By Hungry Panda
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” -- Berkshire Hathaway 2008 Chairman's Letter
The capital markets have been gripped by a great deal of fear from a variety of sources. Almost every sector has sustained losses and our Rising China Stocks (RCS) Index is no exception. As contrarians, we believe this is the perfect time to be investing.
Previously mentioned Biostar Pharmaceuticals (BSPM) recently had their Q1 earnings call. After a brief run up following the NASDAQ uplisting, its stock price has continued to slide.
Management made some great comments, most importantly its earnings guidance of $18m–20m, revised upwards from previous estimates of $16.2m–17m. Let’s take a look at where these earnings are going to come from:
-- Xin Aoxing, Biostar’s flagship product is marketed at the estimated 350 million carriers (as of 2004) of Hepatitus B which is endemic in China, with 10% of the population affected. Q1 saw increased sales by 138.2% with a gross margin of 85.1%.
-- In the Q1, Biostar expanded into four new markets, and is expecting incremental revenue in the following quarters to drive significant earnings growth.
-- The 2010 goal of expanding into 10,000 rural outlets is more than half complete, standing at 6,000 outlets.
-- The company recently completed a military trial of an oral analgesic. The product was classified as "Specially Needed Drug" by the Chinese Military Drug Administration and will also be available to the public.
-- Its raw materials plant will be contributing $7m in new revenue in the Q3 at a gross margin of 30-40%.
During the conference call however, a private investor highlighted a potential problem, stating that on an adjusted basis, Q1's net margins were running at 19.4%, much lower than the 22% required for the low end guidance of $18 million.
Management answered this question poorly by detailing the quarterly revenue schedule. But we remain confident that there will be no problem in reaching guidance for the following reasons. First, Q1 margins show a decrease mainly because BSPM devoted 20-30% of sales revenue to an advertising budget, resulting in significantly higher operating expenses. Further, as regards top line growth, Biostar has been experiencing increasing demand for its products in existing markets, not to mention its new and important expansion into Beijing and Shanghai.
Biostar has shelved plans for an additional secondary offering, stating that this is not required to meet basic guidance. This, as well as a current ratio of 5.72, is evidence that of the company's solid financial standing.
So while BSPM has fallen significantly off its 52-week high, I believe this is more a symptom of the general market malaise, rather than a company-related issue. It may take next quarter’s earnings to push the stock back in the right direction, but make no mistake -- as the institutions catch on with the company's growth story, Biostar is headed to significantly higher grounds.
My Position: Long
Monday, May 24, 2010
Saturday, May 8, 2010
Update: Market Correction Highlights Chinese Small-Cap Buying Opportunities
By Hungry Panda
Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. -- George Soros
With the three headed monster of the 3Gs ravaging world markets (Greece, Goldman, and the Gulf), several high profile investors have made headlines claiming that China is on a path for collapse. Marc Faber has made the news rounds stating that in nine to twelve months, China will experience a market collapse.
Predictions like these remind me of the John Kenneth Galbraith saying: "(t)he only function of economic forecasting is to make astrology look respectable." Simply put, while anything can happen in the next few months, it seems unlikely an economy with such vast reserves and demonstrated growth will experience anything but a minor market correction. And such a correction could present a buying opportuinty.
In recent days, China has made efforts to curb the inflamed real estate market by restricting lending practies. Together with Hong Kong, Lisbon and Spain, the Shanghai Composite Index (SSEC) (2,868 at the time of writing) is one of the few major bourses trading below both its 50-day (3,051) and 200-day moving average (3,093), and also below its February low.
Also, while U.S.-listed Chinese large and mid caps have performed well with some significant gains, our small-cap heavy Rising China Stock Index has struggled.
Prieur du Plessis technicals seem to signal an overall downtrend of the Index leading to an enhanced environment for stock pickers.
Volatility appears to have increased across the market and the majority of our holdings have fallen to very attractive levels. Previously discussed SOKO Fitness and Spa Group (SOKF.OB) has eased to around $4 a share, off its 52-week high of $4.94, while Biostar Pharmaceuticals (BSPM) is now way below $4 dollars.
The argument is that the majority of Chinese small caps are at incredible valuations. Companies like SOKF boast a 84% client retention rate, even while it conducts its business in uniquely thriving market segments. SOKF has a sub 10 mulitiplier and solid earnings growth, and is a clear example of a quality company with demonstrated growth and strong balance sheet that presents an excellent buying opportunity in this current market pullback.
My Position: Long SOKF.OB, BSPM.
Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. -- George Soros
With the three headed monster of the 3Gs ravaging world markets (Greece, Goldman, and the Gulf), several high profile investors have made headlines claiming that China is on a path for collapse. Marc Faber has made the news rounds stating that in nine to twelve months, China will experience a market collapse.
Predictions like these remind me of the John Kenneth Galbraith saying: "(t)he only function of economic forecasting is to make astrology look respectable." Simply put, while anything can happen in the next few months, it seems unlikely an economy with such vast reserves and demonstrated growth will experience anything but a minor market correction. And such a correction could present a buying opportuinty.
