Chinese Pharmaceuticals to Watch Part 2

by Zack Buckley, GeoTeam Contributor

There has been much debate recently as to the future of the Chinese economy. Famous hedge fund manager Jim Chanos has publicly come out saying he will short the Chinese economy. While I believe the Chinese real estate market and domestic stock market are overvalued, I think the Chinese companies trading on the U.S. exchanges (ADRs) are screaming buys! Buffett talked about feeling like “an oversexed man in a brothel” in the mid 1970’s because he was so excited about the cheap prices inU.S. stocks, I feel the same about stocks inChina right now. I do not predict market fluctuations; I just buy when stocks are trading at a huge discount to their intrinsic value. While I am not sure what will happen in the next year or even two years, I am certain that these companies are exceptional buys for the long term investor.

As I discussed in my previous article, leaders in the pharmaceutical industry have several things in common: a strongnationwide sales and distribution network, strong research and development capabilities and access to capital.

Skystar Biopharmaceuticals (NASDAQ:SKBI) appears to be the perfect Buffett-like company. They have a sustainable competitive advantage with little competition in the veterinary health industry. They are currently the only large corporation in this field that is not a state owned enterprise. Skystar also has two important Buffett traits, a high Return on equity and high profit margins of 55% and 42% respectively. This shows that they are not in a heavily competitive industry, because profit margins and ROE are low in competitive industriesSkystar has a P/E of 5.96 while it has grown revenue from 6 million in 2005 to 26 million in 2008, and will have substantial revenue growth in fiscal 2009, with estimates between 44-46 million. Skystar also has a strong balance sheet with no long term debt.

Biostar Bharmaceuticals (OTC BB:BSPM) is poised to grow at unbelievable rates over the next year. They plan on expanding their sales outlets from 3,512 to 10,000 sales outlets by the end of 2010. If they reach their estimates, they will have net income growth of at least 100% in fiscal 2009. Biostar has a near monopoly in their most important drug, a treatment for Hepatitis B. They could as much as triple revenues in 2010, and are trading at a p/e of only 8.

Biopharm Asia is involved in the planting, manufacturing, distribution, and retail sale of a large line of health care products. It is trading at a p/e of only 4.42, and grew net income from 5.5 million to 14.4 million from 2007-2008. This company is expanding rapidly and priced to go nowhere, in these situations, it does not make sense not to buy.

Weikang Bio-technology Group (OTC BB:WKBT) is another Chinese pharmaceutical company that is appears extremely undervalued. They engage in the research, development, manufacturing, marketing, and sales of Traditional Chinese Medicine in China. We believe that a lack of investor awareness is one of the primary reasons for this substantial undervaluation.

A comparison of these Chinese companies to the  US counterparts is shocking in relation to a discrepancy in valuations. Pfizer (NYSE:PFE) has not grown since 2006, and is trading at a p/e of 13. Walgreens (NYSE:WAG) is at a p/e of 16, and has grown revenues from 47 to 63 billion. Sanofi Aventis has had no substantial revenue growth from 2006-2009, yet is trading at a p/e of 14. In China we have companies growing at 30% or greater growth rates, and trading for p/e ratios of less than 8, while in the U.S. we have companies with 0-5% growth rates trading at p/e ratios of 13-16.

The Chinese companies clearly present better value for the intelligent investor. There are a few reasons why this happens, primarily that these companies are unknown to investors and that they are in China investors treat China like a disease; they try and stay as far away as possible, with little logical basis. There is conflicting opinions concerning the future of China While I agree that the real estate market and domestic Chinese stock markets are overvalued, many of the Chinese companies trading on US markets or the OTC exchange are extremely undervalued.

Other companies in the Chinese pharmaceutical industry worth watching are China Kangtai Cactus Bio (OTC BB:CKGT), China Sky One Medical (NASDAQ:CSKI), and China Pharma Holdings (NYSE AMEX:CPHI). This industry is exploding with undervalued companies; investors would be well served to do some serious research.

Disclosure: At time of this article, Zack was long SKBI BSPM WKBT CKGT CSKI CPHI

Profile

GeoTeam Contributor Zack Buckley is CEO of Uncoveringalpha.com and a research analyst at Geoinvesting.com. He developed his investing methodology by synthesizing the ideas from the best investors of all time, based on their track record. This led him to closely follow Warren Buffett, Peter Lynch, Seth Klarman and Benjamin Graham. Using a value approach, he pursued the most undervalued companies he could find, which led primarily to companies in China. Buckley will be spending three months this year in China visiting companies that are exciting investment opportunities.

***Follow him on his blog, Uncoveringalpha.com, as he travels across China touring factories and interviewing management.***