American Oriental Bioengineeri AOB
February 23, 2007 - 7:40pm EST by
thoreau941
2007 2008
Price: 12.28 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 784 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Thesis:
American Oriental Bioengineering (“AOB”) is a producer of Chinese Traditional Medicine (“CTM”) and nutritional supplements with operations in China.  The stock trades at 15.5x 2007 earnings (ex. cash on the books), and is growing at more than 90% per year (50% organic).  Trailing twelve month return on equity is 50% with return on tangible equity of 53%.  We believe it represents a compelling value. 
 
The opportunity in this investment lies in the unique position the company is in to buy state-owned Chinese CTM companies at incredibly cheap prices. For example, the company closed on its acquisition of GLP in April of 2006. AOB paid $25MM for the business. Projected 2007 operating income of this business should be $16MM resulting in an acquisition multiple of 1.6x operating income. We believe AOB’s ability to complete further attractive acquisitions like this, combined with its growing core business, will result in a significantly higher stock price.
 
The main fear investors have about AOB is the fact that it is a Chinese company that may lack transparency, have room for error in the reporting, and be lax on corporate governance.  We have done significant research to explore these issues and are comfortable with the risks. AOB trades on the NYSE and follows US GAAP. It has a US-based VP of finance (based on Park Avenue in NYC), US lawyers, US board members, and US auditors. Management frequently attends conferences in the US.
 
We would rank management on par with the better management teams among many of the companies we follow in the US. They are highly passionate and focused on the business, are strong operators, and have a history of allocating capital well. Moreover, we have visited AOB’s plants in China and came away very impressed with the company’s winning-oriented culture and quality of operations.
 
Given the strength of management and operations, we believe the risk-adjusted returns here are much more compelling than any investments we can find in the US. Put simply, we can’t find investments domestically at 15.5x forward earnings with 90% growth.
 
Company History:
The original company was formed in Harbin PRC under the name of Harbin Three Happiness Bioengineering Co., Ltd. and merged with a BVI shell and US listed entity in June of 2002.  The original operations of the project consisted of a factory and offices in Harbin, PRC, with a GMP (Good Manufacturing Practices) certified facility capable of manufacturing pills and soft gels, derma delivery patches, liquid medicine, soy peptide powder, and bottled health beverages. 
 
Since its first full year as a publicly traded entity in 2003, AOB has acquired two additional product lines and manufacturing facilities, HSPL (Harbin, PRC) in 2004, and GLP (Guangxi, PRC) in 2006.  All of the facilities have been fully certified with regards to GMP.  The company has also acquired a distributor, HQPL with over 90,000 points of distribution throughout the nation.  They have opened a Hong Kong office and a Hong Kong retail location to increase brand recognition and penetrate the southern China demographic.  Most recently the company announced it is relocating its headquarters Shenzhen to improve its access to sophisticated human capital.
 
Valuation Rationale:
 
The stock currently trades at 15.5x forward earnings with the potential to grow revenues organically at nearly 50%.  The company recently put out guidance implying between $106MM and $107MM in revenue and EPS of $0.47.  We expect revenue in 2007 to be and $161MM with EPS of $0.72.  We expect growth to be 40% organically in the near term with additional upside through acquisition. 
 
Current Price (ex Cash)
 $           11.21
 
2006 Earnings
 $           0.47
24.7 x
2007 Earnings
 $           0.72
15.6 x
 
In 2005 the company exhibited a core revenue growth just over 40%.  The recent quarters have demonstrated core revenue growth greater than 75% suggesting that the current year is above trend.  Management is confident, and has said publicly, that the company has the potential to maintain a 40% organic growth rate going forward.  We anticipate that the blended tax rate will be from 13% - 19% over the next 5 years eventually reverting to the 20% - 24% range as the GLP tax abatement expires. 
 
Overall growth rates greater than 90% over the last several years have been fuelled by excellent execution on the acquisitions and are expected to repeat themselves.  After the first year with HSPL (2004 acquisition), the company had grown revenues nearly 3x, and by our estimate, is on track to grow sales another 50% in 2006.  GLP (2006 acquisition) has shown a high level of performance thus far growing company revenues from $10MM in 2005 to a run rate of $34MM in Q406, again a 3x increase in sales.  We believe that GLP may be slightly ahead of trend, but fully expect revenues to continue to grow at a rate higher than the core company revenues through 2007.  The mid January 07 announcement of the release of a new product in the GLP family makes this estimate conservative in our view.
 
The current cash balance of approximately $70MM allows the company the flexibility to pursue further acquisitions.  To be considered a serious bidder for government assets in china, the company must have full cash amount of balance sheet at the time of bid.  To meet the balance sheet needs associated with making acquisitions form the PRC government, the company did an equity raise at the of 12.5MM shares at a price of $4.80 with 3.75MM warrants struck at $6.50 at the end of 2005.  Due to an increased number of shares the company has not had its EPS grow in 2006 at the same rate as revenues or net income.  We are comfortable that the cash on hand to be used as a “bargaining chip” mitigates any need for the company to raise additional capital and potentially dilute the existing equity base.  In 2007 the company should have rapid acceleration of EPS growth given that the share count is flat year over year. 
 
Chinese Pharma Market Outlook:
Manufacturers in China can easily depend on the growth of the healthcare spending market to fuel the expansion of their product lines.  According to a McKinsey Study, the Chinese healthcare market is expected to grow to $323BN by 2025 from the current $32BN level compounding at approximately 15% annually.  Distributors on the ground working with AOB’s product confirmed a consistent and material increase of consumer spending for healthcare products.  The distributor’s daily focus is: “having to cater each day to thousands of new individuals who could not afford the same product the day before.”  Conversations with the company indicate that AOB has approached the market as one that is growing, but must be dominated through branding, proper advertising, and a controlled expansion of the distribution chain to maintain growth and margins in the long term.  Organic growth in demand will fuel the demand for products in all categories, but the company has stated they hope to be the leader in the categories they focus on. 
 
The Products:
AOB’s product mix is highly attractive allowing them to maximize profit through the flexibility to target the hospital as well as consumer markets.  The company sells products in two segments, Plant Based Nutraceuticals (“PBN”) and Plant Based Pharmaceuticals (“PBP”).  PBN products can best be compared to nutritional supplements we are familiar with in the US including vitamin liquids, protein nutrition products, and packaged health drinks.  AOB’s PBP products are both OTC and prescription based and are packaged, branded and marketed as appropriate.  Both product categories are natural Chinese Traditional Medicine as defined by the Chinese government and contain no synthesized chemicals.  The greatest differentiator between the PBP and PBN segments is the need for the SFDA (equivalent to US FDA) approval for PBP products.  Several of the major products are discussed below. 
 
