China Growth Stocks

[GorillaGorilla]

BSPM Overview and Valuation

BSPM is a biotechnology firm based in china. They have a number of successful drugs and one in particular, Xing Oleaonic Acid Capsule, is, by Chinese standards, a potential block buster.

The presentation below [1] is worth a read for all new investors but the essence is that Hepatitis B afflicts 10% of the Chinese population, 130 million, there is no cure, viruses are notoriously difficult to cure, but by taking medication you can limit the damage. If you look at the report [2] you will see that not only is this the only drug that will be available over thecounter (OTC) in China but PRC is not issuing anymore OTC hepatitis licenses - this is a significant moat to protect BSPM's business.

They recently got financing which will be used to grow the business. In doing so they set certain provisions that they were comfortable with.

They said they would aim to do $16M ish Income from operations - which should work out around $12 ish net Income and using 26 Million shares that works out around $0.46.

In 2010 the make good provision is $21.1 M and assuming the same margins and tax rates works out around $0.61.


Another, way of valuing the company is the growth in outlets - during 2009 the percentage of revenue from outlets has been increasing.

Outlets by end:
April '09 1320
Sept'09 3512
Dec '09 5000
By 2011 10,000.

In 2009 with the last numbers available, start of November [3], they were doing $13 ish a day in revenue per outlet. If these are replicated for the rest of the year and next year we will see:

Outlet Revenue
2009 $11.6 Million
2010 $36 Million


Meanwhile the rest of the business in 2009 was around $40 Million. So, if the rest of the business doesn't expand in 2010 $40 + $36 = $76 M revenues which at 23% net margins and same diluted shares gives $0.68.

So, management guidance and rough back of an envelope calculations suggests that $0.60 + is very possible from 2010. So a reasonabe valuation by the end of 2010 might be.

P/E 10 $6
P/E 15 $9
P/E 20 $12

P/E is largely dependent on ongoing growth - we have no guidance beyond end of 2010 - that I am aware of.


Upsides:
- Uplisting - the company has plans to uplist within the next few months and this usually results in companies holding higher multiples.
- As outlets are opened longer it's possible they become better known and do more customers.
- New drugs have a ready distribution chain

Downsides:
Most of the revenue will be coming from Xing Oleaonic Acid Capsule - although they seem to be the only ones allowed to sell this in China - clearly losing this monopoly or losing the license would be a large blow from BSPM.


Conclusion

The company is still holding a cheap valuation. The risk comes from being overly reliant on one drug, however, the drug has a considerable moat - unless it loses it's ability to sell or has, somehow, gets significant competition.


[1] http://www.hcinternational.net/pdf/BSPMInvestor%20Presentation.pdf

[2]http://geoinvesting.com/companies/bspm_biostar_pharmaceuticals/research/special_situations/0023354

[3] http://finance.yahoo.com/news/Biostar-Pharmaceuticals-Inc-prnews-260900339.html?x=0&.v=55