Thoughts on the land use rights purchase...
I posted on Yahoo (in response to a shareholder whe thought it wasn't a smart move for LTUS) how I see the land rights investment as a positive for the following reasons:
1. They didn't use debt for the land rights purchase. They paid for the land already with cold hard cash from operations and aggressive collections of accounts revievables (ARs). The collection of ARs (reported as about $14M in their November filing) is very positive- especially in Chinese pharma companies. Some pad their earnings with ARs that they never collect to inflate revenue growth. Well if LTUS was able to collect these ARs to the point where they can pay $26M outright for land use rights (along with cash on hand and cash flow from operations), then the ARs they were reporting previously were REAL.
2. They bought the rights at a time when the global economy is struggling, and land values (even in China) have gone down. If they bought the rights to the same property two or three years ago, they probably would have paid far more for it.
3. The land rights are an asset for the company that will show on their balance sheet. They will be able to use the land as collateral for a low interest bank loan or government financing of the build-out.
4. The land (100 ms total) converts to about 960 acres. They are only going to use about 32 acres, and SELL or LEASE the remaining 128 acres. Their plans have already been approved by the local government, and now need to be approved by the national government. With all the money China's government is throwing into healthcare/pharmaceuticals (850B RMB) to stimulate their economy, it would seem to be something the central government would favor...perhaps even help fund as LTUS implied in their PR.
5. Paying for the build-out over three years is the next hurdle for them. They list how they plan to accomplish this in the PR and it sounds do-able with a combination of low interest bank loans collateralized by the land, cash flow from operations, sale/rental of large amount of unused land they hold rights to, etc. Just with the new drug they announced in February that they have rights to, they could damn near pay for this land. The actual sales (2008) on this drug were just under $10M with whopping margins of 75%. So you can see that over a period of three years, they could pay for a large part of developing the land from these sales alone. I believe it was not a conicidence that both of these developments were finalized in December- as the sales of this drug (known as Sandostatin by Novatrtis in the US)were probably looked at as a major driver in their ability to develop the land.
6. Significant tax advantages to this land development: "We expect to realize significant cost savings by expanding into Inner Mongolia. Once our new facility is completed and sales begin, we expect our new Inner Mongolia operations, like our wholesale distribution business, to be free from income taxes for eight years and pay income taxes at a reduced rate for the subsequent eight years. Also, we expect to enjoy a preferential VAT policy in Inner Mongolia, labor is less expensive, and the cost of utilities will be lower there."
7. I know as a former shareholder of SGTI that pharmaceutical grade dextrose and other IV fluids are in large demand in China, and there is growing demand for new suppliers every year as China's government helps to get better healthcare for it's more rural population. IV dextrose and blood plasma substitutes are very basic products that will increase in demand as healthcare expands into more rural areas.
So at first glance I didn't think too much about the idea either- but after taking a second look, it seems that they're positioning themselves for future growth going out 3-4 years from now- and they might just be doing it with little or now debt.
I'd be interested in hearing what others think on this land use rights purchase- it doesn't appear to have been discussed here much.
