China Ming Yang: Gone with the wind or Fly with the wind?

China Ming Yang Wind Power (MY) announced fantastic results for the past quarter and beat all consensus estimates. However, its share price showed downward momentum and recently traded in the lower 10s. According to Benjamin Graham, the stock’s owners should not be too concerned with erratic fluctuations in stock prices, because the stock market behaves like a voting machine in the short term but acts like a weighing machine in the long term (i.e., the stock’s true value will be reflected in its price over the long run). Instead of viewing MY as an underdog, I believe its current price in the lower 10s provides value investors a very attractive entry value.
 

China’s 12^th Five-Year Plan presents an exciting renewable energy plan. It states that the installed capacity of wind power will reach 100 million kW by 2015 and 180 million kW by 2020, which suggests roughly 12 GW of newly installed capacity annually. Ming Yang will benefit from these supportive policies as a leading WTG manufacturing company in China. There are also two key wind power development areas: onshore, including Inner Mongolia and Xinjiang, and offshore, including Jiangsu, Hebei, and so on. Because Ming Yang has also secured wind resources in these key wind power development areas, the long-term relationship with wind farm developers in these areas will definitely boost Ming Yang’s sales in the near future.

In previous articles, I have provided some background on Ming Yang; I will focus on valuation in this article.
 

Valuation

Most financial resources show Ming Yang’s trailing P/E as 18, which makes it look like an overvalued stock. However, it should be pointed out that MY just became profitable in 2010, so its negative earnings in Q4 2009 adversely affected the calculation of its trailing P/E.

In fact, MY has earned US$0.71 in the first nine months of 2010, compared to a net loss of US$0.2 for the same period in 2009.

 

MY’s latest quarterly report shows that the company is aiming to achieve revenue recognition of an estimated 800 1.5 MW WTG units in 2010, and is also targeting an estimated 1400 1.5 MW WTG units and 100 3.0 MW SCD units in 2011.

 

I will show my calculation of estimated revenues for MY in both 2010 and 2011, based on the above information, in the following steps:

1.       Calculation of unit price for 1.5 MW WTG units.

According to the latest quarterly report, the total recognized revenue in the third quarter of 2010 was US$ 222.1 million (RMB 1486.0 million), based on 239 1.5 MW units with an exchange rate of 6.69 RMB/USD. The unit price for 1.5 MW WTG units is $222.1 million ÷ 239 = $0.9293 million/unit.

2.       Calculation of unit price for 3.0 MW SCD units.

On December 7, 2010, MY announced that it had won its bid for a government authorized wind farm project in the Hami area of Xinjiang Uyghur Autonomous Region, China. Ming Yang’s winning bid is equivalent to 67 units of 3.0 MW SCD WTGs with an awarded total contract value of RMB 824 million. Based on an exchange rate of 6.69 RMB/USD, the contract value is $123.2 million and the unit price for 3.0 MW SCD units can be calculated as 123.2 ÷ 67 = $1.8383 million/unit.

3.       Now we can easily estimate that the revenue for MY in 2010 will be 800 x 0.9293 = $743.4 million and (1400 x 0.9293) + (10 x 1.8383) = $1484.9 million in 2011.

 

 

As of September 30, 2010, 4.6 million shares are issued upon the exercise of share options, which were granted to certain directors and employees in Ming Yang. If all of these options were exercised, the net book value per share would decrease to US$ 10.28. Adding back the 125 million common shares, the diluted shares for MY is 125 + 4.6 = 129.6 million.

 

Finally, excluding IPO costs, the net margin per share for MY is 16%. Therefore, we can calculate the net income for MY in 2010 as 743.4*16%/129.6 = $0.92 and 1484.9*16%/129.6 = $1.83 in 2011.

Considering MY’s closing price of 9.9, P/E in 2010 is 11 and forward P/E in 2011 is only 5.5.

 

The order backlog of MY increased to 1,331 units and 363 units (not yet signed) as of September 30, 2010. The cumulative WTGs commissioned in 2010 totals 549 units. The strong demand for MY’s wind turbines and order backlog, together with orders awarded but yet to be signed, makes me feel confident that MY will achieve its revenue target.