Prescription PBP:
Cease-Enuresis Soft Gel – Bed wetting and incontinence – 20% of sales, 131% 1H06 growth
Shuanghuanglian Lyophilized Injection Powder – Antiviral – 27% of sales, 69.3% 1H06 growth
 
OTC PBP:
Cease-Enuresis Patch – Bed wetting and incontinence  - No segment data
JinJi – Gynecological inflammation and women’s health – 7% of sales, Acquired 1H06
UrineStopper Patch - Bed wetting and incontinence – 5% of sales, 180.2% 1H06 growth
 
PBN Products:
Protein peptide products – Beverage tablets for warm water – 28% of sales, 101.5% 1H06 growth
Vitamate Nutritional Oral - Immune System – 3 % of sales, 70.5% 1H06 growth
 
We have been pleased to see growth across all categories, and among existing as well as acquired brands. 
 
Manufacturing, Distribution, and Competitive Advantage:
The company recently invested in upgrading its peptide factory from an output level of 1,000 tons/year to 10,000 tons/year.  The full capacity of the plant will not be used immediately, but the company intends to produce peptide for sale on a wholesale level as well as continue the growth of its Protein Peptide line.  The HSPL plant has been improved to handle the increased demand of Shuanghuangliang, and the company was completing additional renovations during our visit to the facility in August 2006.  The newly acquired GLP plant is the focus of management as they work to bring the level of efficiency up to that of the other plants.  Key personnel have been added to the plant and the workforce has been tested for competency and culled in accordance with PRC employment laws. 
 
Control of the distribution channel is a key to preserving margins and diversifying the geographic regions into which the company sells its products.  In the early 2006, AOB completed its acquisition of HQPL, a national distributor with over 90,000 distribution points.  According to the company, this increased their distribution to 100,000 locations from 10,000 enabling them to sell all regions of China.  Distributors, their sub-agents, and reps take a 50%-100% markup on product.  By capturing some of the spread, AOB can mitigate margin compression and grow revenue dollars based on capturing markup and increasing unit volume. 
 
The existing product lines are highly appealing when compared to standard pharmaceutical companies selling into the Chinese market.  AOB produces no generic products and does not compete directly with high volume low margin suppliers of generic western drugs to the market.  Several of the major products face limited competition within the market.  By government mandate, Shuanghuanglian powder is produced by only two companies, AOB and Harbin Pharmaceutical Group No. 2.  The company has four competitors that produce a similar product to the Cease Enuresis Soft Gel.  While the drug can be produced by other companies, unlike AOB, the existing competitors have not taken the necessary steps necessary to market and brand their versions as the premium brand.  The GLP JinJi brand has a 30 year history and two competing products in the market.  To ensure brand dominance, AOB has initiated a national marketing campaign, point of sale promotional items, and an updated package that differentiates the product on the shelf from its competitors.  Our pharmacy visits and conversations with merchants in China have confirmed that the success of the program as the JinJi brand has pulled away from its competitors in the short time it has been under AOB’s control.  The recently introduced GLP Jinji Yi Mu Cau product will be placed in existing channels and piggyback on the success of the existing Jinji marketing campaign.
 
China Risk:
Risks associated with Chinese companies tend to discourage investment for fear of fraud, poor corporate governance, misstated results and the inability to communicate with management when necessary.  As mentioned above, we have done extensive due diligence regarding the company including multiple meetings with management on the ground in China.  We have had opportunity to tour both of the factories, and the corporate office located in Harbin, the Hong Kong retail location, and the Beijing office. 
 
Early February 2007 press has brought forward several stories relating to the sale of fraudulent or dangerous medicines in China and the related government investigation.  The PRC regulators will review over 170,000 production licenses issued by the State Food and Drug Administration, with particular focus on the permits issued between 1999 and 2002.  The company has commented that none of their product licenses have been granted during that period.  We anticipate that there will be no effect on AOB.  Industry growth may slow slightly, but acquisition multiples may be cheaper. 
 
Operationally, AOB is one of the most impressive working environments we have seen.  Due to the filing requirements associated with a US listing, the company financials provide the same data as would be expected with a US company.  We are confident in the control and reliability of the information provided as the company made plans early on to be SOX 404 compliant by the end of the 2006.  Furthering our confidence in the financial controls of the company is the US VP of finance who has substantial experience as an employee of the large auditing firms.  Access to the company is easy with the New York office having the appropriate infrastructure to support the inquiries and demands of US institutional investors.  The COO and co-founder of the company is fluent in English, and spends a significant amount of her time in the US; her ability to communicate the details of their strategy and to demonstrate a depth of operational understanding more poignant that that of some US management teams has further reinforced our confidence in the company’s foundation.  The board includes sophisticated independent individuals consisting of two former auditors and a former NASD arbitrator. 
 
The recent announcement that they have elected to move the corporate headquarters to the developmentally focused area of Shenzhen in the south of China will allow them access to a more sophisticated talent pool on both the R&D and managerial sides of the business than would otherwise be available in the current home base of Harbin in northern China. 
 
We had the opportunity to visit the Harbin headquarters, HSPL, and Harbin Bioengineering.  Operations and facilities were extremely impressive, with a highly organized structure and knowledgeable staff.  The company is run with a level of discipline and pride that would be equivalent to that which might be found among employees of IBM in the 1950s.  The company has several mottos that are posted throughout the organization including “Discover needs and realize value” and “AOBO Dedicated to your health improvement.”  The corporate culture is quite impressive with a morning oath and staff uniforms.  One would be had pressed to find a company in the US with comparably dedicated and motivated staff. 
 
Growth Through Acquisition:
The company has made three acquisitions in the last several years including the above mentioned HQPL distribution platform.  The acquisitions of HSPL and GLP in 2004 and early 2006 respectively were made at excellent prices showing management’s exemplary ability to deploy capital efficiently.  The subsequent operational improvements to sales and manufacturing practices allowed the company to receive a significant return on investment.  Because they were state owned, the companies were inefficiently run before acquisition.  Unnecessary employees, poor expense management, mediocre marketing, and a fantastic, but underutilized brand were hallmarks of the targets. 
 
