Financial Results Review
For the first three months of its financial year ending 30 June 2011, C&O posted a revenue of HK$128.8 million, representing a 2.3% increase on-year for the same period. Due to lower cost of goods sold as well as other income, C&O's net profit after tax increased 12.% to HK$29.0 million. No dividends were announced for this interim period.
In its review, the management said that in anticipation of potential price adjustment of drugs by the PRC government, as part of the healthcare reform, many of its customers has adopted a wait-and-see attitude and maintained a lower inventory level. This helped explained the decline or slowdown in the sales of some of its products.
C&O Pharmaceutical's Chairman Gao Bin, commenting on the outlook, said, “We are also actively discussing with foreign partners on collaboration opportunities, with the aim of strengthening our product portfolio by introducing more premium foreign drugs to the PRC market.”
SGX Stock Picker's Comments
After looking carefully at the quarterly report while writing this post, I would think that it would have been wiser of me to research first then buy (cardinal sin). Nonetheless, I am giving the company 1 to 2 quarters more before considering any further action.
In my opinion, the healthcare reforms to be introduced by the PRC government, particularly those with regards to pricing, have a strong impact on C&O. The revelation of a weak 1QFY11 could help explain why the stock had dropped by 3 cents a few day before the results were actually announced.
Here are some brokers' recommendations, that is if you do believe them:
19 Aug 2010. CIMB starts C&O Pharmaceutical Technology (E92.SG) at Buy with S$0.60 target price, based on 12X FY11 P/E. Says China-based drug maker's strong R&D capability provides springboard to launch new products, paving way for expansion in local, even international markets; "C&O is also an attractive partner to foreign drug companies looking to enter the China market." Says prospects backed by China's increasing healthcare spending. Forecasts FY10 dividend of S$0.073/share, translating to prospective 17% yield.
30 Aug 2010. Phillip Securities lifts C&O Pharmaceutical (E92.SG) target price to S$0.65 from S$0.53, implying 13.7X FY11 P/E, after increasing FY11 earnings estimate by 8.6% to HK$175 million to assume stronger growth across all business segments, contributions from roll-out of new drugs. Keeps Buy call. Expects new drug Edaravone, used to aid neurological recovery, to be major earnings driver in coming years considering fewer than 5 manufacturers in China capable of producing it. Notes market for this drug, which C&O expects to get regulatory approval for mass production by October, worth about CNY1 billion in 2009.