Wednesday, March 9, 2011

Goldman Sachs Issued a Conviction Buy for AMBO- PT 12$

Goldman Sachs' Report

Source of opportunity
We upgrade Ambow to Buy post the stock’s recent correction and add it to the Asia Pacific Conviction Buy
list. Ambow is one of the largest players in China supplementary education, and we forecast its K-12 tutoring
and career enhancement services (two-thirds of revenues in 2010) to drive 20% 2010-2013E earnings
CAGR. We view the stock’s recent significant correction (from liquidity constraints and sector weakness) as
unwarranted, given fundamentals appear intact, with 4Q10 results exceeding expectations. At current levels,
Ambow trades at 12X 2011E non-GAAP P/E, or 45%/60% discounts to Xueda/New Oriental. Our $12 12-m
TP implies c.50% upside.
1) Ambow has executed on track post IPO in Aug 2010, which should ease investors’ concern over its
historically M&A driven business model. Ambow beat our 4Q10 revenue and EPS estimates by 10%, and
guided 1Q11 revenue 10% ahead of our forecast. The company plans to add a substantial number of
learning centers organically in 2011, (40 on top of the existing 131), accelerating its expansion. 2) We believe
the market will appreciate Ambow’s differentiated career enhancement business, which targets high-end IT
training and leverages its cooperation with local govt.
We raise our 2011E revenue forecast by 9% but lower our margin assumption on faster expansion. We have
adjusted our 2011/2012E EPADS by -4%/+3% and introduce 2013E EPADS of $0.96. We maintain our 12-m
target price of $12, derived from P/E-based SOTP. We apply 18X 2011 P/E to the tutoring business’s non-
GAAP NOPAT, 25X to career enhancement services, and 10X on K-12 schools and colleges. Our M&A
scenario analysis would add $4 to Ambow’s base-case DCF value of $16.7.

Friday, January 7, 2011

China Jo-Jo DrugStores: China's CVS with great growth potential

China Jo-Jo Drugstores (CJJD) owns and operates a retail pharmacy chain in China. The company currently has 31 stores in Hangzhou, the capital of Zhejiang Province, located approximately 112 miles south of Shanghai. Its stores provide customers with a wide variety of medicinal products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, traditional Chinese medicine (“TCM”) products, personal care products, family care products, and medical devices, as well as convenience products including consumable, seasonal, and promotional items. In addition to these products, the company has licensed doctors of both western medicine and TCM onsite for consultation, examination, and the treatment of common ailments at scheduled hours. The company attempts to tailor its product offerings, physician access, and operating hours based on the community in which each individual store is located.
 China has 1.3 billion people, making up approximately one-fifth of the world’s population. The portion of the Chinese population aged 60 and above has been increasing for the past two decades. On average, older people spend more on health care, particularly because the prevalence of several diseases typically increases with age. The significant growth of China’s economy, as well as the increase in disposable income among its consumers, has in turn led to a stronger demand for pharmaceutical and other health care related products, including nutritional supplements, Traditional Chinese Medicine (“TCM”), and herbal products.
China’s total expenditure on health care was RMB 1.5 trillion in 2008 and is forecasted to expand to RMB 2.5 trillion by the end of 2012, representing a CAGR of 14.6%. Current estimates put U.S. health care spending at approximately 16% of GDP. In China, health expenditure as a percentage of GDP is forecasted to grow to 6.4% in 2012, representing a CAGR of 6.0%.
The business mode of CJJD is to provide a convenient, high quality health care service to it’s customers. Among CJJD’s competitors, it is the first retail drug store that has licensed physicians onsite during scheduled hours.
Furthermore, some stores have adjoining medical clinics that offer customers health consultations and minor outpatient surgical treatments. CJJD’s customers appreciate the onsite physician service and give very positive feedback. This is a key distinction between CJJD’s stores and its’ competitors.
The short-term strategy of CJJD is to expand into other cities within Zhejiang Province. Zhejiang Province is one of the wealthiest provinces in China. It has 51.8 million residents and Hangzhou, its’ modern provincial capital, has a population of over one million people. The economy of Zhejiang Province has grown significantly in recent years, and was the fourth largest among the provinces of China in 2009. According to the PRC National Bureau of Statistics, from 2000 to 2008, the average per capita annual household disposable income of urban residents in Zhejiang Province increased from RMB 9,279 to RMB 24,611. The urban population as a percentage of the total population in Zhejiang Province increased from 60.0% in 2005 to 63.0% in 2008. Rapid urbanization is expected to continue to fuel the rapid growth of urban residential communities, presenting a significant opportunity for expansion. Also contributing to the growth of the healthcare sector in Zhejiang Province is its aging population: the percentage of people who are 60 and above increased from 13.6% in 2003 to 15.6% in 2008.
In the recent quarterly report, the company reported a very healthy financial situation. It has $12.4 million in cash and only $6.8 million liability. Gross profit in CJJD rose to $4.4 million, up 26% year from the previous year. CJJD is currently traded at $4.2, a P/E less than five, and has the lowest valuation in the health care industry as shown below.