The HSPL acquisition solidified the company’s position in a prescription drug practice that is protected by government regulations allowing only them and one other company to make Shuanghuanglian.  The efficiency of the plant at acquisition left opportunity for improvement operationally, and for the expansion of a well known product to other parts of the country.  The ability for management to improve the operation of a target company is the evidenced by HSPL’s first full year of sales exceeding the previous by approximately 325%.  Operating margin improvement from a blended rate of approximately 15% pre acquisition to 32%-34% post acquisition demonstrates both the strength of management and their ability to find highly attractive areas in which to invest capital.  The trend has continued with first half 2006 sales for the same unit exceeding those in 2005 by 70%.  A cash on cash analysis considering both the operating margins and tax rate of 33% specific to HSPL yields a 62% return. 
 
Total cash consideration:
7,228,916
 
Revenue Generated (Approximate 2H05 & actual 1H06 sales
20,764,840
Operating Margin (decreased by 2% due to lower gross at HSPL)
32%
Operating Income
6,644,748
Tax Rate
33%
Return
4,451,981
Cash on Cash Return
62%
 
The GLP acquisition demonstrates very similar return characteristics to the HSPL acquisition.  Acquired in April of 2006, the company had approximately 10MM in sales in 2005 with an operating margin of between 4%-8%.  In the last two months of Q206, immediately after the acquisition, the company produced sales of approximately $3MM out of the GLP unit, putting them on a run rate of $18MM.  While not a perfect proxy, management has released that the Q406 sales orders within GLP have already reached $6MM.  According to the company approximately 70% of orders for a quarter come in before the quarter, therefore grossing up the sales one can expect approximately $8.5MM in sales during Q406.  This produces a run rate of $34MM per year.  Given conservative estimates regarding the success of the Jinji Yi Mu Cau product, the 2007 GLP sales should near the $47MM level.  Management expects GLP margins to be at the corporate average by the close of the year compared with 4% at the time of acquisition.  A forward looking cash on cash analysis considering operating margins of 34% and tax rate of 0% due to a tax holiday yields a 63% return. 
 
Total consideration
25,409,837
 
 
Revenue
47,285,714.29
Operating Margin
34%
Operating Income
16,077,142.86
Tax Rate
0%
Return
16,077,142.86
Cash on Cash Return
63%
 
Proper deployment of capital to projects such as HSPL and GLP is demonstrative of a diligent and effective management team making selective acquisitions. 
 
Pricing & Margin Pressure:
AOB currently has operating margins of around 33% while margins in the industry are somewhat lower at around 20-25%.  The most important risk to get comfortable with for this investment is margin sustainability. As explained below, we believe that AOB is somewhat insulated from margin pressure in the Chinese pharmaceutical industry. Our view is that there may be some margin pressure over time, but that it will come some years into the future and will be mitigated by AOB’s focus on high-end products, Traditional Chinese Medicine, strong in-house distribution, and proprietary products.
 
Within the past year, the government has put in place measures which have fixed prices on some drugs, with a focus on “western style” style medicines.  The reason for the price ceiling is that the health care system is supported almost entirely by the government.  Income to the hospitals by means of prescription sales is a source of revenue which helps to defer healthcare costs on a national level.  Further reinforcing the government's intentions, in March of 2006, kickbacks from distributors were deemed a crime.  According to the company, sales directly to hospitals and clinics represented approximately $7MM in 2005 directly to hospitals/clinics or about 13% of total revenues.  Those sales directly to hospitals will be the first to experience any margin pressure if the government imposes price restrictions on AOB’s prescription products.  We are comfortable with the government pricing risk as it is focused on western style medicine rather than CTM.  Further raising our comfort level is the company’s recent announcement that the two of the Company's leading products, Cease-Enuresis Soft Gel and Jinji Gel, have been selected to join in the International Traditional Chinese Medicine Program for Cooperation in Science and Technology.  This program recognizes the usefulness of CTM as a lower cost means of treating patients than western medicine, and demonstrates that the government is generally pleased with AOB and will be less prone to interfere with their development and marketing efforts. 
 
The overall demand for the OTC products in the country and the company’s early efforts to brand its products and promote quality will protect them from shrinking margins.  On a recent visit to China, we spoke with a pharmaceutical distributor in Harbin who reported that there had been no margin pressure to date in pharmaceutical or OTC medications.  His outlook for the future contemplated no immediate need for price reductions, but rather a slow change in pricing which would effect selling agents and third tier distributors.  Given the acceptance of AOBs products, and the anecdotal information gathered form the marketplace, the demand for OTC product and the need for CTM, prescription products will continue to give the company pricing power and mitigate the risk of near term margin compression. 
 
Looking into the future, the company has made an impressive effort to brand its new JinJi product acquired through GLP.  The company began a national advertising campaign with the Chinese talk show celebrity Ni Ping to promote and represent the product  The JinJi women’s health product has a 30 year brand history, that has significant equity.  The company recognizes this equity and has chosen to take the product to the next level through national advertising and aggressive distribution.  The intention is clearly to establish their product as the household name in women’s health.  As they repeat this process with other products, and solidify their position in each market, they will establish themselves as the “name brand” and provide sustainable margins, aided by the increased revenue amounts that can be captured by selling directly to vendors through the use of the proprietary HQPL distribution network.  Given the current growth profile, we would be comfortable taking a position in the company even if margin were to compress by 10 points resulting in a multiple closer to 23x 2007 earnings. 

Catalyst

Next year’s EPS growth will be calculated on a consistent number of shares. An offering in December 2005 has obscured the increase in profitability to those not willing to study the financials and growth profile of the company.
Blended margins for the company, lowered slightly by recent acquisition integrations, will improve to core levels by 2007 further contributing to bottom line growth profile.
The company has completed two acquisitions, and has indicated another in the coming year. Integration experience and a proven eye for excellent capital allocation opportunities will position the company target and transform inefficient state run assets.
The company is trading at a 15.5x forward earnings and 24.7x current year while growing at greater than 90%. Closing of the valuation gap as investors look towards forward numbers will result in above average returns in the near term.
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    Description

    Thesis:
    American Oriental Bioengineering (“AOB”) is a producer of Chinese Traditional Medicine (“CTM”) and nutritional supplements with operations in China.  The stock trades at 15.5x 2007 earnings (ex. cash on the books), and is growing at more than 90% per year (50% organic).  Trailing twelve month return on equity is 50% with return on tangible equity of 53%.  We believe it represents a compelling value. 
     
    The opportunity in this investment lies in the unique position the company is in to buy state-owned Chinese CTM companies at incredibly cheap prices. For example, the company closed on its acquisition of GLP in April of 2006. AOB paid $25MM for the business. Projected 2007 operating income of this business should be $16MM resulting in an acquisition multiple of 1.6x operating income. We believe AOB’s ability to complete further attractive acquisitions like this, combined with its growing core business, will result in a significantly higher stock price.
     