In recent days, China has made efforts to curb the inflamed real estate market by restricting lending practies. Together with Hong Kong, Lisbon and Spain, the Shanghai Composite Index (SSEC) (2,868 at the time of writing) is one of the few major bourses trading below both its 50-day (3,051) and 200-day moving average (3,093), and also below its February low.
Also, while U.S.-listed Chinese large and mid caps have performed well with some significant gains, our small-cap heavy Rising China Stock Index has struggled.
Prieur du Plessis technicals seem to signal an overall downtrend of the Index leading to an enhanced environment for stock pickers.
Volatility appears to have increased across the market and the majority of our holdings have fallen to very attractive levels. Previously discussed SOKO Fitness and Spa Group (SOKF.OB) has eased to around $4 a share, off its 52-week high of $4.94, while Biostar Pharmaceuticals (BSPM) is now way below $4 dollars.
The argument is that the majority of Chinese small caps are at incredible valuations. Companies like SOKF boast a 84% client retention rate, even while it conducts its business in uniquely thriving market segments. SOKF has a sub 10 mulitiplier and solid earnings growth, and is a clear example of a quality company with demonstrated growth and strong balance sheet that presents an excellent buying opportunity in this current market pullback.
My Position: Long SOKF.OB, BSPM.
Tuesday, April 27, 2010
Update: Biostar Confirms Rumor; Says "No Impact on Income Guidance"
By Platinum Tiger
Biostar Pharmaceuticals (BSPM.OB) moved swiftly and admirably today to confront investor worries that sent the company's stock tumbling by nearly 20 percent on Monday. The company issued a press release confirming the rumor that the provincial bureau of the Shaanxi State Food and Drug Administration (SFDA) had notified Biostar that it had been using improper language in its marketing materials for its flagship hepatitis drug, Xin Aoxing Oleanolic Acid Capsules.
The press release went on to say that the company has already modified its marketing materials, and received the SFDA's approval to continue marketing the drug. The SFDA's notification "has not disrupted production or sales of Xin Aoxing and is not expected to have any impact on previously announced fiscal 2010 revenue and net income guidance."
As of this writing BSPM is trading at $4.50, still 18 percent below the peak price it reached on Friday before the SFDA notification was publicized. With BSPM having just uplisted to the NASDAQ, and with management guidance of 100 percent earnings growth for the coming year, I see this as a terrific gift of a buying opportunity. I have more than doubled my position in the stock in anticipation that it will soon reach new highs.
My Position: Long BSPM.
Biostar Pharmaceuticals (BSPM.OB) moved swiftly and admirably today to confront investor worries that sent the company's stock tumbling by nearly 20 percent on Monday. The company issued a press release confirming the rumor that the provincial bureau of the Shaanxi State Food and Drug Administration (SFDA) had notified Biostar that it had been using improper language in its marketing materials for its flagship hepatitis drug, Xin Aoxing Oleanolic Acid Capsules.
The press release went on to say that the company has already modified its marketing materials, and received the SFDA's approval to continue marketing the drug. The SFDA's notification "has not disrupted production or sales of Xin Aoxing and is not expected to have any impact on previously announced fiscal 2010 revenue and net income guidance."
As of this writing BSPM is trading at $4.50, still 18 percent below the peak price it reached on Friday before the SFDA notification was publicized. With BSPM having just uplisted to the NASDAQ, and with management guidance of 100 percent earnings growth for the coming year, I see this as a terrific gift of a buying opportunity. I have more than doubled my position in the stock in anticipation that it will soon reach new highs.
My Position: Long BSPM.
Monday, April 26, 2010
Biostar Plunges on Government Suspension Rumors
By Platinum Tiger
On only the second trading day after Biostar Pharmaceuticals (BSPM) uplisted to the NASDAQ, when investors might have otherwise celebrated the usual price bump that accompanies a move from the bulletin boards to a listed exchange, they were instead surprised on Monday by a 20 percent price drop on massive volume of nearly 2 million shares.
According to rumors that circulated among investors, Biostar was suspended last week from advertising its major hepatitis drug, Aoxing number one Oleanolic Acid Capsules, by the Shanxi provincial bureau of China's State Food and Drug Administration (SFDA) due to "unauthorized" and "exaggerated" advertising practices. The source of these rumors was a "suspension notice" posted on a Chinese website purporting to be an SFDA news site.
Since there was no other news in the Chinese or U.S. press, and no announcement from Biostar, I'm treating this for the moment as a harmful rumor that may or may not prove true. Since the hepatitis drug accounts for as much as 70 percent of Biostar's revenue, any suspension of its advertising, even if limited to Shanxi province, could adversely affect the company's profits, at least until the problem is corrected.
I'm guessing the 20 percent drop may in any case be an overreaction. Even if the rumor is true, it seems unlikely that such a suspension of advertising in a single province would reduce the company's long-term profits by 20 percent. With management's recent guidance indicating 100 percent profit growth, and BSPM trading at a forward PE of around 9x, the stock looks extremely undervalued to me, especially after Monday's plunge.
