Skystar Bio-Pharma (NASDAQ:SKBI)

Termination of Coverage 

Effective immediately, we are terminating coverage on Skystar Bio-Pharmaceuticals Co. (SKBI) to better allocate resources within our coverage universe. Our last rating on Skystar was Market Outperform/Speculative Risk with a Target Price of $15.00. Investors should not rely on our previously published financial projections.

INVESTMENT THESIS 

Skystar Bio-Pharmaceutical Company (SKBI) is a leading private Chinese company developing and selling veterinary medicine products. The company currently offers a complete suite of products to meet the needs of farmers from the birth of the animal through slaughter. SKBI’s products include vaccines, food-additives, and micro-organisms. The company currently markets approximately 200 products throughout China. 

In our view, SKBI’s distribution network is one of its primary competitive advantages. In China’s highly segmented animal farming industry, where an estimated 70% of pork products come from small farms with less than 15 pigs, SKBI has developed a network of company-owned or company promoted stores which educate farmers on the latest farming innovations and animal health. The company hires local farming experts at these facilities, and includes instructions on how to best use the company’s products to achieve desired results. The primary competitors for SKBI are government-owned enterprises that produce just several products, which are often under-promoted and are not competitively priced to SKBI’s product portfolio. SKBI has positioned itself as a leading and innovative manufacturer of animal husbandry health products, and we believe that the company’s regional stores and local expert endorsement may further strengthen the corporate brand.

We believe that the demand for animal husbandry products will continue to be strong in China in the foreseeable future. The economic growth over the last decade has significantly increased the consumption of protein by the Chinese. The gross production of farm animals is estimated at $200-250B in 2007, and growing at a CAGR of 9%. The current demand for animal husbandry products exceeds the current production capacity.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on SKBI                                  5/24/2011

SKBI: Strong Quarter, Anticipating Regulatory Milestone

Key Points

• For 1Q11, Skystar Bio-Pharmaceutical reported $7.1MM in revenues and $1.9MM in net income, slightly higher than our estimates of $6.7MM and $1.6MM, respectively.
• The company reported a cash balance of $7.4MM at the end of 1Q11, an increase of $1.5MM from 4Q10.
• Future growth could be largely driven by the expansion of the vaccine production line as well as the improved capacity of the micro-organism facility in 2011.
• The company reassured 2011 guidance of $60-63MM in revenues.
• We reiterate our Market Outperform rating with a $15/share target price in 12 months.

Investing to Prepare for Inflation

Given the increased costs of raw materials, gross margins decreased to 51% in 1Q11 from 54% in 2010. In addressing ongoing inflation, the company has taken a proactive approach to control raw material costs by securing favorable pricing through prepayments. In 1Q11, the company stocked $12MM in raw materials in comparison to $5.5MM in 4Q10. As a result, the company incurred an operating loss of ($6MM). The prepayment schedule could reduce the impact of price increases. However, continued inflation may cause further erosion in the gross margins. Given these competing trends, we slightly decrease our gross profit projection from 53% to 50% for 2011.

Anticipating GMP Approval in 3Q11

Skystar is estimated to obtain GMP approval from the Ministry of Agriculture in 3Q11 for the vaccine production line, representing a 2600% increase in capacity. We project a conservative material contribution of $3MM in 2011 from vaccine products. Going forward, the vaccine production line is estimated to generate $8-15MM in revenues in 3-5 years.

New Acquisition Expected to Have Material Contribution in 2H11

Skystar recently invested $8MM in the Kunshan acquisition to expand the micro-organism production line. The company has obtained the title for the land usage and is expected to complete the acquisition in 2Q11. With an estimated $5MM in capital expenditure, the facility is expected to have a small material contribution in 2011 and reach $30MM in annual sales in five years.

Maintaining Our Market Outperform Rating and $15 Target Price

Utilizing a 2011 P/E multiple of 7.5, we derive a 12-month price target of $15/share. By way of comparison, other profitable and growing Chinese companies yield average P/E ratio of 16 for 2011. In our opinion a target price of $15 is easily justified by Skystar’s full product suite offering, significant growth opportunities in the domestic veterinary medications/vaccines market and the incremental growth potential stemming from entering the underserved aquaculture vaccines market.


Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on SKBI             4/12/2011

SKBI: Solid 2010, Expansion in 2011 and Beyond

Key Points

• Skystar Bio-Pharmaceutical reported 2010 revenue of $47.6MM, slightly higher than our estimate of $46.6MM, and fell into the higher end of the 2010 guidance ($45.5-47.5MM). The company earned $14MM in net income, or $1.98 per diluted share, in line with our estimate of $1.97/share.
• Future growth could be largely driven by the expansion of the vaccine production line as well as the improved capacity of the micro-organism facility in 2011.
• The company reported a cash balance of $6MM at the end of 4Q10, an increase of $4MM from 3Q10.
• Management provided 2011 guidance of $60-63MM in revenue with an estimated gross margin of 50-55%.
• We maintain our top line assumption of $62.6MM in revenues and the bottom line estimates of $2.25 in diluted EPS in 2011.
• We reiterate our Market Outperform rating with a $15/share target price.