 

Goldwind (002202.SZ) is a state-owned pure wind turbine supplier in China and can be seen as MY’s most comparable peer. Goldwind is now trading at 32 trailing P/E and 15 forward P/E.

 

The financial statement for MY is audited by KPMG, one of the “Big 4,” and therefore the credibility of the financial data is ensured. Considering the supportive policies made by the Chinese government and improving profitability from MY, I believe that MY with P/E less than six is obviously an undervalued stock.

Top Three Reasons to Buy China MingYang Wind Energy

On November 15th, 2010, China Ming Yang Wind Power (MY) reported its third quarter results for 2010. Shares jumped as much as 14% in early trading after the earnings were released, but the stock pulled back throughout the later trading hours. If there are no material events, I consider MY to be a significantly undervalued stock. In this article, I want to provide my top three reasons to long MY following my previous article.

1. Strong Financial Highlights

Unit (RMB)	2009-Q1	2009-Q2	2009-Q3	2009-Q4	2010-Q1	2010-Q2	2010-Q3
Revenue	149576	451989	231159	339968	1008074	1310536	1485963
Gross Profit	3972	4432	25842	41722	206758	249050	248654
Diluted (loss) earnings / share	-0.32	-0.51	-0.49	-0.9	1.37	1.61	1.7

The above table represents the quarterly results of operations for the quarters in the period from March 31st, 2009 to September 30th, 2010 inclusive. Financial highlights are summarized below:

• Total revenue increased by 543% over Q3 2009, to RMB 1,486.0 million ($222.1 million).
• Gross profit increased by 862% over Q3 2009, to RMB 248.7 million ($37.2 million), which is well above the analysts’ estimates of RMB 113-142 million. Gross margin also increased to 16.7% compared to 11.2% for Q3 2009, above analysts’ estimates of 16.5%. The Q3 2010 gross margin is lower than the 19.0% in Q2 2010, due to the sales contract mix in Q3 2010, and should bounce back to over 18% in Q4 2010.
• Basic and diluted earnings per ordinary share were RMB 1.70 ($0.25) compared with basic and diluted loss per share of RMB 0.49 for the same period in 2009. The most recent analysts’ consensus for FY 2010 is in the range of 0.69 to 0.72. In fact, MY already earned an EPS of $0.69 in the first nine month of 2010 and could easily beat these estimates by several cents.

The quarterly results of operations from MY are affected by seasonal trends. Since customers typically award winning bids for wind farm projects in the first and fourth quarters of each year, the cost of sales in MY is typically higher in the second and third quarters of each year.
It is reasonable to assume MY‘s fourth quarter results will be at least as good as those from the third quarter. This assumption gives an estimate of $0.94 for 2010 EPS. Considering the current closing price of $10.60, P/E in 2010 is only 11, which suggests that MY is significantly undervalued. If we consider that secured sales orders have doubled in the past twelve months and that the sales revenues are not recognized yet, the forward P/E of MY is around 7. MY’s direct competitor, Goldwind, is trading at 15x P/E.

2. Good “Guanxi” With Chinese Governemnt

“Guanxi” literally means "relationships." In China, the right "Guanxi" makes all the difference in ensuring that a business will be successful. MY has very good “Guanxi” with government and some evidence is shown below:

• A total of 66 investment projects were reported to the Chinese central government this year, for 5.7 billion RMB, and Ming Yang received 60 million RMB to support its business.Ming Yang received 51 sets of SCD wind turbine orders from the government.
• In addition, Ming Yang has signed offshore wind farm development agreements with the government of Rudong county, Jiangsu Province, and two new energy subsidiaries of China Huadian Corporation ("Huadian") and China Huaneng Group ("Huaneng") (HNP), two of China's largest wind power developers.
• On the evening of Oct. 29, 2010, MingYang held a celebration of its successful listing on the NYSE in the United States in Beijing’s Great Hall. This is very rare for a non-state-owned company. Among the companies that were allowed to hold celebrations of listing on a major exchange in Beijing’s Great Hall are the Industrial and Commercial Bank (ICBC), and China Railway, which are state owned enterprises with good “Guanxi” with the government.
• The newly released 12th Five-Year Plan of China (2011-2015) aims to boost the development of strategic emerging industries, and Beijing will provide 4 trillion RMB ($600 billion) to financially support key emerging industries, including wind, solar, biological, new-energy automobiles, etc.

