A Small Dose of Cheap Chinese Drugs

08/12/2010 11:20 am EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says a small pharmaceutical company will profit from the explosive growth of health care spending in China—and the stock is cheap.

China's growth translates into strong future demand for pharmaceutical and other health care-related products.

In 2008, China's total expenditure on health care was 1.5 trillion yuan. That number is expected to grow to 2.5 trillion yuan by the end of 2012, a 67% increase in just four years and a compounded average annual growth rate of 15%.

The production value of China's pharmaceutical industry is projected to grow at an average annual rate of 22% from 2010 to 2019, according to the Southern Medicine Economic Research Institute (SMERI).

Jiangbo Pharmaceuticals (NASDAQ: JGBO) [is] a leading drug company in China and one of the most undervalued companies around. At current valuation, the company's stock is trading at a ridiculously cheap [price].  

Founded in 2003, Jiangbo Pharmaceuticals develops new drugs through its internal [research & development] team, as well as [through] collaboration with leading research institutions.

The company is well-positioned to benefit from the rapidly growing pharmaceutical market in China due to its strong industry reputation, experienced management, skilled workforce, and extensive nationwide distribution network.

Currently the company's strategy is to continue to leverage Jiangbo's strong industry position and cash flow to achieve stable growth. Management expects to grow its business through product development, more efficient operations, and potential [merger & acquisition] opportunities.

In fact, the acquisition of Hongrui in January 2009 increased Jiangbo's product portfolio from six to 28 products. In addition, the company has recently received [regulatory] approval for production of felodipine sustained-release tablets, which is expected to add 10% to 12% in sales. Jiangbo [also] has three new products in the pipeline awaiting final approval. Management expects to see a modest revenue growth for the remainder of this year.

Jiangbo has a very healthy balance sheet. As of March 31, 2010, the company has almost $108 million cash, $186 million total assets, and only $62.6 million total debt. Compared to its current market capitalization of [around $100 million], the company is trading below its book value.

Now, the company does currently have warrants and convertible debentures on its books, which may create some dilution. But even if we include all possible potential dilution, the earnings per share is still around $2.00 per share, or around [4.5x fully diluted earnings at recent prices].

The stock traded as high as $14.50 in January, but sold off as a result of declining revenue coupled with weak overall market condition for Chinese small-cap stocks. With market conditions improving as well as the newly approved drug and fully operational production lines boosting earnings, JGBO is now one of the most undervalued Chinese stocks in a very attractive sector.

[So,] buy JGBO under $11. (It closed at around $9 Wednesday. Chinese small-cap stocks can be volatile and are highly speculative vehicles for risk-tolerant investors only—Editor.)

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