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Open Letter To Ms. Zhilin Li, CEO China Pharma Holdings (CPHI)

|Includes: China Pharma Holdings, Inc. (CPHI)

Note: This article covers a micro-cap stock. Please be aware of the risks associated with these type of stocks.

Dear Ms. Zhilin Li,

it must be frustrating to see that your hard work isn't reflected in the share price of China Pharma Holdings (NYSEMKT:CPHI). Mr Market isn't kind to your company at the moment.

I studied your stock in detail... and ... and ... no! No bashing today. There has to be an end to this ubiquitous China stock bashing.
I'm sure you are someone who leads her company very well and someone who does the right decisions.

But when it comes to shareholder value, you don't have to be passive. Give the market the right signals. Signal the market that your company isn't a "self-service store" like China Natural Gas (OTC:CHNG) and dozens of other companies.

Here we go:

1. Reduce short term debt

Like almost all other small Chinese companies your company has no long term debt. But your company is in such a strong condition that it doesn't need the short term debt either. Go and reduce the $4m debt every year by half a million instead of letting it grow slowly.

No big point here? Surely not. It's O.K. for the short term debt going up for a growing company like yours. What I feel uncomfortable with are the rising debt interest rates you pay in the last years and inflation itself is going down. This is a trend a CEO/CFO cannot tolerate. So get rid of things that are making your company weaker and weaker step by step.

2. Inventory

$25m in raw materials? This has to be explained in more detail in the next 10-K filing. Relative to the $81m total revenue and considering your operating margin (25%) this looks like you have almost a year's production in raw materials in inventory. This either cannot be true or has a reasonable explanation.

3. Update your Website

Having a nice website isn't your prime goal - agreed. But here are some hints that are not labor-intensive to accomplish:

Give us photo's on your website that show us your

  • production lines (not only a laboratory table like you do now)
  • factory buildings
  • management team.

People are the heart and blood of a company, the flesh behind "dry" numbers (of the annual report). We want to see them to get an impression.

4. Show YOUR confidence

You participate in stock option plans. And you own 23% of the company. Nevertheless It would be a good idea to buy again some shares on open market to show your confidence regarding the future prospects of the company.

5. No dilution

Lately you expanded the shares authorized to 95,000,000. This is no good sign for the shareholders neither for the analysts. So be careful in not expanding the real shares outstanding too fast.

The points 1-5 are not so complicated to accomplish. But they give the market, the shareholders and the analysts a signal - a signal that CPHI is thriving its way forward.

But every healthy company in your situation would consider an additional measure. Share buyback. CPHI has a net income of $19m and your market cap is only $16m So it is obvious that with
a Price/Book-Ratio of 0.1 this would be a brilliant idea to increase shareholder value. But this might not be so easy for a Chinese company so I mention it only as a "footnote".

Gordon Gekko

P.S. First published in July, 2012

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.