Weikang Bio-Tech (PINK:WKBT)

Began actively tracking on August 19, 2009 when stock was below $1.00 and traded virtually no volume.

Added to the GeoSpecial list on November 20, 2009 @ $2.90

Catalyst: Solved liquidity issues; Increased capacity; Attained several quarters of respectable EPS growth.
Peak performance: Reached a high of $6.99 on April 5, 2010
Current Price: $3.25

Current road block: Lack of investor awareness; Shares are quite illiquid; Make good net income target of $17.0 million implies growth of just 12.2%; Could not find verbiage in the 2010 first quarter regarding liquidity needs; Funding requirements surrounding original reverse merger transaction still exist.

Remains on the GeoSpecial list. Adjusted EPS for the 2010 first quarter increased 33.3% to $0.20, which would normally qualify a stock as a GeoBargain. However, the weak 2010 growth implied by existing net income targets creates a dilemma for us. The positive news is that the first quarter net income annual run rate is tracking at $22.0 million, which would imply a growth rate of 41.1%. Combine this observation with the company's typically weak first quarter in terms of sales and earnings and we have reason to postulate that the company can handily exceed its target. If we apply the first quarter outstanding share count of 27.4 million and $22.0 in net income, 2010 EPS translates to $0.80, implying EPS growth of 29.0%. Still, investors need to be aware that WKBT may have to deal with some sub par EPS comparisons in the third and fourth quarter depending on how net income is spread out.

Also consider

1. Comments from the 2010 first quarter press release:
   
    "The market opportunity for Traditional Chinese Medicine and Western medicine continues to expand in China as consumers' medical expenditure is estimated to double annually over the next two decades."
   
   "Weikang intends to continue developing new products and expanding its distribution network throughout 2010. The Company has 10 therapeutics in various stages of the SFDA approval process and expects to launch its 10-HDA in the third quarter of 2010 and ShuangBaoGu by the end of 2010."
   
2. The company has openly stated goals to enhance shareholder value.
   
3. Solved liquidity problems we highlighted in our original note.

WKBT reported 2009 net income of $15.6 million, which exceeded its 2009 net income target figure of $13.0 million. The 2010 net income target is $17.0 million.

More due diligence is required to determine if 2010 EPS can grow at least 30%, which seems like a tall task:

• The 2010 net income target is calling for 8.7% growth.
• Dilution from recent private placement.

However, the company did handily beat its 2009 target. Furthermore, with trailing EPS of $0.62 WKBT shares are trading at a meager P/E of 6.82. Combine this with:

Mr. Wang concludes, "Looking ahead, we will continue our growth strategy of developing newer and higher margin pharmaceutical and nutriceutical products, while expanding our sales and distribution network in China. In 2010, we will also deploy more time and resources towards the U.S. capital markets by increasing our investor relations efforts and potentially uplifting to a senior stock exchange. The management team is fully committed to build long term value for all of our stakeholders."

Gives us hope that investors will bid up WKBT shares to a more appropriate P/E multiple.