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Buying China Pharma Holdings (CPHI.OB) ahead of earnings
Topics: UncategorizedMicrocap traders have hit homeruns in a number of Chinese pharmaceutical and biotech companies, such as American Oriental Bioengineering (AOB) and Tiens Biotech (TBV). Reader J.Z. has alerted me to another intriguing Chinese pharmaceutical play — China Pharma Holdings: CPHI.OB. China Pharma develops, manufactures, and markets Chinese and Western bio-pharmaceutical products for treating infections, hepatitis, vascular disease, CNS, and other conditions.
With roughly 40.9M shares outstanding (37.23M at the end of last quarter plus 3.76M registered for issuance upon exercise of warrants), CPHI has a market cap of approximately $55.2M at today’s closing price of $1.35. The balance sheet is clean, with $2.95M in cash and equivalents, no long-term debt, and short-term notes amounting to less than half of its receivables. Last quarter, China Pharma earned $2.4 million (up 46.6% year-over-year) on revenues of $7.2 million (up 52.8% year-over-year). A substantial part of the growth came from two newly-introduced products: hepatocyte growth promoting factor and ozagrel sodium (representing 8.5% and 10.7% of revenue, respectively). In the earnings release, China Pharma also reaffirmed its full year guidance for 2007 of 30% increase over 2006 net income of $8,587,086. By my calculations, that amounts to $11.16M, or just over 27 cents per share.
Now for the caveats: First, despite progress in most operational metrics, CPHI was operating cash-flow negative last quarter due to ballooning receivables and inventories. While this is not abnormal for a growing business, it needs to be watched very closely. If the receivables need to be written off, CPHI will be adversely affected. Second, J.Z. indicates that $600k of the first quarter revenues were attributable to one-time gains on technology sales, although I can’t seem to find that information. Third, the technical picture is not good. After a breakout and spike upwards last fall, CPHI has retreated steadily even after what appeared to be a solid first quarter report. I am concerned that perhaps the sellers know something I don’t.
Bottom line: Despite a good first quarter report and reaffirming 2007 guidance, China Pharma shares have been pummeled mercilessly. If the company reports even a decent second quarter, I expect shares to bounce up to $1.80 or higher.
DISCLOSURE: Long CPHI.OB.
The sale of formulas you mentioned is listed under Note 6: Transfers of Technology in the 2007 Q1
My grandson “helped me send ” that 1st comment prematurely..lol. I agree with your assessment of CPHI, and have been tracking them for several months now. That sale of formulas was mentioned in the 2007 Q1 10Q under Note 6: Transfer of Technology. I posted the following notes on CPHI on the AOB Yahoo message board back on 20 July (no board for CPHI in Yahoo):
CPHI on MarketWatch, SeekingAlpha and Scottrade CPHI.OB on Yahoo
A pharmaceutical company focusing on both natural and western medicine marketing and R&D in China.
EOY 2006 EPS .25 (down from .34 in 2005 because 23m shares were issued in 2006)
Net Inc incr’d from 3.8m to 8.5m in 2006
2006-Expected 20m Rev, got 21.8m
2006-Expected 8m Net Inc, got 8.5m
(they historically underestimate @ 10%)
They predict 30% incr over 2006 for 2007 (40%?)
Currently have ½ EPS of AOB @ ¼ the price (TTM P/E fluctuates between 6 and 8)
Assuming they meet their 30% incr for 2007, if they had the P/E of AOB, their price at the end of 2007 would be $5.61 (.33 EPS * P/E of 17) which, by the way, is a pretty darn respectable P/E for a pharmaceutical company…look it up….
By the way, did I mention their Rev incr’d in 2006 to 21.8m from 8.6m in 2005?
Yes, they’re a penny stock ($1.55/share as of 20Jul07) …. so was AOB a few years back, guess you wish you’d have been there, eh? The good news is they’re a bargain right now. Why pay premium prices?
One more thing, then I’ll leave you alone…assuming an incr of 30% for 2008 (just like this year), and a P/E that mirror’s AOB (@17), their price will be within a dollar of AOB’s current price, which is north of $8.00…that’s in excess of a 400% return in 2 years, not a stretch, considering their performance to date, and their market…the aging (and increasing) Chinese population.
Thanks for your insights. I agree 100% with your analysis of the metrics. Hopefully we are both correct.
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