    The main fear investors have about AOB is the fact that it is a Chinese company that may lack transparency, have room for error in the reporting, and be lax on corporate governance.  We have done significant research to explore these issues and are comfortable with the risks. AOB trades on the NYSE and follows US GAAP. It has a US-based VP of finance (based on Park Avenue in NYC), US lawyers, US board members, and US auditors. Management frequently attends conferences in the US.
     
    We would rank management on par with the better management teams among many of the companies we follow in the US. They are highly passionate and focused on the business, are strong operators, and have a history of allocating capital well. Moreover, we have visited AOB’s plants in China and came away very impressed with the company’s winning-oriented culture and quality of operations.
     
    Given the strength of management and operations, we believe the risk-adjusted returns here are much more compelling than any investments we can find in the US. Put simply, we can’t find investments domestically at 15.5x forward earnings with 90% growth.
     
    Company History:
    The original company was formed in Harbin PRC under the name of Harbin Three Happiness Bioengineering Co., Ltd. and merged with a BVI shell and US listed entity in June of 2002.  The original operations of the project consisted of a factory and offices in Harbin, PRC, with a GMP (Good Manufacturing Practices) certified facility capable of manufacturing pills and soft gels, derma delivery patches, liquid medicine, soy peptide powder, and bottled health beverages. 
     
    Since its first full year as a publicly traded entity in 2003, AOB has acquired two additional product lines and manufacturing facilities, HSPL (Harbin, PRC) in 2004, and GLP (Guangxi, PRC) in 2006.  All of the facilities have been fully certified with regards to GMP.  The company has also acquired a distributor, HQPL with over 90,000 points of distribution throughout the nation.  They have opened a Hong Kong office and a Hong Kong retail location to increase brand recognition and penetrate the southern China demographic.  Most recently the company announced it is relocating its headquarters Shenzhen to improve its access to sophisticated human capital.
     
    Valuation Rationale:
     
    The stock currently trades at 15.5x forward earnings with the potential to grow revenues organically at nearly 50%.  The company recently put out guidance implying between $106MM and $107MM in revenue and EPS of $0.47.  We expect revenue in 2007 to be and $161MM with EPS of $0.72.  We expect growth to be 40% organically in the near term with additional upside through acquisition. 
     
    Current Price (ex Cash)
     $           11.21
     
    2006 Earnings
     $           0.47
    24.7 x
    2007 Earnings
     $           0.72
    15.6 x
     
    In 2005 the company exhibited a core revenue growth just over 40%.  The recent quarters have demonstrated core revenue growth greater than 75% suggesting that the current year is above trend.  Management is confident, and has said publicly, that the company has the potential to maintain a 40% organic growth rate going forward.  We anticipate that the blended tax rate will be from 13% - 19% over the next 5 years eventually reverting to the 20% - 24% range as the GLP tax abatement expires. 
     
    Overall growth rates greater than 90% over the last several years have been fuelled by excellent execution on the acquisitions and are expected to repeat themselves.  After the first year with HSPL (2004 acquisition), the company had grown revenues nearly 3x, and by our estimate, is on track to grow sales another 50% in 2006.  GLP (2006 acquisition) has shown a high level of performance thus far growing company revenues from $10MM in 2005 to a run rate of $34MM in Q406, again a 3x increase in sales.  We believe that GLP may be slightly ahead of trend, but fully expect revenues to continue to grow at a rate higher than the core company revenues through 2007.  The mid January 07 announcement of the release of a new product in the GLP family makes this estimate conservative in our view.
     
    The current cash balance of approximately $70MM allows the company the flexibility to pursue further acquisitions.  To be considered a serious bidder for government assets in china, the company must have full cash amount of balance sheet at the time of bid.  To meet the balance sheet needs associated with making acquisitions form the PRC government, the company did an equity raise at the of 12.5MM shares at a price of $4.80 with 3.75MM warrants struck at $6.50 at the end of 2005.  Due to an increased number of shares the company has not had its EPS grow in 2006 at the same rate as revenues or net income.  We are comfortable that the cash on hand to be used as a “bargaining chip” mitigates any need for the company to raise additional capital and potentially dilute the existing equity base.  In 2007 the company should have rapid acceleration of EPS growth given that the share count is flat year over year. 
     
    Chinese Pharma Market Outlook:
    Manufacturers in China can easily depend on the growth of the healthcare spending market to fuel the expansion of their product lines.  According to a McKinsey Study, the Chinese healthcare market is expected to grow to $323BN by 2025 from the current $32BN level compounding at approximately 15% annually.  Distributors on the ground working with AOB’s product confirmed a consistent and material increase of consumer spending for healthcare products.  The distributor’s daily focus is: “having to cater each day to thousands of new individuals who could not afford the same product the day before.”  Conversations with the company indicate that AOB has approached the market as one that is growing, but must be dominated through branding, proper advertising, and a controlled expansion of the distribution chain to maintain growth and margins in the long term.  Organic growth in demand will fuel the demand for products in all categories, but the company has stated they hope to be the leader in the categories they focus on. 
     
    The Products:
    AOB’s product mix is highly attractive allowing them to maximize profit through the flexibility to target the hospital as well as consumer markets.  The company sells products in two segments, Plant Based Nutraceuticals (“PBN”) and Plant Based Pharmaceuticals (“PBP”).  PBN products can best be compared to nutritional supplements we are familiar with in the US including vitamin liquids, protein nutrition products, and packaged health drinks.  AOB’s PBP products are both OTC and prescription based and are packaged, branded and marketed as appropriate.  Both product categories are natural Chinese Traditional Medicine as defined by the Chinese government and contain no synthesized chemicals.  The greatest differentiator between the PBP and PBN segments is the need for the SFDA (equivalent to US FDA) approval for PBP products.  Several of the major products are discussed below. 
     
    Prescription PBP:
    Cease-Enuresis Soft Gel – Bed wetting and incontinence – 20% of sales, 131% 1H06 growth
    Shuanghuanglian Lyophilized Injection Powder – Antiviral – 27% of sales, 69.3% 1H06 growth
     
    OTC PBP:
    Cease-Enuresis Patch – Bed wetting and incontinence  - No segment data
    JinJi – Gynecological inflammation and women’s health – 7% of sales, Acquired 1H06
    UrineStopper Patch - Bed wetting and incontinence – 5% of sales, 180.2% 1H06 growth
     
    PBN Products:
    Protein peptide products – Beverage tablets for warm water – 28% of sales, 101.5% 1H06 growth
    Vitamate Nutritional Oral - Immune System – 3 % of sales, 70.5% 1H06 growth
     
    We have been pleased to see growth across all categories, and among existing as well as acquired brands. 
     