3. Coverage From Top Analysts

The joint bookrunners for MY are Morgan Stanley (MS), Merrill Lynch and Credit Suisse (CS). Now the quiet period for IPOs has ended, analysts are beginning to add coverage for this stock. During the last five days, Morgan Stanley started China Mingyang at “Overweight” with a target of $15.40. Merrill Lynch started MY at “Buy” with a target of $17 while Credit Suisse started MY at “Outperform” with a target of $16.10. The current price level offers a huge discount compared to the consensus estimate from analysts and is an optimistic sign for MY.

There are two important attributes that define value investing, according to Michael F. Price, the 271st richest person in the world and a renowned money manager who has earned a reputation for buying undervalued companies. One is patience and the other is focus; this means that one should not be distracted by global or macro forecasts. It is always easier to understand a security than an economy and using this understanding leads the way to profit.

At the current price level, MY is a significantly undervalued stock and offers a price with a discount large enough to allow for a margin of safety. The business of MY is the manufacture and sale of wind turbines and is easily understood. As a technology leader in China’s wind power equipment industry, MY will benefit from the new policies and is well positioned to capture a large share of the fast growing wind energy market in China. With strong sales figures for wind turbine orders and increased demand for wind energy in China, I believe that MY offers a fantastic investment opportunity.

Le Gaga: Veggie Lover's favorite

Le Gaga Holdings, Limited (GAGA) is one of the largest greenhouse vegetable producers and one of the fastest growing major vegetable producers in China. Gaga grows vegetables in open fields and greenhouses, and focuses on applying advanced agricultural techniques to grow safe and consistently high-quality vegetables. Over 100 varieties of vegetables are sold to wholesalers, institutional customers and supermarket chains in China and Hong Kong. Their customers include Walmart, the largest grocery retailer in the world, and the top three Hong Kong supermarket chains, Wellcome, ParknShop and Vanguard.
 

As one Chinese proverb suggests, “Hunger breeds discontent.” Agriculture has always been a very important industry in China and contributed 18.1% of China’s GDP in 2009. The largest component of the agricultural industry is farming, contributing 47.7% of the sector’s output, according to Frost & Sullivan. The farming industry in China includes the farming of vegetables, grain, fruit, tea, cotton and other crops.

China is the largest global producer of vegetables by volume. In 2009, China’s vegetable production reached RMB 875.8 billion, and this amount is expected to increase to RMB 1,286.5 billion in 2014. China’s large vegetable production output is due to the availability of arable lands. Vegetables are indispensable ingredients in Chinese cuisine, and China has consistently high vegetable consumption. The idea of a vegetarian diet is stressed by China’s traditional religions, such as Taoism and Buddhism, and welcomed by the Chinese people.
 

Over the past four years, vegetable prices have steadily risen in China and the trends are expected to continue. For example, the wholesale price of cabbage is 10 times more expensive now than it was in 2009.  Since October, 2010, the price of cabbage has gone up nearly 40% within only ten days in Shouguang, Shangdong Province, China’s largest vegetable distributor. Very recently, the KimChi Crisis in South Korea became the catalyst to boost the price of cabbage in China.
 

“In order to obtain a good profit, the key is to develop planting plans," said Mr.  Ma Chengrong, CEO of GAGA, during an interview with financial media: GAGA has developed an effective and comprehensive database to store sales, seed, and vegetable production information in target markets and accumulated valuable proprietary knowledge through years of research and development. A strong brand has been built on the superior quality and safety of GAGA’s produce and the reliability of their supply.
 

The table below shows the operation data for GAGA between 2008 and 2010.