Solid Growth in 2010, Prepared for Inflation in the Near Term

In 2010, the company achieved $47.6MM in revenues, a 41% growth over 2009. Gross margins were improved to 54% in 2010 in comparison with 49% in 2009. On the bottom line the company reported $14MM in net income, representing a 30% growth over 2009. The company has taken a proactive approach to control costs of the raw materials by securing favorable pricing through prepayments. We project a 53% in the gross profit in 2011. However, we expect an erosion in the gross margin in 2012 if the inflation remains high in China.

GMP Approval to Enhance Vaccine Contribution

Skystar is estimated to obtain the GMP approval in 3Q11 on the vaccine production line, representing a 2600% increase in capacity. We projected a conservative material contribution of $2.6MM in 2011 from the new facility, resulting in total revenue of $4.6MM in 2011 from the vaccine products. Going forward, the vaccine production line is estimated to generate $8-15MM in revenues in 3-5 years.

New Acquisition to Contribute to the Future

Skystar recently invested $8MM in the Kunshan acquisition to expand micro-organism production line. The company has obtained the title for the land usage and is expected to complete the acquisition in 1H11. With an estimated $2-3MM in additional capital expenditure, the facility is expected to have small material contribution in 2011 and reach $30MM in annual sales in five years.

Maintaining Our Market Outperform Rating and $15 Target Price

Utilizing a 2011 P/E multiple of 8.5, we derive a 12-month price target of $15/share. By way of comparison, other profitable and growing Chinese companies yield average P/E ratios of 15.8 for 2010 and 15.6 for 2011. In our opinion a target price of $15 is easily justified by Skystar’s impressive margins, full product suite offering, significant growth opportunities in the domestic veterinary medications/vaccines market and the incremental growth potential stemming from entering the underserved aquaculture vaccines market.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on SKBI

Key Points 

• Skystar Bio-Pharmaceutical reported 3Q10 revenue of $18.6MM, higher than our estimate of $17MM. The company earned $6.6MM net income, or $0.93 per diluted share, beating our estimate of $0.50/share. 

• The stellar quarter is due to 1) increased production capacity, 2) improved gross margins, 3) reduced SG&A expenses and 4) lower tax expenses. 

• Management reiterated 2010 guidance of $45.5 – $47.5MM in revenue, representing a 35–41% growth over 2009. 

• Future growth could be largely driven by the expansion of vaccine production, as well as potential acquisitions. 

• The company reported a cash balance of $2MM at the end of 3Q10, a decrease of $1.5MM from 2Q10. 

• We maintain our growth assumptions and increase revenue and EPS estimates for 2010 and 2011 to reflect better than expected 3Q10 results. 

• We reiterate our Market Outperform rating with a $15/share target price.   

Solid Top and Bottom Line Growth 

During 3Q10, the company achieved a 45% revenue growth YoY. Gross margins were slightly improved (54%) in 3Q10 in comparison with 53% in 2Q10. SG&A expenses decreased from 17% of total revenue in 2Q10 down to 11% of total revenue in 3Q10. On the bottom line the company reported a 36% net income growth in 3Q10 YoY. We maintain our top line growth assumption for both 2010 and 2011. But to reflect the strong 3Q10 results, we increase our revenue projections to $47MM from $45MM in 2010, and to $61MM from $59MM in 2011. We also adjust our gross margin and SG&A assumption to reflect improved performance. As a result, EPS projections are increased from $1.43 to $1.98 in 2010, $1.75 to $2.25 in 2011.

Invest in The Future 

Skystar reported negative net operating cash flow of ($3.1MM) in 3Q10. The decrease is mainly due to an increase in deposits and prepaid expenses ($11.4MM), which is composed of mostly prepayment for raw materials purchasing. Management stated that inventory would be drawn down during the next quarter or two. Accounts receivables were improved by $2MM, a great achievement in light of growing revenues. The company secured low interest $3.0MM line of credit and short term loan facility for $0.7MM in China.

All Four Product Lines Maintain Robust Growth 

The company’s 3Q10 revenues were attributable to 248 products from four product lines: veterinary medications, micro-organism, feed additives, and vaccines. Veterinary medications generated $12.4MM in revenues in 3Q10, or 67% of total revenues and a 46% growth YoY. Micro-organism products generated revenues of $4.7MM in 3Q10, or 25% of total revenues and a 48% growth YoY. Feed additives contributed 4% of total revenues, representing a 37% growth in comparison to sales in 3Q09. Vaccine products accounted for 4% of 3Q10 revenues, a 35% growth YoY. 

Increasing Capacity and Novel Products to Contribute to the Future 

Skystar recently completed the expansion of the vaccines and microorganisms production facility and is expected to receive GMP production approval by YE10 or early 2011. The company expects to significantly increase its production capacity of these product lines, which could contribute to revenue in 2011. The new vaccine plant is estimated to contribute $8-15MM in annual revenue within 3 – 5 years of market introduction.

Maintaining Our Market Outperform Rating and $15 Target Price 

Utilizing a 2010 P/E multiple of 11 and 2011 P/E multiple of 8.5, we derive a 12-month price target of $15/share. By way of comparison, other profitable and growing Chinese companies yield average P/E ratios of 15.8 for 2010 and 15.6 for 2011. In our opinion a target price of $15 is easily justified by Skystar’s impressive margins, full product suite offering, significant growth opportunities in the domestic veterinary medications/vaccines market and the incremental growth potential stemming from entering the underserved aquaculture vaccines market.

Notice Regarding Privacy and Confidentiality:   

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.