    Manufacturing, Distribution, and Competitive Advantage:
    The company recently invested in upgrading its peptide factory from an output level of 1,000 tons/year to 10,000 tons/year.  The full capacity of the plant will not be used immediately, but the company intends to produce peptide for sale on a wholesale level as well as continue the growth of its Protein Peptide line.  The HSPL plant has been improved to handle the increased demand of Shuanghuangliang, and the company was completing additional renovations during our visit to the facility in August 2006.  The newly acquired GLP plant is the focus of management as they work to bring the level of efficiency up to that of the other plants.  Key personnel have been added to the plant and the workforce has been tested for competency and culled in accordance with PRC employment laws. 
     
    Control of the distribution channel is a key to preserving margins and diversifying the geographic regions into which the company sells its products.  In the early 2006, AOB completed its acquisition of HQPL, a national distributor with over 90,000 distribution points.  According to the company, this increased their distribution to 100,000 locations from 10,000 enabling them to sell all regions of China.  Distributors, their sub-agents, and reps take a 50%-100% markup on product.  By capturing some of the spread, AOB can mitigate margin compression and grow revenue dollars based on capturing markup and increasing unit volume. 
     
    The existing product lines are highly appealing when compared to standard pharmaceutical companies selling into the Chinese market.  AOB produces no generic products and does not compete directly with high volume low margin suppliers of generic western drugs to the market.  Several of the major products face limited competition within the market.  By government mandate, Shuanghuanglian powder is produced by only two companies, AOB and Harbin Pharmaceutical Group No. 2.  The company has four competitors that produce a similar product to the Cease Enuresis Soft Gel.  While the drug can be produced by other companies, unlike AOB, the existing competitors have not taken the necessary steps necessary to market and brand their versions as the premium brand.  The GLP JinJi brand has a 30 year history and two competing products in the market.  To ensure brand dominance, AOB has initiated a national marketing campaign, point of sale promotional items, and an updated package that differentiates the product on the shelf from its competitors.  Our pharmacy visits and conversations with merchants in China have confirmed that the success of the program as the JinJi brand has pulled away from its competitors in the short time it has been under AOB’s control.  The recently introduced GLP Jinji Yi Mu Cau product will be placed in existing channels and piggyback on the success of the existing Jinji marketing campaign.
     
    China Risk:
    Risks associated with Chinese companies tend to discourage investment for fear of fraud, poor corporate governance, misstated results and the inability to communicate with management when necessary.  As mentioned above, we have done extensive due diligence regarding the company including multiple meetings with management on the ground in China.  We have had opportunity to tour both of the factories, and the corporate office located in Harbin, the Hong Kong retail location, and the Beijing office. 
     
    Early February 2007 press has brought forward several stories relating to the sale of fraudulent or dangerous medicines in China and the related government investigation.  The PRC regulators will review over 170,000 production licenses issued by the State Food and Drug Administration, with particular focus on the permits issued between 1999 and 2002.  The company has commented that none of their product licenses have been granted during that period.  We anticipate that there will be no effect on AOB.  Industry growth may slow slightly, but acquisition multiples may be cheaper. 
     
    Operationally, AOB is one of the most impressive working environments we have seen.  Due to the filing requirements associated with a US listing, the company financials provide the same data as would be expected with a US company.  We are confident in the control and reliability of the information provided as the company made plans early on to be SOX 404 compliant by the end of the 2006.  Furthering our confidence in the financial controls of the company is the US VP of finance who has substantial experience as an employee of the large auditing firms.  Access to the company is easy with the New York office having the appropriate infrastructure to support the inquiries and demands of US institutional investors.  The COO and co-founder of the company is fluent in English, and spends a significant amount of her time in the US; her ability to communicate the details of their strategy and to demonstrate a depth of operational understanding more poignant that that of some US management teams has further reinforced our confidence in the company’s foundation.  The board includes sophisticated independent individuals consisting of two former auditors and a former NASD arbitrator. 
     
    The recent announcement that they have elected to move the corporate headquarters to the developmentally focused area of Shenzhen in the south of China will allow them access to a more sophisticated talent pool on both the R&D and managerial sides of the business than would otherwise be available in the current home base of Harbin in northern China. 
     
    We had the opportunity to visit the Harbin headquarters, HSPL, and Harbin Bioengineering.  Operations and facilities were extremely impressive, with a highly organized structure and knowledgeable staff.  The company is run with a level of discipline and pride that would be equivalent to that which might be found among employees of IBM in the 1950s.  The company has several mottos that are posted throughout the organization including “Discover needs and realize value” and “AOBO Dedicated to your health improvement.”  The corporate culture is quite impressive with a morning oath and staff uniforms.  One would be had pressed to find a company in the US with comparably dedicated and motivated staff. 
     
    Growth Through Acquisition:
    The company has made three acquisitions in the last several years including the above mentioned HQPL distribution platform.  The acquisitions of HSPL and GLP in 2004 and early 2006 respectively were made at excellent prices showing management’s exemplary ability to deploy capital efficiently.  The subsequent operational improvements to sales and manufacturing practices allowed the company to receive a significant return on investment.  Because they were state owned, the companies were inefficiently run before acquisition.  Unnecessary employees, poor expense management, mediocre marketing, and a fantastic, but underutilized brand were hallmarks of the targets. 
     
    The HSPL acquisition solidified the company’s position in a prescription drug practice that is protected by government regulations allowing only them and one other company to make Shuanghuanglian.  The efficiency of the plant at acquisition left opportunity for improvement operationally, and for the expansion of a well known product to other parts of the country.  The ability for management to improve the operation of a target company is the evidenced by HSPL’s first full year of sales exceeding the previous by approximately 325%.  Operating margin improvement from a blended rate of approximately 15% pre acquisition to 32%-34% post acquisition demonstrates both the strength of management and their ability to find highly attractive areas in which to invest capital.  The trend has continued with first half 2006 sales for the same unit exceeding those in 2005 by 70%.  A cash on cash analysis considering both the operating margins and tax rate of 33% specific to HSPL yields a 62% return. 
     