	2008	2009	2010	Unit
Total arable land area	17103	16525	18850	Mu
Greenhouse Land Area/Total Arable Land area	15.60%	18.90%	23.40%
Total production output	57085	69240	98076	Tonnes
Production Yield	3.6	3.9	5.4	Tonnes/Mu
Revenue Per Mu	9611	11167	15497	RMB

As we can see from the above table, the greenhouse land area had grown rapidly to cover 23.4% of total arable land area. The revenue per mu also increased significantly, changing from 9611 RMB to 15497 RMB, representing a CAGR of 17.3%.
 

The latest SEC filing also shows that the company’s revenue had increased 35% year over year to 280 million RMB ($41 million) and profit for the year soared 79% to 110 million RMB ($16.3 million).
 

Agriculture is supported by China’s national policy and the growth of the domestic vegetable market is very large. With the continuous improvement of quality of life of ordinary people, the demand for high-quality brand of vegetables will also increase and offer a fantastic return for the GAGA shareholders.
 

The double benefit of GAGA is of course the stronger Chinese Yuan. The revenues and costs in GAGA are mostly denominated in the Renminbi, and a significant portion of financial assets are also denominated in the Renminbi. According to a note issued by Auriga this week, total scale of Yuan appreciation is estimated to be between 25% and 40% in five years. Those picking U.S.-listed Chinese stocks that are focused on domestic consumption, such as GAGA in the agriculture industry, will be generously rewarded. In the short term, I expect GAGA to reach $13-15 and $20-22 in the next two years.

China Ming Yang: A Clean Star with huge growth potentials

China Ming Yang Wind Power Group limited is the largest non-state owned wind turbine manufacturer in China. The Guangdong-based company focuses on designing, manufacturing, selling and servicing wind turbines. It has established customer relationships with leading Chinese state-owned and local power producers.

Wind power technology is cost efficient and mature compared to other renewable energy technologies. According to Global Wind Energy Council, wind power is one of the fastest growing renewable energy technologies in the world.

 

As one Chinese proverb suggests, a picture is worth a thousand words. Let us see one graph as shown below.

The graph sets forth the growth of wind power compared to total global electricity generation according to BTM-Consult Aps –April, 2010.

BTM estimates that global installed cumulative capacity will increase at a CAGR of 22.8% between 2009 and 2014, reaching 447,689MW by the end of 2014.

Wind power development started in China in the late 1980s, but did not begin to grow significantly until 2005. Total installed wind capacity increased from 406MW in 2001 to 25,853MW in 2009, representing a CAGR of 68.1%. China had advanced to the first and second positions in the world in terms of new and cumulative installed capacity by the end of 2009. The most abundant wind resources along coastal areas and offshore are found in Jiangsu, Shandong, Zhejiang, Fujian and Guangdong, where Ming Yang is located.

According to a list compiled by the global accounting firm Ernst & Young in September 2010, China overtook the U.S. to lead a quarterly index of the most attractive countries for renewable energy projects for the first time. China also topped Ernst & Young’s attractiveness index for investments in wind power.

Ming Yang was consistently losing money over the past two years. However, in the past two quarters, the company has made a strong turn around and has generated great earnings. In the meantime, its domestic market share has increased to become among the five largest domestic-branded wind turbine manufacturers in China by the end of 2009, according to BTM. 

In 2008, the company reported its total revenue as $124.7 million. The revenue then increased significantly to $1.17 billion in 2009. In the first half of 2010, Ming Yang continues to grow with the same momentum as the past year. As of June 30, 2010, its total revenue reached $2.31 billion, which doubled the total earnings in 2009. Compared to the first half of 2009, it has increased 285.43%. The management of the company stated the fast growth is mainly due to the sale of the wind turbines. The sales volume significantly increased from 78 sets to 310 sets.

Although the average selling price of wind turbines dropped from RMB 5,365 per watt in the first half of 2009 to RMB 4,098 per watt in the same period of 2010,

The increase in sales of wind turbines successfully offsets the negative impact of price drop.

If we only look at the trailing P/E ratio, MY is definitely expensive.