Some investors took the price drop to be a buying opportunity and acted accordingly. I've held onto my position in anticipation that Biostar will clarify the situation soon with a press release. If this isn't forthcoming in the next day or so I'll interpret that as a bad sign and act accordingly.
My Position: Long BSPM.
On only the second trading day after Biostar Pharmaceuticals (BSPM) uplisted to the NASDAQ, when investors might have otherwise celebrated the usual price bump that accompanies a move from the bulletin boards to a listed exchange, they were instead surprised on Monday by a 20 percent price drop on massive volume of nearly 2 million shares.
According to rumors that circulated among investors, Biostar was suspended last week from advertising its major hepatitis drug, Aoxing number one Oleanolic Acid Capsules, by the Shanxi provincial bureau of China's State Food and Drug Administration (SFDA) due to "unauthorized" and "exaggerated" advertising practices. The source of these rumors was a "suspension notice" posted on a Chinese website purporting to be an SFDA news site.
Since there was no other news in the Chinese or U.S. press, and no announcement from Biostar, I'm treating this for the moment as a harmful rumor that may or may not prove true. Since the hepatitis drug accounts for as much as 70 percent of Biostar's revenue, any suspension of its advertising, even if limited to Shanxi province, could adversely affect the company's profits, at least until the problem is corrected.
I'm guessing the 20 percent drop may in any case be an overreaction. Even if the rumor is true, it seems unlikely that such a suspension of advertising in a single province would reduce the company's long-term profits by 20 percent. With management's recent guidance indicating 100 percent profit growth, and BSPM trading at a forward PE of around 9x, the stock looks extremely undervalued to me, especially after Monday's plunge.
Some investors took the price drop to be a buying opportunity and acted accordingly. I've held onto my position in anticipation that Biostar will clarify the situation soon with a press release. If this isn't forthcoming in the next day or so I'll interpret that as a bad sign and act accordingly.
My Position: Long BSPM.
Sunday, April 25, 2010
Real Estate Stocks Sink Chinese Small Caps for Second Straight Week
By Platinum Tiger
A 10 percent plunge in real estate stocks cooled off the Rising China Stocks (RCS) index for a second consecutive week, wiping out nearly a third of the gains the small cap index had made this year and putting it well off the pace of the red hot Russell 2000 small cap index, which is now up by nearly 20 percent this year.
[Click to Enlarge]
Friday marked the fifth time in six sessions that the index lost ground, culminating its biggest drop since mid-January. The decline was mainly due to heavy selling amongst a handful of real estate, basic materials and energy stocks. Tech and media stocks were off slightly during the week, while consumer, pharmaceutical and industrial stocks held steady.
[Click to Enlarge]
Big decliners included China Carbon Graphite Group (CHGI.OB), which fell 34 percent on poor earnings, and IFM Investments, or Century 21 China (CTC), which dropped 19 percent as investors sold off real estate and related stocks in response to the Chinese government's clampdown on speculative real estate lending. The week's top gainer was China Power Equipment (CPQQ.OB), which gained 14 percent on increasing accumulation, perhaps in anticipation of an impending uplisting.
Although the index is still in a downtrend, selling pressure appears to be abating as the last several down days came on decreasing volume. Breadth, while still negative, improved markedly from the prior week. At present I'm optimistic that the tide will turn, and so I'm looking for a day of widespread gains on heavy volume. But I won't be taking any new positions until I see confirmation that the next bull leg has begun.
My Positions: None.
A 10 percent plunge in real estate stocks cooled off the Rising China Stocks (RCS) index for a second consecutive week, wiping out nearly a third of the gains the small cap index had made this year and putting it well off the pace of the red hot Russell 2000 small cap index, which is now up by nearly 20 percent this year.
[Click to Enlarge]
Friday marked the fifth time in six sessions that the index lost ground, culminating its biggest drop since mid-January. The decline was mainly due to heavy selling amongst a handful of real estate, basic materials and energy stocks. Tech and media stocks were off slightly during the week, while consumer, pharmaceutical and industrial stocks held steady.
[Click to Enlarge]
Big decliners included China Carbon Graphite Group (CHGI.OB), which fell 34 percent on poor earnings, and IFM Investments, or Century 21 China (CTC), which dropped 19 percent as investors sold off real estate and related stocks in response to the Chinese government's clampdown on speculative real estate lending. The week's top gainer was China Power Equipment (CPQQ.OB), which gained 14 percent on increasing accumulation, perhaps in anticipation of an impending uplisting.
Although the index is still in a downtrend, selling pressure appears to be abating as the last several down days came on decreasing volume. Breadth, while still negative, improved markedly from the prior week. At present I'm optimistic that the tide will turn, and so I'm looking for a day of widespread gains on heavy volume. But I won't be taking any new positions until I see confirmation that the next bull leg has begun.
My Positions: None.
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