    Total cash consideration:
    7,228,916
     
    Revenue Generated (Approximate 2H05 & actual 1H06 sales
    20,764,840
    Operating Margin (decreased by 2% due to lower gross at HSPL)
    32%
    Operating Income
    6,644,748
    Tax Rate
    33%
    Return
    4,451,981
    Cash on Cash Return
    62%
     
    The GLP acquisition demonstrates very similar return characteristics to the HSPL acquisition.  Acquired in April of 2006, the company had approximately 10MM in sales in 2005 with an operating margin of between 4%-8%.  In the last two months of Q206, immediately after the acquisition, the company produced sales of approximately $3MM out of the GLP unit, putting them on a run rate of $18MM.  While not a perfect proxy, management has released that the Q406 sales orders within GLP have already reached $6MM.  According to the company approximately 70% of orders for a quarter come in before the quarter, therefore grossing up the sales one can expect approximately $8.5MM in sales during Q406.  This produces a run rate of $34MM per year.  Given conservative estimates regarding the success of the Jinji Yi Mu Cau product, the 2007 GLP sales should near the $47MM level.  Management expects GLP margins to be at the corporate average by the close of the year compared with 4% at the time of acquisition.  A forward looking cash on cash analysis considering operating margins of 34% and tax rate of 0% due to a tax holiday yields a 63% return. 
     
    Total consideration
    25,409,837
     
     
    Revenue
    47,285,714.29
    Operating Margin
    34%
    Operating Income
    16,077,142.86
    Tax Rate
    0%
    Return
    16,077,142.86
    Cash on Cash Return
    63%
     
    Proper deployment of capital to projects such as HSPL and GLP is demonstrative of a diligent and effective management team making selective acquisitions. 
     
    Pricing & Margin Pressure:
    AOB currently has operating margins of around 33% while margins in the industry are somewhat lower at around 20-25%.  The most important risk to get comfortable with for this investment is margin sustainability. As explained below, we believe that AOB is somewhat insulated from margin pressure in the Chinese pharmaceutical industry. Our view is that there may be some margin pressure over time, but that it will come some years into the future and will be mitigated by AOB’s focus on high-end products, Traditional Chinese Medicine, strong in-house distribution, and proprietary products.
     
    Within the past year, the government has put in place measures which have fixed prices on some drugs, with a focus on “western style” style medicines.  The reason for the price ceiling is that the health care system is supported almost entirely by the government.  Income to the hospitals by means of prescription sales is a source of revenue which helps to defer healthcare costs on a national level.  Further reinforcing the government's intentions, in March of 2006, kickbacks from distributors were deemed a crime.  According to the company, sales directly to hospitals and clinics represented approximately $7MM in 2005 directly to hospitals/clinics or about 13% of total revenues.  Those sales directly to hospitals will be the first to experience any margin pressure if the government imposes price restrictions on AOB’s prescription products.  We are comfortable with the government pricing risk as it is focused on western style medicine rather than CTM.  Further raising our comfort level is the company’s recent announcement that the two of the Company's leading products, Cease-Enuresis Soft Gel and Jinji Gel, have been selected to join in the International Traditional Chinese Medicine Program for Cooperation in Science and Technology.  This program recognizes the usefulness of CTM as a lower cost means of treating patients than western medicine, and demonstrates that the government is generally pleased with AOB and will be less prone to interfere with their development and marketing efforts. 
     
    The overall demand for the OTC products in the country and the company’s early efforts to brand its products and promote quality will protect them from shrinking margins.  On a recent visit to China, we spoke with a pharmaceutical distributor in Harbin who reported that there had been no margin pressure to date in pharmaceutical or OTC medications.  His outlook for the future contemplated no immediate need for price reductions, but rather a slow change in pricing which would effect selling agents and third tier distributors.  Given the acceptance of AOBs products, and the anecdotal information gathered form the marketplace, the demand for OTC product and the need for CTM, prescription products will continue to give the company pricing power and mitigate the risk of near term margin compression. 
     
    Looking into the future, the company has made an impressive effort to brand its new JinJi product acquired through GLP.  The company began a national advertising campaign with the Chinese talk show celebrity Ni Ping to promote and represent the product  The JinJi women’s health product has a 30 year brand history, that has significant equity.  The company recognizes this equity and has chosen to take the product to the next level through national advertising and aggressive distribution.  The intention is clearly to establish their product as the household name in women’s health.  As they repeat this process with other products, and solidify their position in each market, they will establish themselves as the “name brand” and provide sustainable margins, aided by the increased revenue amounts that can be captured by selling directly to vendors through the use of the proprietary HQPL distribution network.  Given the current growth profile, we would be comfortable taking a position in the company even if margin were to compress by 10 points resulting in a multiple closer to 23x 2007 earnings. 

    Catalyst

    Next year’s EPS growth will be calculated on a consistent number of shares. An offering in December 2005 has obscured the increase in profitability to those not willing to study the financials and growth profile of the company.
    Blended margins for the company, lowered slightly by recent acquisition integrations, will improve to core levels by 2007 further contributing to bottom line growth profile.
    The company has completed two acquisitions, and has indicated another in the coming year. Integration experience and a proven eye for excellent capital allocation opportunities will position the company target and transform inefficient state run assets.
    The company is trading at a 15.5x forward earnings and 24.7x current year while growing at greater than 90%. Closing of the valuation gap as investors look towards forward numbers will result in above average returns in the near term.

    Messages


    SubjectCurrent Market
    Entry02/27/2007 02:39 PM
    Memberdavid101
    Thoureau,

    Somewhat unkind of me to ask, because it is not AOB specific, but any thoughts on today's gyrations? Is this a case of "Nothing is so much to be feared as fear."

    David

    SubjectGuidance
    Entry03/13/2007 10:53 AM
    Membertrev62
    Thoreau,

    Any thoughts on the recent numbers, particularly management's guidance for 07? The drop in organic growth to 15-20% would be a significant slowdown, but there is always the chance that they are being overly conservative. Thanks in advance,


    SubjectGuidance
    Entry03/13/2007 01:36 PM
    Memberthoreau941
    4th quarter looked fantastic. Our guess is that they are being conservative with guidance. We will continue to study the regulatory environment in China as time passes.

    We will keep you up to date.

    SubjectPublic Offering
    Entry06/04/2007 04:23 PM
    Membersvflc022
    In an effort to try to understand the rationale behind management’s decision to dilute current shareholders by almost 25%, we have taken a look at the possible uses of the proceeds to be raised in the recently announced public offering. In the press release, AOB affirmed that the proceeds will be used “for sales and marketing of its products, acquisitions, research and development activities and for working capital and other general corporate purposes”.

    Recently, management has shared with investors the rationale behind its increased spending in Sales and Marketing, mainly pointing to the launch of new products such as Yi Mu Cau and the strengthening of the whole Jinji line of products. In 1Q2007, AOB saw Selling, Marketing and Advertising expenses of $6.52 million, a 66% rise from the $3.93 million in 1Q2006. That is a run rate of approximately $26 million, compared to the $24 million spent in all of 2006. Despite the increased spending, AOB generates enough cash to fund these marketing initiatives and an equity raise wouldn’t have been necessary for this purpose. Regarding R&D, working capital and other general corporate purposes, the same rationale as above applies.