	2009	First Half of 2009	First Half of 2010
Basic EPS	-0.33	-0.124	0.44
Diluted EPS	-0.33	-0.124	0.44

 

From comparison of the basic EPS and diluted EPS, the trailing 12-month PE is 44X. This valuation sounds alarming.

Do we stop here? The answer is no and let us take a second look.

Of course, there is something one has to be especially aware of. China Ming Yang was losing money during 2006 to 2009. The company just turned a loss into a gain in the first half of 2010, achieving earnings of $0.44 per share.

According to SEC filings and other Chinese media, Ming Yang’s second half is very positive because of government support, economies of scale, and strong market penetration.

Mr. Chen, vice president of China Ming Yang Wind Power Group, was interviewed by Reuters at the China Alternative Energy Conference this September and indicated that the revenue guidance was at least RMB 10 billion (US$ 1.52 billion). According to the SEC Filings, MY had earned RMB 2.3 billion (US$ 0.34 billion) in revenue during the six months ended June 30, 2010. The revenue in the guidance has tripled the revenues recorded in the first half of 2010 and showed confidence in management.

 

The latest report issued by Industrial Securities indicated that many owners of civil construction projects at the downstream will begin to work in the fourth quarter of any calendar year. Such seasonal factor will make the fourth quarter the best season for the delivery of wind turbines for MY and other wind turbine manufactures.

If we assume that Ming Yang can achieve the same EPS as first half of 2009 in Q3 and Q4, its total 2010 EPS will be 0.88.

Considering today’s closing price of $10.22, its forward PE is around 12X compared to the industrial average of 24X.

For a growth stock like MY, we can also apply the PEG ratio because it explicitly puts a value on the expected growth in company earnings. Compared to its competitors, MY now has a very attractive valuation as shown below.

Company	Ticker	PEG
China Ming Yang Wind Power Group	MY	0.3
A-Power Energy Generation Syste	APWR	0.6
China Wind Systems, Inc.	CWS	0.4
Xinjiang Goldwind Sci & Tech Co., Ltd	002202.SZ	0.7

 

With technological leadership and improved competitiveness through research and development initiatives, China Ming Yang Power Group aims to compete effectively in China’s wind power equipment industry and offers a fantastic investment opportunity.

Updates on NEWN: Is it too good to be true or too good to pass up?

In my previous article, I provided my analysis on an under-valued stock NEWN (New Energy Systems). In the current article, I want to detail the rationale for investing in this gem.

There is no doubt that Apple changed the world, ever since their creation of the advertising slogan “Think Different” in 1997. Nowadays, we can see people play with iPods, iPhones, and iPads everywhere. Our kids had one Mac computer at home and then the teachers bought several for the computer lab at the schools. The successful launch of iPad and iPhone allowed the company stock to have a major upturn in the past months with a nice 50% return in 2010. Can we benefit from the rally? In the current article, I want to show you why NEWN is a great candidate to benefit from Apple’s rally.

When people are talking about market gurus, Peter Lynch is a name that usually pops up. During his 13 years of service at Fidelity Magellan Fund, the average return was 29% annually and was a record among mutual fund managers. Lynch is a "story" investor. That is, each stock selection is based on a well-grounded expectation concerning the firm’s growth prospects. The expectations are derived from the company’s "story"; what the company is going to do or what is going to happen to bring about the desired results. I will apply this principle to examine NEWN to see whether it qualifies for great investments. 

1. What is the company going to do?

China has more than 600 million mobile phone subscribers, making it the country with the largest mobile market on the planet. The soaring demand for mobile power sources, such as lithium ion batteries, has fueled New Energy’s organic growth. New Energy’s wholly owned subsidiary, Shenzhen E’Jenie Technology Development Co., Ltd., has been licensed to manufacture backup power systems and accessories interoperable with Apple’s mobile digital devices. These electronic accessories are designed to connect specially to iPod, iPhone, or iPad respectively and have been certified by the developer to meet Apple performance standards.

 The products will be sold under the MeePower™ brand in the international marketplace and are anticipated to be made available to distributors in the U.S. beginning in late 2010.

