China Shenghuo: Increased Costs Keep Lid On Earnings

| About: China Shenghuo (CKUN)
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China Shenghuo Pharmaceutical Holdings, Inc. (KUN) reported greatly improved numbers for its second quarter. Compared to the year earlier, revenues for the company jumped 52% to $6.4 million, while net income climbed 29% to $1.3 million. The revenue figure also represented a 47% increase over the first quarter.

China Shenghuo makes and markets pharmaceuticals, nutritional supplements and cosmetics in China. A full 80% of its revenues come from Xuesaitong Soft Capsules, a traditional Chinese medicine that increases blood circulation for people with cardiovascular and cerebrovascular diseases.

In the second quarter, gross margin moved up from 63% to 75%. The actual gross profit number jumped 82% to $4.8 million. But increased costs kept some of the increases from moving to the bottom line. These higher costs included higher spending for marketing, as the company expanded its sales efforts, especially in Beijing and Shanghai, and took control of more of its marketing.

Some of the selling costs were the result of introducing a new line of cosmetics. Shenghuo also included an $800,000 charge for doubtful accounts and a small amount for costs associated with its IPO in June. For the full year, Shenghou expects sales and marketing to consume between 30% and 35% of its revenues.

At the end of the second quarter, China Shenghou had $1.9 million in cash and working capital of $5.9 million. The company is forecasting its full-year 2007 revenues to be about $25 million, with profits totaling between $5 and $6 million. Earnings per share are expected to be approximately $.30.

In June, China Shenghou completed its IPO with a small placement of 460,000 shares (see story). The offering price was $3.50 per share, and the stock quickly doubled to $7. Since then, it has slipped back towards its IPO price, trading today at $3.75 and giving China Shenghou a market cap of $73 million.

The company completed its Phase II trial of Wei Dingkang Soft Capsules as a treatment for peptic ulcers in July (see story). Although China Shenghou promised that results of the trial would be released in a few weeks, they have not been announced as yet.

Disclosure: none.