The business of CJJD is very similar to CVS in the United States but CJJD is still a fast growing company. The superior service, reliable quality, and affordable drug prices are the key factors that drive CJJD’s growth. In the meantime, the low valuation and growth of China’s health care industry makes CJJD very attractive to value investors.

Wednesday, December 29, 2010

Dehaier Medical Systems Limited : A Shining Star in Medical Device Market

Since I published an article on China Kanghui Holdings (KH) a few months ago, KH has outperformed market by double digits. It had soared from $12 to $23 and is trading around $18 now, 50% higher than my initial recommendation. In a world where many investors are fleeing from hot Chinese IPOs with high valuation matrix, I looked at Chinese small cap stocks and found another well undervalued gem: Dehaier Medical Systems Limited (DHRM).
DHRM is a leading distributor and self-branded provider of medical devices based in Beijing, China. DHRM designs, develops, and markets self-branded homecare medical products (oxygen homecare products) and distributes products manufactured by other companies.
The Chinese government is well aware that the current health care facilities infrastructure and investments made are highly inadequate to cope with the growing needs of the population. Hence, in 2009 the central government decided to disburse an estimated RMB 850 billion (USD 124 billion) over the next three years. This included an estimated RMB 4.1 billion (USD 620 million) to be disbursed for the setting up of CHC (Community Health Centers) and for the purchase of medical devices. A recent report published by the Wharton School of Business, University of Pennsylvania suggests that the expected value of China’s medical device market will reach $28 billion by 2014, representing a 15% CAGR. Because of increasing availability of health care insurance, increasing percentage of GDP to be spent on health care by the government, and growing desire for better quality of care, the medical device market is projected to grow much faster than the global medical device market. Within the next five to seven years, China is expected to surpass Japan and become the second largest medical device market in the world.
With such strong government emphasis and massive investments committed, DHRM has become one of the fastest-growing medical device companies in China today. The company has managed to maintain revenue growth of 35% annually for the past three years and has controlled expenses well. In fact, the profit margin for monitoring devices, one of the key products offered by DHRM, increased from 31.1% in 1H 2009 to 52.1% in 1H 2010 due to effective cost control.
In China, hospitals and clinics purchase almost all of their medical devices and supplies  through distributors. As a result, medical device companies need to develop relationships with several distributors in different regions. DHRM has contractual relationships with over 2000 independent distributors and business relationships with over 3000 hospitals throughout China. Very recently, DHRM had won a $2 million medical device distribution bid for a new rural healthcare construction project supported by the China Development Bank Corp ("CDB"), a major Chinese state-owned bank focused on supporting China's national infrastructure development initiatives. Under the terms of the contract, Dehaier will cooperate with Philips Medical Systems, Olympus Corporation of Japan and many other companies to distribute medical devices to the new healthcare facility. Winning this project gives DHRM entry into the basic-level medical care market and DHRM expects to obtain more projects within this optimal environment. DHRM also established the Customer Experience Center (CEC) network for its Homecare Medical products. The CECs are established to provide broad ranges of branded Homecare Medical products and to meet customer’s expectations, e.g., real time recording system, diversified solutions and treatments etc.
In the recent quarterly report, the company reported a net income of $3.1 million in the first nine months of 2010, up 48% year from the previous year. DHRM also earned $0.77 per share, compared with EPS of $0.69 achieved in the same period a year ago. DHRM is currently traded around $5 at P/E less than five and has the lowest valuation compared to the industry as shown below.

