Profit from the Graying of China

10/14/2010 11:03 am EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, likes a domestic Chinese medical devices company, trading in New York, that is growing rapidly along with China’s aging population.

China now has about 200 million people over the age of 60. And each year, about eight million people will turn 60. By 2050, a whopping 400 million Chinese are expected to be over 60 years old, a number that is greater than the entire current population of the United States.

Because of the aging population, the demand for orthopedic surgery—primarily undertaken by people over 60 with osteoporosis conditions—has risen very quickly in China. China's orthopedic implant market grew 18.4% annually in the past three years, and is expected to reach more than $2.43 billion in 2015.

China Kanghui Holdings (NYSE: KH), a leading player in China's orthopedic implant market, was founded by its current chairman, Yikang Jiang, a second-generation orthopedics medical device expert.

He started the company in 1995 and has personally developed several different products, including orthopedic screws and a series of patented spine products that could shorten surgery time by 30%.

Now, 15 years later, China Kanghui has grown into a leading domestic developer, manufacturer, and marketer of orthopedic implants in China.

In the past year, Kanghui's research team brought eight products to market, and so far Kanghui has received 21 patents in China. In addition, the company plans to launch eight new products by the end of next year and expand its research and development capabilities to [more profitable] joint implants and complementary products.

[Unlike other Chinese companies,]  Kanghui's founder handed the [chief executive officer’s] position to Libo Yang, a professional manager and a veteran of Johnson & Johnson (NYSE: JNJ). With Mr. Yang's management capability coupled with Mr. Jiang's industry expertise, Kanghui's fast and healthy growth attracted several top global and domestic venture capital firms, [as well as the Government of Singapore Investment Corporation—GIC].

The fundamentals of the company are solid. Kanghui grew its revenue from 87.7 million yuan in 2007 to 139.7 million yuan in 2008 and then to 184.3 million in 2009. (Currently one US dollar goes for less than seven yuan—Editor.) Kanghui's balance sheet is healthy, with about 127 million yuan in cash and just 126 million yuan total debt.

In August, Kanghui went public through an initial public offering on the New York Stock Exchange, with Morgan Stanley as its lead underwriter. The stock's IPO price was $10.25 per share, and since then [it] has steadily climbed. (It closed below $18 after an 8% move on Wednesday—Editor.)

Considering its strong growth and a P/E ratio of around 24x [next year’s estimated] earnings, I think this company has great up side potential. I recommend you buy KH under $16. I expect that the share price will reach $20 in four to six months.

(Editor’s Note: Kanghui is a small-cap stock, with a market capitalization of under $400 million and is appropriate for investors who are comfortable with risk and volatility.)

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