Nothing”.

The article above leads me to conclude that China Sky One is judicious in its management of inventory. That’s one more reason to like the company.

Here are most of my reasons, in point form:

PRODUCT RELATED
- Large and diversified portfolio of approximately 100 products including:
- Patches
- Creams, ointments, drops and sprays
- Diagnostic kits
- Injectibles
- Tablets and suppositories
- Many drugs in for SFDA approval
- Company-controlled sales force as well as third party distribution
- Three acquisitions in 2008
- Expansion into prescription drugs
- Strong and expanding drug pipeline including:
- Sudden cardiac death early exam kit (revenue potential of $20+ Million)
- Breast Lesion drug (revenue potential of $146.2 Million)
- Management that is pleased to open its facilities to shareholders

FINANCIAL
- Revenue growth from $8M to $92M since 2005
- High gross margin of 76%
- Reasonably controlled expenses
- Earnings growth from $2M to $29M since 2005
- Earnings per share growth from $.19 to $1.87 since 2005
- Cash on hand of $40M
- Working capital of $58M
- No debt
- Judicious inventory management
- Reasonable level of accounts receivable
- Strong cash flow which should be able to fund 2009 CAPEX

FUTURE
- Strong 2009 guidance of $128M-$130M revenue and $38M-$39M net income
- Guidance doesn’t include acquisitions
- Management is predicting continued growth over the next five year period
- The company can easily afford to commence payment of a dividend, if it so chooses

Let me close off this listing of positives for CSKI by stating that the company appears to be driven to be successful, as pointed out by their press releases. Over the last year (by my count), they have issued 17 drug/pipe related releases, plus 4 related to distribution agreements/export arrangements, 1 for an acquisition, 1 for a guidance increase, 2 for a change of market for the stock (OTC to AMEX to Nasdaq) and 2 for scientific recognition. That’s about one positive news release every 2 weeks.

Disclosure: I am long on CSKI and I don’t concern myself with the day to day stock price movements. This is such a lovely long term growth story.

China Sky's Reported Inventory Belies Its Stated Earnings and Sales

"The lady doth protest too much, methinks." (Hamlet, Act 3, scene 2)