    As it seems, the main story behind the offering is acquisitions. Although this assertion is admittedly purely speculative, if history is any indication, we may see a pretty large acquisition (> $100 million) coming up in the not too distant future. As stated by Thoreau in his original investment thesis, “to be considered a serious bidder for government assets in china, the company must have full cash amount of balance sheet at the time of bid.“ We have taken a look at AOB’s previous major dilutive event as a reference:

    Previous Scenario
    September 30, 2005 - The Company had $19.1 million in cash and equivalents

    November 28, 2005 - Private placement to 31 investors raised $60 million (12.5 million shares x $4.80)

    March 31, 2006 - $80.9 million in cash and equivalents

    April 18, 2006 – Acquisition of Guangxi Lingfeng Pharmaceutical (GLP) – 1.2 million shares ($4.70 at the time) + $20 million cash = $25.64 million

    July 27, 2006 – Acquisition of HQPL (a letter of intent had already been signed a year earlier, though) - $4 million


    Current Scenario
    March 31, 2007 - The Company had $93.4 million in cash and equivalents.

    June 04, 2007 – Public offering to raise approximately $130 million (13 million shares x $10)

    2H2007 - $100+ million acquisition??

    SubjectBarron's Article-Part 1
    Entry06/24/2007 09:22 PM
    Memberpman908
    This weekend, Barron’s wrote a negative article on AOB, which we believe was spectacularly one-sided, and does not accurately reflect the strong prospects of the company.

    In fact, rather then address the fundamentals of the company outlined by Thoreau (including the strong macro-environment, solid organic growth, and outstanding track record of management), the article produces a laundry list of outdated, misinterpreted, and out of context points which do not relate at all to the company’s prospects today.

    It is worth noting that the article does not attempt to address the company’s low valuation, tremendous earnings and cash flow growth, cash conversion, healthy balance sheet and excellent capital allocation.

    Given the increasing short interest, we surmise that the article may have been fed to Barron’s by short sellers who are looking to drive down the price of the announced secondary.

    Addressing the points one by one

    Article Point #1: AOB has in the past suggested that its protein peptide product can inhibit the growth of tumor cells

    Quote: “The company's research team discovered that soybean protein peptide extracted from some special species of soybean could effectively inhibit the growth of tumors based on research conducted on mice. The growth of liver cancer cells inside the mice was successfully suppressed by soybean protein peptide without side effects”. (Obesity, Fitness and Wellness Week-June 5, 2004)

    The company’s claim was looking at the effect on mice, never making the claim on people. A google search discussing the benefits of soy shows other studies with similar results on mice. Here are links to a couple of the search results on the USDA and UC Berkeley websites, quoting UC Davis and UC Berekely researchers:

    http://www.ars.usda.gov/research/publications/publications.htm?SEQ_NO_115=185797

    http://mbn.berkeley.edu/content/view/45/

    Article Point #2: Urin Stopper Patch contains radioactive photons that warm the acupoints:

    Lost in translation: Although the literal translation from the Chinese on the product says radioactive, we believe that the understood original meaning is that the manufacturing process includes a fine filtering of raw materials.

    Note: it wouldn’t be the first translation issue for AOB – according to an article, even the company’s name is mistranslated:

    “The Chinese maker of herbal traditional medicines doesn't do bioengineering, says Wilfred Chow, vice president of finance. The term "bioengineering" was simply a name recommended to the firm when it sought its first stock market listing in the U.S. in 2002. "Translated into Chinese, 'bioengineering' would be more like health technology," Chow said.”

    Article Point #3: Peptide Powder claims patent technology from UC Berkeley:

    Answer: We had a native language speaker review the current product packaging, and she could find no such claim. We did find the English words “patent technologue” on there. The company does have patents registered in Hong Kong and China (2006 10K)

    Article Point #4: Management does not execute on plans as business is almost all China right now while the company had previously indicated other plans

    Article Example 1: In March 2004, the company said its primary objective was “to penetrate the US, European, and Asian markets” and in September 2004, that it was busy expanding its nutraceutical and pharmaceutical business in the US.

    Answer: True, but out of context. The company announced the opening of a New York office in 2004 to build strategic relationships in the US, increase investor awareness, and look for US FDA approval. We believe the company is in process of exploring these opportunities, but has found the opportunities for growth in China to be too good to pass up. For example, the $7M acquisition of HSPL in October 2004 has worked out to about 1x 2006 pretax income. The $25M acquisition of GLP in April 2007 will work out to be 1-2x 2007 pretax income. The recently announced acquisition of CCXA is expected to have similarly strong prospects. To us, this is a company that has responded to the opportunities as they developed.

    Article Example 2: In earlier releases, it said it got 5% of sales in Japan and 20% from Korea, and that it had established a distribution agreement in the UK and Europe.

    Answer: True, but completely out of context: The company reported this in an August 2002 press release that 25% but that relates back to a time when this company was primarily a one product company with roughly $10M of total sales compared to expectations of $150M+ sales in 2007.

    While the company did explore opportunities outside its core Chinese market, it has been clear for some time where its focus was:

    From the 10KSB filed in April 2005:

    “Presently we sell our products mainly in China and export a very small portion of our food related products to Japan and South Korea, China will remain our primary market for the foreseeable future.”

    Seems pretty clear to us.







    SubjectBarron's Article-Part 2
    Entry06/24/2007 09:23 PM
    Memberpman908
    Article Point #5: Wang Xianmin: AOB director who was top official in Heilongjong province, was a driving force behind an IPO of a company (Daqing Lianyi) where some executives were accused of bribery:

    Answer: Although we cannot confirm or deny that Xianmin was a driving force behind the IPO of this company, there is no evidence linking him to the improprieties of the management of that company. Our research indicates that Xianmin had involvement with many companies in the province, which makes sense given that his role as vice governor in charge of Financial and Economic Affairs

    What is interesting to note is that the article did not mention 3 of the other independent board members of AOB. Cosimo Patti was an arbiter for the NASD and NYSE for 18 years. Eileen Brody was a senior manager at KPMG and held various management positions at Melville. Lawrence Wizel was an audit partner at Deloitte and Touche for 26 years. It’s rare to see these types of directors serve on a small cap Chinese company, and it gives us increased comfort that the company operates with strong controls.

