A Natural Winner in China

06/03/2008 12:00 am EST

Focus: OPTIONS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts and Strategies, finds a midsized purveyor of herbs and natural remedies that’s growing much faster than the Chinese economy itself.

Warren Buffett, who just held his annual Berkshire Hathaway shareholders’ meeting in Omaha, once said, “The 21st century belongs to China. Invest accordingly.”

The key is to find medium-sized companies in China, India, Brazil, Vietnam, and in other emerging markets that fit into the Buffett acquisition criteria. As outlined in his latest shareholder letter, his formula for investing is to “buy great companies cheaply”—that is, businesses you can understand [and that have] a long-term competitive advantage, good management, and a cheap price.

We think we found such a company in China: American Oriental Bioengineering  (NYSE: AOB). This Shenzhen-based natural herb company sells vitamins, healthy beverages, and over-the-counter drugs to treat various physical and mental illnesses. It sells its products directly to retail stores, pharmacies, hospitals, and independent distributors in China and around the world.

And revenues and earnings are booming. Last month, the company announced first- quarter results, and its numbers exploded upward like a Chinese firecracker. Revenues increased 50.7% to $38.8 million, and net income rose 46.2% to $9.4 million. Sales of the Jinji series and Jinji Yimucao products were major contributors to this increase, as well as sales generated by CCXA and Boke.

AOB benefited from increased brand recognition, effective pricing, and expanded distribution coverage to new rural markets.

Chief executive officer Tony Liu stated, “We completed the first quarter of 2008, which is always our slowest sales quarter of the year, with strong financial performance. We are well-positioned for 2008 as we begin to recognize the benefits of our acquisition strategy and the synergies realized from our Boke and CCXA acquisitions. We believe these transactions, as well as our recently announced strategic alliance with China Aoxing Pharmaceutical, significantly strengthen our position to achieve our goal of building a leading pharmaceutical business in China. We continue to seek acquisitions that allow us to drive growth and flexibility through product diversification, brand strength, distribution reach, and vertical integration.”

The company’s most recent report does not include any potential acquisitions, so results could be even better in the future. This mid-sized Chinese company is expected to continue expanding at a 50% revenue rate into the foreseeable future.

What about the recent massive earthquake in China? CEO Tony Liu states, “Our manufacturing, production, and overall operations were not impacted by the earthquake and we do not anticipate any damage-related impact to our sales in the second quarter.”

(The ADRs closed below $12 Monday—Editor.)

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