Appliances & Equipment
Operating Margin(TTM)
Net Margin(TTM)

DHRM has an extensive marketing network and stable relationships with old customers. It also enhanced its ability to control risk by decreasing dependence on major customers. Because of a strong government support in the medical industry and the direction of healthcare shifting towards community-centric healthcare in China, DHRM’s strong growth trend is expected to continue. In my opinion, DHRM is a well under-valued stock and the current price is definitely a bargain.

Tuesday, December 21, 2010

SkyPeople Fruit Juice: The best beverage stock in the world

SkyPeople Fruit Juice, Inc. (SPU) produces kiwi, apple, pear, jujube and mulberry concentrated fruit juices and fruit juice beverages as well as fresh fruit. It also owns the largest kiwifruit plantation in Asia. As a result, SPU is one of the fastest-growing fruit product companies in China today. The company rode out the financial crisis and has managed to maintain revenue growth of 40% annually for the past four years.
From September to October of 2010, concentrated fruit juice prices have risen from $850 to $1,600 per ton. Due to production cuts in apples from Europe, the price of apple juice in Portland has already increased more than 20%, and the price of apple juice in China is expected to reach $1,800 a ton in the near future.
China consumed 12.5 billion kiloliters of fruit and vegetable juice in 2009, according to Euromonitor International, and this figure is likely to reach 18.1 billion kiloliters within three years. Double-digit growth is therefore likely to remain a feature of the market for some time. In the long run, the future of concentrated fruit juice is very bright due to growing domestic demand. Sales of fruit juice beverages continue to benefit from strong demand from Chinese consumers as more middle-class consumers now drink fruit juices as a healthy alternative to carbonated soft drinks. In the short term, due to expectations of high inflation ahead, rising price will become the catalyst boosting stock prices for fruit juice companies.
First: Two major exporters – China and Portland – are facing inventory reduction and supply shortage problems today. China is currently the world’s largest producer of apple concentrate around the world, with 95% of its annual output exported overseas. FOODNEWS showed that there will be a shortage of concentrated apple juice in China because of rising price.
Second: Orange Juice, once considered to be the substitute of apple juice, also experienced a sharp increase in price. The price of orange juice increased more than 50% in 2009 because of a freezing disaster in the United States, one of the major orange exporters. The price of orange juice has remained above $3,000 per ton due to tight inventories in 2010. As a substitute for orange juice, the rising price of orange juice will definitely increase the demand for apple juice.
SPU is a small-cap company but its strength lies in its diversity. Huiyuan, the largest domestic fruit juice producer, and other peers in China mainly specialize in apple- and orange-related products. SPU, unlike its peers, however, specialized in kiwi juice, which has a much wider profit margin than apple- and orange-related products. Earlier this year, SPU introduced a bottled kiwifruit and mulberry juice under the brand name of Hedetang in Beijing. This helped the company to avoid direct competition with major players like Huiyuan (1886.HK) in China, which mainly produces orange and apple juices. 
In the recent quarterly report, the company reported a net income of $3.6 million, up 71.4% from 3Q 2009, and revenues from kiwifruit and apple concentrates increased 207.6% and 117.6%, respectively, on a yearly basis. Apple and orange concentrated juice   are the most profitable products in SkyPeople’s portfolio. They account for 60% of total revenue in the first 9 months of 2010 and continue to enjoy the rising price in today’s fruit market.
As of September 30th, 2010, the company had US$46.1 million in cash from strong internal cash flows, and its total liability is only $22.3 million. The company’s rich cash position, as well as its strong relationships with local lending institutions, provides SPU adequate funds to support its growth plans.
Because of the strong financial reports and rising demand for its product, SPU recently updated its net income and earnings per share guidance for 2010. The GAAP EPS (diluted) is $0.82 to $0.91, which means the stock is traded at P/E less than 5 today! The price-to-book ratio of SPU is 0.99 with a PEG Ratio of 0.15, which is relatively low and suggests that SPU is a significantly undervalued company with great growth potential.

Considering the huge growth potential of China’s fruit industry, increased fruit beverage consumption and SPU’s strong past performance, SkyPeople Fruit Juice definitely represents a great opportunity for value investors.