    Article Point 6: Association with Mid-Continental Securities until 2004. This company was controlled by Mark Anthony who was barred in 1997 from dealing with brokers, investment advisors, or penny stock offerings

    Answer: Yes, AOB did issue stock in 2001 and 2003 to Mid-continental securities in exchange for helping the company get listed in the US. To be clear, AOB was no longer involved with this securities firm when AOB listed on the NYSE.

    Until the last year or two, it was difficult for Chinese companies to go public in the US through traditional means and most companies had to do reverse mergers in order to become listed in the US. We believe that AOB was a bit naïve as to who they were involved with, but AOB has not been involved with the company for three years now. Once again, interactions with Midcontinental were happening when this company had $10-$20M in sales and a $30M market cap)

    Article Point 7: In 2005, They used CEO-cast for investor relations. This firm was controlled by Michael Wachs, who was barred in 1997 from banking and brokerage.

    Answer: True, but according to a November 2006 Barron’s article, it was only found out in April 2006 that Wachs still had a controlling interest, which was contrary to documentation filed with the SEC and IRS. By this time, AOB had already stopped using the services of the company anyway.

    We have visited the company and spoken with management, distributors and competitors, seen the product on shelves in multiple locations in multiple cities in China. This article appears to be a tired rehash of very old news, the legacy of a small company that came public via reverse merger many years ago, and a series of what look like attempts to make mountains out of molehills.

    Usual disclaimer: We own this stock, but may buy or sell at any time, without notice. This is not a recommendation to buy or sell the stock.

    SubjectRebuttal to Barron's article
    Entry06/26/2007 04:29 PM
    Memberpman908
    Shaumo Sadhukhan of Lotus Partners wrote a nice rebuttal to the initial Barron’s article. See below

    TUESDAY, JUNE 26, 2007 3:25 p.m. EDT
    MAILBAG
    An Exchange on a China Stock
    To the Editor:

    On June 25, Barron's published a negative column by Leslie P. Norton entitled "Chinese Medicine Show" about American Oriental Bioengineering (ticker: AOB). My firm is a shareholder of AOB. I have traveled to Harbin and Hezhou in China to visit AOB's offices, factories, managers, and distributors. The picture that has emerged is diametrically opposed to the portrayal in the column. I have found the company has quality products, fast growth, known brands, savvy management, and hardworking employees.

    I believe that the issues raised by the article are immaterial to the fundamentals of the company. However, I would like to address them:

    • Peptide products inhibit tumor growth.


    AOB has never claimed inhibition of human tumors. A press release in 2004 stated that AOB researchers had shown inhibition of tumor cell growth in mice. Studies done by American researchers (including at UC, Davis) have shown similar results.

    • AOB recently said that China will be its main market, whereas earlier filings mentioned international opportunities.


    There is no inconsistency between AOB's past and current statements. In 2003 and 2004, AOB had two major products. A significant percentage of sales came from Korea and Japan, and expanding those products into foreign markets was a major objective. AOB has since acquired or introduced new products with sales in China that are much larger than the sales of legacy products. As a result, the company's current statement that China is its main market is not contradictory to past statements.

    • Director Wang Xianmin aided the IPO of Daqing Lianyi, whose executives bribed officials.


    Wang was a government official in Heilongjiang Province and not an employee of Daqing Lianyi. There is no evidence of anything improper by him. A background check on Wang run by AOB revealed nothing. This is a classic case of guilt by association based on speculation.

    • Packaging for soy peptide claims use of technology from UC, Berkeley.


    The company does not use technology from UC, Berkeley. AOB had been in past negotiations with UC, Berkeley, to license patents. During this negotiation, one of AOB's local marketing agents inadvertently put this claim on its packaging for the Hong Kong market only (less than 1% of sales). The company is correcting this problem.

    • AOB was involved with CEOCast and MidContinental Securities. Controlling owners of these firms have questionable histories.


    The fact that Michael Wachs controlled CEOCast was only discovered a year after AOB stopped doing business with the firm. AOB no longer has any relationship with either CEOCast or MidContinental and was not aware of either company's history at the time of involvement. There is no allegation of any wrongdoing occurring from AOB's involvement with either firm.

    More important than whom AOB was peripherally involved with in the past is the people it is directly involved with today. AOB Board Member Lawrence Wizel was a partner with Deloitte and Touche for 26 years. Director Cosimo Patti was an arbiter for the NASD and NYSE for 18 years. It is unlikely that these people would serve as Directors if integrity or accounting problems existed.

    AOB is a fast-growing company at an extremely cheap valuation with a phenomenal track record of creating shareholder value. Excluding cash, AOB trades at 9x forward (2008) earnings. EPS has grown at a 43% CAGR over the last four years, and consensus projections are for 37% growth in the next 2 years.

    Most importantly, AOB possesses a unique opportunity to acquire at extremely attractive prices. This opportunity is illustrated by recent history. In 2004, AOB acquired HSPL for $7MM. Today that company generates an estimated $6MM in net income. AOB paid a little over 1x current earnings. In April 2006, AOB paid 2-3x year-end 2007 run rate earnings for GLP.

    The case for AOB is simple. How many other NYSE companies trade at 9x earnings, are growing 30%+, and have the opportunity to acquire at 2-5x earnings?

    My work in China has confirmed this story. I've seen AOB products on the shelves, toured their factories, and confirmed that its brands are known and demand for the products is real.

    Sincerely,
    Shaumo Sadhukhan
    Managing Partner,
    Lotus Partners
    New York City

    Barron's Replies: Shaumo Sadhukhan is an eloquent advocate for American Oriental Bioengineering. However, we believe that our columnist's criticisms were warranted. Interestingly, although Sadhukhan mentions one of the mislabeled products cited in our piece, the other, the rather amazing Urin Stopper-Patch, an anti-bed-wetting product whose packaging said it contained "radioactive photons" that "warm the acupoints" isn't mentioned at all.




    SubjectAny update
    Entry07/23/2007 11:46 AM
    Memberaviclara181
    the stock continues to go down? any idea if there is a fundamental reason, or is this just a great buying opportunity. It looks like following the offering, there is close to $2.50 a share of net cash.

    SubjectUpdate
    Entry07/24/2007 06:44 AM
    Memberpman908
    The cash on the balance sheet should be closer to $2, post acquisition of CCXA.

    We think the stock decline reflects concern over the article in Barron’s and some confusion around some differences in 2007 and 2008 estimates that are out there

    But even if you take the most conservative estimates out there ($0.56 in 2007, and $0.66 in 2008), you are getting a company that should achieve organic growth of 15-20% at the minimum, along with the ability to make acquisitions at 2x-5x EPS (one to two years out) for 9x NTM EPS ex cash.

    Seems pretty compelling to me.
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