China Sky One Medical (PINK:CSKI)

China Sky One Medical shocked investors when, after the close, it announced that it lowered its guidance:

• The Company has lowered its 2010 revenue guidance from a prior range of $160 million and $164 million to between $128 million and $136 million.
  
  
• The Company also has lowered its 2010 adjusted net income guidance, excluding the impact of derivative warrant liabilities, from between $40 million and $41 million to between $26 million and $31 million.
  
  
• Management's reduced guidance reflects the termination of relationships with certain private distributors, who after several rounds of discussions, chose to end their cooperation with the Company after learning that their business information was disclosed in the Company's public SEC filings and would continue to be disclosed in such documents as required by SEC regulations. This disclosure, these distributors claim, has led to increased scrutiny of their financial performance by government authorities within China. While the Company expects to replace these lost distribution arrangements over time, revenue and net income in the second half of 2010 are expected to be negatively impacted by the disruption in distribution channels. The Company expects to incur higher selling and marketing costs during second half 2010 to develop new distributor relationships.

GeoTeam® note:

We found it very interesting that the PRC government has poked its head into the CSKI story and we are surmising that it will not be the last. It may be that China is finally getting wind of the fraud allegations taking place in the ChinaHybrid® space. We are curious if part of the issue  in CSKI's case could be with the existence of possible discrepancies between distributor sales reported in its SEC filings and those reported by its distributors in China.   Furthermore, as tax evasion may be prevalent in China, maybe the distributors see a potential risk on their end as they may have under reported income. Any theory is just speculation for now, but this could open up a can of worms and give shorts another avenue to champion their cause by contacting PRC government officials.

This development gives investors another reason to perform extreme due diligence in the ChinaHybrid sector.

CSY is considered a GeoBargain as it meets 8 out of 10 of the following criteria:

X Recent 52 week High
X EPS growth at least 30%
X Revenue growth at least 10%
X Strong Balance Sheet
X Return on Equity of at least 15%
X Minimum Pre-tax operating margin of 8%
X Small Float
High insider ownership**
Limited Institutional ownership**
X Strives to Maximize Shareholder value

**The GeoTeam is attempting to locate accurate figures on Insider and Institutional Ownership.

As evidenced in the financial section of this discussion CSY exceeds many of the above criteria by a wide margin. The growth in the company’s business has been a direct result of increased distribution channels coupled with new product introductions. The stock has been rather quiet for sometime despite its financial performance, but the recent move to the American Stock Exchange from the OTC Bulletin Board may give the stock more exposure.

Several pieces of information point toward the company continuing its aggressive growth trend:

* Searching the SEC filings one can find earnings targets that the firm set in association with a recent capital raise initiative. If these targets are not met extra shares will be given to certain investors resulting in diluting ownership. Thus, although these targets are not guidance, it may be inferred that companies set targets that they can realistically achieve. This is very common in China reverse mergers. CSY met the target for 2007. The 2008 Earnings Per Share Target is $1.61 ($1.35 on an adjusted fully taxed basis ).

* Published analyst Estimates reveal EPS expectations of $1.58 for 2008 ( $1.32 on a fully taxed basis ) and $2.48 for 2009 ( $2.08 on a fully taxed basis ).
(Source: SEC 8K Filing Feb 21, 2008 )

* According to the company recent acquisitions will be accretive to earnings:

- "As a result of our recent acquisitions, we are currently on track to increase revenues materially as compared to last year and hope to increase
our gross margin to approximately 78.5%."
(Source: PR Newswire May 13, 2008)

* Involvement in new initiatives:

- “We are in the early stages of stem cell research which involve perfecting, cultivation methods and the freezing and storage of stem cells. We hope to complete this in the second half of 2008 and expect to see material revenues from these efforts begin to develop in 2009.” (Source: 2007 Year end conference call)

* Strong Pipeline of drugs:

- "By the end of 2008, the Company will have a total 38 new drugs submitted to the SFDA approval." (Source: PR Newswire May 20, 2008)

* Strong commentary:

- "For the full year 2008, and as a result of our recent acquisitions, we are currently on track to increase revenues materially as compared to last year and hope to increase our gross margin to approximately 78.5%."
(Source: PR Newswire May 13, 2008 )

2007 Key ratios are also impressive:

* Pre-tax Profit Margin: 37%
* Current Ratio: 4.29 to 1
* Tax Adjusted Return On Equity: 39%
* Long-Term Debt : None

GeoTeam note: We were impressed that the company swiftly changed accounting firms. It seems that the previous accounting firm may had come under some public scrutiny, although we are not sure as to the specific reasons for the change. This move shows that the firm is committed to developing a solid reputation among investors and enhancing shareholder value:

* ''We look forward to working with our new independent auditor, Moore Stephens, to ensure that the Company continues to achieve high standards in financial reporting, which is in keeping with our profile as an American Stock Exchange listed company. We are committed to protecting the interests of our shareholders and providing transparent public disclosure,'' said Mr. Yan-qing Liu, Chairman, CEO and Director of China Sky One Medical, Inc. (Source: PR Newswire May 28, 2008)


The GeoTeam holds a position in CSY. Sticking with the Geo discipline, we may place good-to-cancel sell limits. We may change these limits or liquidate our position if new developments arise. We may also change these limits or liquidate our position to meet firm capital needs or as our market outlook changes.

China Sky One Medical, Inc. Approved for Listing on the American Stock Exchange

"This approval is contingent upon China Sky One Medical being in compliance with all applicable listing standards on the date it begins trading on the AMEX and may be rescinded if China Sky One Medical is not in compliance with such standards. Concurrent with its first trade on AMEX, China Sky One Medical will no longer be quoted on the Over-the-Counter Bulletin Board."

(Source: Press)