Saturday, November 13, 2010

C&O Pharmaceutical: 1QFY11 Results Review

While doing research on Sinotel, I chance upon an old post by MusicWhiz on C&O Pharma (link). I f I had read his bit first, I would probably not buy the stock at all. But since I suffer from confirmation bias, I will do a review of C&O Pharmaceutical's recently released first quarter results, for their financial year ending 30 June 2011. Take note that I bought 5 lots at $0.505 a few months back and its current price is $0.475 (slight ouch).

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.

Brokers' Recommendation

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. 


  1. Hi SG Stock Picker

    Thanks for the post on C&O Pharma. You are not alone :) I am also vested on C&O Pharma, right after Sumitomo Corporation bought up 29% stake.

    But I managed to average down to 46 cents as of today. Am thinking to load up more since market sentiment is weak currently. I agree with you that the drug pricing policy and health care reforms by the local government will have an impact on C&O earnings potential.

    Nonetheless, in my opinion, there are a number of factors which prompt me to hold on to my current holdings and absorb a certain level of risks. You can see the SWOT analysis (at a brief) in my blog:

    C&O SWOT (qualitative)

    In summary, I feel that:

    (a) C&O is exploring the SE Asia markets as part of their export plans ever since Sumitomo is their second largest shareholder. This helps to reduce the country risk amidst the volatility of the pricing policy in mainland China

    (b) In the last press release by Gao Bin, he mentioned that there are exciting plans put on the management drawing board and will inform investors in due course. This may be in line with the Japanese whom sits as part of the BOD:

    A promising plan ahead – “Intend to double C&O turnover to 15 billion yen within 5 years”. The Japanese does not make 5 year plan out of nothing and publicize it in the press, especially after an acquisition.

    (c) The drug Edaravone has been approved by the State Food & Drug Administration

    (d) Local China has untapped potential in the pharma market, especially on the end consumers side of the supply chain; China being the world most populous nation. With C&O well entrenched distribution network, they could easily tap into their channels - which explains why Sumitomo chooses C&O Pharma.

    But of course, there are downsides and one of which I find it a little disappointing is no dividend payout in the interim.

    I will be keeping a close tab on C&O Pharma development and I hope you will too :)

    Will keep a lookout on your blog - thanks for the article!

  2. C&O is a cash machine, but with new shareholders on board, the payout rate might be lower, since they paid a high price to enter the company.

    side note, i think there are many Japanese companies looking to acquire companies because they themselves are looking for investment opportunities. but with the earthquake, they might be distracted in the short run.

  3.'s indeed a very sad day for the Japanese. I am saddened to hear about the disaster and my heart is with Japan.

    Let's wait till end year to get more updates on the company's "exciting plans" as defined by Gao Bin.