This week
China Vesting wanted to
highlight a company that is already
in the Dragon Undervalued Index. Biostar Pharmaceuticals
(BSPM)
develops, manufactures and markets pharmaceutical and health supplement
products for a variety of diseases and conditions. The company's most
popular product is its Xin Ao Xing Oleanolic Acid Capsule, an
over-the-counter ("OTC") medicine for chronic hepatitis B, a disease
affecting approximately 10% of the Chinese population. In addition to
its hepatitis product, Biostar currently manufactures two broad-based
OTC products, two prescription-based pharmaceuticals, one medical
device and five health supplements.
Biostar has been public for a few years but never seemed to get any
respect from investors on any level. We remember it was about two years
ago a consulting company in China was trying to raise money for BSPM
and having zero luck. This was despite the company posting
excellent revenue and net income growth. Then a year ago
one of the very smartest institutional investors in the China deal
space bought approximately 3 million shares of BSPM in a private
placement at an average of $1.87 per share. That was when the stock
started to get some attention trading as high as $5.50 per share and
has never traded below $2.32 per share in the past 12 months.
Based on today's (11-19-2010) closing price of $3.03 per share,
China
Vesting believes BSPM represents deep value for investors interested in
gaining
some exposure to the China drug industry. Our timing could have
been better if we released this report just a little earlier because
the stock was up
$0.35 or 13.06% today due to coverage being initiated by Rodman and Renshaw.
However, even with today's gain the valuation is still incredibly
attractive. Let's run through the numbers...
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Focus
On
Valuation |
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There are currently 26,876,864 shares
of Biostar outstanding and at $3.03
per share the market capitalization is $81.44 million. The company announced Q3 financials on Monday (press
release) and reiterated revenues of $80 million for
2010 with net income of $18 million. The
stock actually traded down after Q3 numbers were released because
previous net income estimates were $18-$20
million. Despite guidance that is on the lower range the
current 2010 PE is still a very
low 4.52.
The next part is where it gets interesting...unlike most China
stocks
BSPM actually has ample cash on its balance sheet to the tune of $16.6
million with no debt! If
we back out the cash from Biostar's market cap we have an enterprise
value of $64.84
million divided by $18 million
we get an Enterprise Value to Earnings
ratio of 3.60. Now that
is pretty cheap and not something any of us will find for an American
based company trading on a U.S. exchange. Most of the China
companies trading on U.S. exchanges thirst for more capital but in the
case of Biostar the company actually generates a lot of cash.
Biostar's valuation would make a lot of sense as a private equity
deal where the company was taken private or even a leveraged buyout
organized by management. Here's the math....assuming someone
offered $4.00 per share...an almost 33% premium to the current market
price... to buyout BSPM. The valuation would be $107.5 million...with an interest rate of 8% the annual interest expense would
be around $8.5 million. That means an additional $10
million a year in profits would be used to pay down the debt. Then add
in the existing $16.6 million in cash and the deal pays for
itself in less than five years if the company continues to grow. Ok..we
are going to be lazy and not run the full calculations on a
potential deal to take BSPM private. The point is to illustrate
that the company's valuation is extremely undervalued.
We are even not sure if the Chairman /CEO of Biostar knows any of
this finance mumbo jumbo but.....the CFO definitely does.
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Surprise...A
Real
CFO |
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Normally, China Vesting would
never have a section titled what is written above...but we've met or
have spoken to way too many Chinese companies who have CFOs that have
no idea what is going. Many Chinese companies are too cheap to
hire a qualified CFO despite being a publicly listed company...BSPM's
CFO seems to be the real deal..here is his bio from a press release Biostar
Pharma
(BSPM)
Appoints Deyin "Bill" Chen as CFO ":
- Mr. Chen brings more than 13 years of multinational and Big 4
accounting experiences to Biostar. His expertise includes financial
management, financing transactions, corporate governance and investor
relations. Most recently, Mr. Chen was an independent advisor engaged
in local RMB PE fundraising and providing M&A and PE advisory and
due diligence services. Prior to that, Mr. Chen was a partner of
Trenwith Securities LLC, where he was engaged in and executed
cross-border equity financing for various Chinese companies. He was
also a senior business advisor of Ernst & Young and a senior
financial advisor of IBM Global Services. From 1997 to 2000, Mr. Chen
was the CFO for China Operations of Ashland Inc.
- Mr. Chen graduated with a Bachelor's degree in Nuclear Physics
from Fudan University, and Master of Science degree in Nuclear
Engineering and Accountancy from University of Cincinnati. He also
holds a MBA degree from York University.
It's rare to see any resume with nuclear physics and accounting....it's
wonderful that BSPM understands the value of a REAL CFO...although for
most of the China companies we see...a CFO who knew just GAAP
accounting and English would be a marked improvement.
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Conclusion
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Currently, shares of BSPM are right smack
in between its 200 day moving average (DMA) of $3.25 and its 50 DMA of
$2.80. Biostar is one of those companies that will one day
breakout to the upside. What the company needs is a stronger retail and
institutional following because the fundamentals are clearly already
there. Adding a big four auditor would also do wonders for
Biostar as well. These days it seems every China company is
guilty until proven innocent. Quite frankly...this is the right
way to view investing in China. China Vesting knows about
China...about investing in China...and how things work there....
It seems like every week another China
stock is taking their shareholders to the cleaners. The list has
grown from Fuqi International (FUQI), Orient Paper (ONP)
and the most recent blow up RINO International (RINO).
Many of these problems could be solved by using big name
auditors. This is not to say that Big Four auditors are
infallible as proven by Enron, WorldCom and a laundry list of other
companies. But seriously..what's a few hundred thousand dollars
extra per year to avoid a drop in your company's entire value that
could be in the tens if not hundreds of million in value. Let's
hope BSPM hires a big four sooner than later.
To rehash...26,876,864 shares
of Biostar are currently outstanding and at $3.03
per share the market capitalization is $81.44 million. 2010 revenues are estimated to be $80 million with
net income of $18 million. That means the current PE based on 2010 earnings is still
4.52. However, keep in mind that Biostar has $0.60 per
share in cash and no debt on the balance sheet. BSPM
may have not gotten much respect in the past or even now...but if the
continues to perform there is very little chance the stock remains at
these levels.
SEC
Filings Q3
Biostar
Company Presentation