2. What it is going to happen?

As China is switching to a domestic, demand-driven economy, the sales of cell phones, laptops, and the like will grow exponentially. It was the first time that the fourth version of the iPhone had been officially available on the Chinese mainland. In September, 2010, the high demand from people in China had caused China Unicom, the country’s sole iPhone distributor, to stop taking online orders. More than 200,000 preorders were received prior to the launch. The pace of sales outstripped those of the previous iPhone 3, which sold 100,000 after six weeks. The rising demand for fancy Apple products will also fuel New Energy’s growth. In a country with $4 billion of lithium ion battery sales per year, a growing, affluent middle class, and an exciting array of innovative mobile devices, such as the iPhone 4, being introduced into the Chinese market, New Energy is well-positioned to grow through its line of quality products, expanding distribution networks, and accretive acquisitions.

3. How will the company achieve the desired results?

For the second quarter of 2010, the company’s revenue increased 335.2% to approximately $23.4 million, with the adjusted EPS increased 59.1% to $0.35 per diluted share. These amazing results have led the management team in NEWN to reaffirm its revenue guidance of at least $88 million and adjusted net income guidance of at least $15.6 million, or $1.23 per share, for 2010. This is a huge opportunity for NEWN.

NEWN now has a very attractive valuation compared to its peers as shown below.
 

Company	Ticker	P/E	P/B
New Energy Systems Group	NEWN	4.9	1.2
Advanced Battery Tech.	ABAT	8.3	1.8
China BAK Battery	CBAK	N/A	0.8
China Ritar Power Corp	CRTP	7.4	1.4
Hong Kong Highpower	HPJ	8.5	2.1

With strong sales figures for Apple's products and increased demand for its accessories, I believe that NEWN offers a fantastic investment opportunity. My target price for NEWN is $12 – 15 for the short term and $20 – 25 in the next two years.

If you can buy them now at $6, you may be able to bring a next-generation iPad back home with you in 2011, as well as your original investment.

My instantblog on SeekingAlpha!

http://seekingalpha.com/author/andy-li/instablog
Turn tuned!

A Bright and Shining Star in the IPO Market - KH

Kanghui Holdings (NYSE: KH) is a leading domestic developer, manufacturer and marketer of orthopedic implant products in China. They sell two primary lines of proprietary orthopedic implant products, trauma and spine, with more than 30 product series covering a wide array of orthopedic implants and associated instruments. Trauma products include nails, plates and screws used in bone fracture surgery. It also makes meshes and interbody cages, as well as fixation systems for spines.

According to Frost & Sullivan, the global orthopedic implant market is set to grow from US$12.9 billion in 2006 to US$27.7 billion by 2015, representing a CAGR of 8.1%. The Asia Pacific region is expected to become the most important geographic region for growth in the global orthopedic implant market in the coming years, and the rapid growth in the China and India markets is a principal factor for this overall growth. China’s orthopedic implant market grew from RMB4.4 billion in 2007 to RMB6.1 billion in 2009, representing a CAGR of 18.4%, and is expected to grow to RMB16.6 billion in 2015, representing a CAGR of 18.1% from 2009. Furthermore, China’s orthopedic implant market is estimated to move from the third largest in 2010 to the second largest in 2015, surpassing Japan.

With rapid domestic economic growth and rising per capita disposable income in China, medical treatment and products are becoming increasingly affordable. Notably, according to Frost & Sullivan, China’s per capita healthcare expenditure in 2007 was only US $112, compared to the United States’ per capita healthcare expenditure of US $7290. China’s overall healthcare expenditure represented only 4.8% of its GDP in 2007, compared to 16.0% of the GDP in the United States. Recently, the Chinese government unveiled a RMB 850 billion (approximately US $125 billion) three-year spending plan to improve the healthcare infrastructure and expand insurance coverage in China.

 By 2011, healthcare reform is expected to enable more than 90% of Chinese citizens to obtain basic medical insurance. The reform will continue to expand the accessibility and affordability of Kanghui Holdings’s products beyond the top tier cities in China.

