Sep 24, 2020
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Making Money On Chinese Medicine

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The high level of business growth China has enjoyed over the last several years has led to larger demand for stock of businesses that operate inside the region. This has resulted in sharp share price gains and rich valuations particularly for those companies whose growth is anticipated to remain high for the foreseeable future

 

To average investors this has made it tough to find a stock that will allow them to take part inside the region s current expansion. Fortunately the quantitative model employed by the Forbes Growth Investor has found one in American Oriental Bioengineering. With top line growth expected to exceed 50% in 2008 an earnings multiple of about 14 and favorable demographic trends the stock offers great growth potential at a bargain basement price

 

Forbes Growth Investor readers doubled their money in Goldman Sachs (GS). What are they doing now? Click here for the updated model portfolios with a free trial of Forbes Growth Investor. AOB is a China-based pharmaceutical company. Unlike Western drug makers together with Pfizer Bristol Myers Squibb GlxoSmihKline Novartis and Merck the company makes a speciality of manufacturing and marketing plant-based traditional Chinese medicines (TCM) in China

 

Products fall into two categories. Plant-based pharmaceuticals which generated 82% of first-quarter sales are medicinal compounds derived from the leaves and roots of plants. These products approved by the Chinese State Food and Drug Administration are used to regard various illnesses. They’re sold over the counter and by prescription. Examples include Shuanghuanglian Lyophilized injection powder an antiviral product that’s effective against respiratory disease; and Cease-enuresis soft gel and patch which treats bedwetting and incontinence

 

Special Offer: Investigate Forbes Growth Investor s market-beating model portfolio free for 30 days. Click here. Plant-based nutraceuticals generated 18% of first-quarter sales. These are supplements designed to prevent illness in preference to treat it. PBNs also are believed to promote health and wellness. AOB sells tablets powders and an instant coffee containing soy peptides

 

It also sells nutritional drinks derived from honey products marine plants and natural herbs which are rich in amino acids and vitamins. The Chinese pharmaceutical market has enjoyed significant growth over the last several years by means of several favorable trends. A booming economy has led to larger amounts of disposable incomes and raised living standards

 

Demand has risen for pharmaceutical products as Chinese people moved up the commercial ladder. These trends were accompanied by greater participation inside the State Basic Medical Insurance System and increased government spending on health care. AOB has benefited from a general preference in China for TCMs over synthetically manufactured alternatives

 

Complementary acquisitions have also contributed to the company s growth. Total revenues and net income over the last three years climbed fivefold to $160 million and $43. 3 million in 2007 respectively. Net revenues inside the first quarter of 2008 jumped 50. 7% from a year ago to $38. 8 million. Strong over-the-counter sales more than offset slower growth inside the prescription business and falling PBN sales

 

Special Offer: Click here for a 30-day free trial of Professional Timing Service with long and short trades in energy and metals. The gross profit margin contracted 101 basis points last quarter to 67. 82% by means of a shift inside the sales mix and higher expenses associated with the combination of an acquisition

 

However the operating profit margin improved 12 basis points to 30. 89% and net income jumped 46. 2% to $9. 4 million. Investment risks include the planned issuance of $115 million of convertible bonds which could dilute future earnings and the sometimes capricious nature of Chinese laws and regulations. However we are focused more on potential growth

 

Organic sales should rise 30% in 2008. Total sales growth should exceed 50%. Net income is anticipated to climb at least 43%. Taesik Yoon is senior equity analyst and associate editor with the Forbes Investors Advisory Institute publisher of Forbes Growth Investor and Forbes Special Situation Survey. Click here for details on model portfolio holdings and recent buys and sells

 

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