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CSY - an opportunity?



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By PAndreola

Posted: Tuesday Aug 12 5:30:56AM 2008

Count me as one of the interested. Two Chinese companies I am following: HFGB and LTUS. LTUS is trading at 2.7 times earnings makes and sells pharmaceuticals. HFGB trades at about 4 times 2008 guidance makes and sell base compounds for drugs and nutraceuticals. Both growing revs over 100% YOY. I own some HFGB.

By stocklad

Posted: Monday Jul 21 12:14:14PM 2008

With markets down everywhere, it seems somewhat like shuffling the deck chairs on the Titanic to sell shares of one company to acquire those of another these days. In times like this, Iím guided by a single principle: to keep moving the underlying value of my portfolio northward. This means that Iíll happily sell a company trading at 70-80% of its underlying value to acquire another trading at say 50% or less of its underlying value. Thatís what I did recently to acquire a rather interesting company with great growth and potential. [Warning: If you prefer companies doing business in the 1% growth area of North America to those participating in the 10% Chinese growth story, you can stop reading now.] The company is China Sky One Medical and it trades on the AMEX under symbol CSY, but not long ago traded under the symbol CSKI on the OTCBB. The company formerly produced and sold over-the-counter medications in Asia, but they have been moving into the prescription drug business and now have 30% of their sales from that area. The company has been expanding its business at a great rate since 2004, both organically and by acquisition. They have been given approval to commence production of several drugs and they have made 3 acquisitions so far this year. Hereís one news release that caught my attention: Apr 9th Ė They closed an acquisition of an over-the-counter drug maker, including a state-of-the-art GMP-certified plant, research facility, 69 approved drugs and 38 new drugs. Cost: about 1.5x sales and a p/e of about 5. Revenue over the past four years (from 2004-2007) was $4.9M, $7.7M, $19.9M and $49.3M. Thatís over 100% annual growth. Earnings were $1.4M, $2.2M, $0.6M and $15.3M. (2006 earnings were low due to organization build-out expenses and expenses resulting from their going public.) Thatís a lot higher percentage growth. Gross margin over the period was 75.6%, 71.3%, 74.5% and 77.8%. I only have annual eps figures for 2006 and 2007 and these were $0.05 and $1.15 respectively. Revenue and per share earnings guidance for 2008 are $81-83M and $1.74-$1.79 respectively. Guidance for Q2 of 2008 is $19.5M revenue, $0.43/share earnings and 78% gross margin. This is pretty impressive stuff. At the end of 2008 Q1, CSY had no debt and cash on hand of $2.78 per share. Some of that cash is committed (acquisition and research facility), but as of the last quarter about $1.28 was uncommitted. As at 31 Dec 07, directors and officers had a 41% stake in the company. So, whatís it worth? A North American pharma with these growth credentials would fetch an astronomical p/e Ė certainly in excess of 25 Ė but Iíve given it a p/e of just 15 on this yearís eps to be conservative. Hereís my calculation: Low end eps guidance of ($1.74 x 15 p/e) + $1.28 cash = $27.38 Personally, it doesnít matter what p/e you feel is appropriate, because the company is trading at about $11.00, or at about 6 times 2008 earnings. Thatís a bargain in my books. I know lots of people in the investment community like to make quick trades, but thatís not my style. CSY have shown they can grow their business, and Iím looking forward to participating in the next couple of years of growth. Iíve seen Chinese pharmas with lower growth rates get priced by the markets much more like North American pharmas, so thatís something to look forward to as well. By the way, the company has just announced a five-year distribution agreement that should add approx. $9M per year in new sales. In all, they have issued 7 positive news releases in the last 7 weeks. Enjoy!

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