The domestic orthopedic implant market is also driven by the aging population. Elderly patients have an increased susceptibility to many conditions that require orthopedic surgery.  For example, fractures by osteoporosis and degenerative diseases, more commonly seen in the elderly, are the primary reasons for patients to undergo trauma or spine surgeries using products developed by KH. The United Nations projects over 400 million, or nearly 35% of the Chinese population, are expected to be over 60 years old, while nearly 70 million people over 50 years old in China now have osteoporosis conditions in the year 2006. The growing and aging population and increased need for orthopedic care will drive the revenue growth of KH in the years ahead.

It is remarkable that the orthopedic implantation rates in China is 100 times lower relative to the rates in the United States. The low implantation rate in China leaves significant room for additional growth in the Chinese orthopedic implant market in the future.

On July 31, 2008, Kanghui Holdings acquired Beijing Libeier for the sum of RMB 182.7 million. This acquisition complemented Kanghui’s existing network of distributors, brought 83 new distributors and contributed to the net revenues. In China, health care manufacturers sell products to third-party distributors, who in turn sell those products directly to hospitals or through sub-distributors. As of June 30, 2010, KH had built a strong domestic network of 237 distributors for their products covering 30 of the 31 provinces, municipalities and autonomous regions in China. Kanghui Holdings (KH) has a global network of 27 distributors in 24 countries across Asia, Europe, South America and Africa. Moreover, Zero2IPO, the most prestigious integrated service provider in the field of VC and PE, selected Kanghui Holdings as No. 1 in the “Zero2IPO-Venture 50 Awards” in 2008. In 2009, Forbes released the “Potential of Enterprises in China 2009 Forbes List” and Kanghui Holdings was ranked No. 4 among 200 rapidly growing SMEs in China.

In the Chinese market, KH’s direct competitors include Shandong Weigao Group, Medical Polymer Company Limited (Weigao) and other leading international orthopedic implant manufacturers, such as Johnson & Johnson and Medtronic. Weigao (8199.HK) is listed in the Hong Kong Stock Market with a much higher P/E of ~50.

To compete with global companies, Kanghui Holdings has strong research and development capabilities that focuses on developing new proprietary products. Since 2008, nine new products (four trauma products and five spine products) have been released and seven more are expected to be released by the end of 2011. KH has also received government incentives and subsidies from time to time. The company has received numerous awards from central, state, and local governments, including more than RMB 100 million from the Innovation Fund of the National Ministry of Science and Technology in China. In addition to internal efforts, KH collaborates with the Institute of Metal Research of the Chinese Academy of Sciences to perform strategic research and product developments. A post-doctoral research program was also established at KH’s research and development center and graduates from top universities in China were recruited.

The company showed strong financial results for the quarter ended June 30, 2010. 

·         Net revenue increased by 29.4% to RMB58.1 million (US$8.6 million) in the second quarter of 2010 from RMB44.9 million in the second quarter of 2009.

·         Gross profit increased by 25.6% to RMB38.8 million (US$5.6 million) in the second quarter of 2010 from RMB30.9 million in the second quarter of 2009.

·         Net income was RMB27.7 million (US$4.1 million) in the second quarter of 2010, representing 47.7% of our net revenue, compared to RMB20.9 million in the second quarter of 2009, representing 46.5% of our net revenue.

·         Net revenues grew from RMB139.6 million in 2008 to RMB184.3 million (USD $27.0 million) in 2009 at a CAGR of 32%. Net income grew from RMB60 million in 2008 to RMB75.0 million (US $11.0 million) in 2009 at a CAGR of 25%.

The company has launched its IPO and offered 5,340,000 ADSs on August 11, 2010. Each ADS represents six of its ordinary shares, so its P/E should be calculated ~13 compared to the industry average of 20. The joint bookrunners for KH are Morgan Stanley (MS) and Piper Jaffray (PJC). Once the reticent period ends, more analysts will begin to add coverage for this stock, and that will be an optimistic sign for KH. I believe KH will continue to generate value for shareholders due to the increasing portion of the people in China, who can afford high-quality orthopedic implants and the growing emphasis on health coverage from the Chinese government.