China Sky One Medical

[beerbaron]

I just spent a few hours researching a company called China Sky One Medical (CSKI) and on many metrics it highly undervalued.

 

It is currently trading at a PE of 7.3.

Current assets of 75M and no debt. Market cap of 250M. 52M of cash on hands..

Positive FCF is in the same range as earnings.

 

This is totally a growth stock, if it follows China GDP growth it is still an 8% grower. It's most likely going to be a 15% grower with reinvested capital.

 

Pros

Positive demographic and economics.

No debt.

Very cheap under lots of metrics.

Invests in diagnostics kits, which I believe is a great idea for a Country without the medical infrastructure for professionnal disgnostics. (Maybe even a great idea for all of us as well)

Lots of revenues comes from patch, ointment and sprays. Which are non-prescriptions drugs.

Understandeable financial statements.

Seems to have a great pipeline.

 

Cons

It's China... how accurate can we trust the reporting?

Out of my circle of competence.

Subject to China's regulations changes.

 

Under a 8% growth (discounted cash flow 5%), 5 year outlook  scenario and a change of PE from 7 to 15 this stock is worth about 35$. (18% CAGR Return)

Under a more optimistic 12% scenario, 5 year outlook, and a change from PE of 7 to 20 this stock is worth about 60$. (31% CAGR return)

 

12% growth is still conservative considering China's economy...

 

So what am I not seeing here?

 

BeerBaron

[xxx1313]

Hi BeerBaron,

 

thanks for your idea. I am not quite familiar with CSKI, however there are many cheap chinese micro caps out there. For example, beside CSKI, I have SKBI, CADC, CHIO, CSR, AOB and HQS on my watch list or in my portfolio. They all trade with forward P/Es between 4 and 7. Some of them traded at trailing P/Es < 2 a year ago. I think you have to adopt a Graham style approach - buy a broad range of those stocks with small amounts or at least a handful of those that look quite good to you. Many of them will double or triple, but there will be some losers too.

 

xxx1313

[libor.plus1]

"Under a 8% growth (discounted cash flow 5%), 5 year outlook  scenario and a change of PE from 7 to 15 this stock is worth about 35$. (18% CAGR Return)

Under a more optimistic 12% scenario, 5 year outlook, and a change from PE of 7 to 20 this stock is worth about 60$. (31% CAGR return)

 

12% growth is still conservative considering China's economy...

 

So what am I not seeing here?"

 

Those are some rather rich assumptions.. especially for a microcap. There are a ton of Chinese based micros out there that are trading for a fraction of 'fair value'. But given the huge risks associated with Chinese companies, a trade far below fair value is the norm.

[Phoenix01]

This one also caught my attention.  Based on the finanacials I have started to nibble.  I asked their IR department for their vision statement and some insight of the managmenet culture last week and still have not received a reply. :(

[nodnub]

This one also caught my attention.   Based on the finanacials I have started to nibble.  I asked their IR department for their vision statement and some insight of the managmenet culture last week and still have not received a reply. :(

 

Maybe your request was too vague to be accurately translated.  Is your question answered by reading 10-K and Qs?

[Phoenix01]

The vision statement should be a straight forward request.  They can point me the existing documentation if such already exists.

 

I found this interesting article while digging a little deeper.

 

http://seekingalpha.com/article/129921-three-reasons-to-heed-china-sky-one-medical-s-10-k-filing-extension

 

Perhaps it is time to re-think this position!

[beerbaron]

Yep, the margin of safety just dissapeared there.

 

BeerBaron

[Phoenix01]

BB,

 

You need to remember that the Chinese play by Chinese rules.  Connections are much more important than competence because it is so cheap to hire competent people to do the work.  Dealing with the bureaucracy is the real challenge.  It looks like Sky One is doing that correctly.  The results are intriguing, but the methods are not North American.

 

[jasonw1]

If you're looking at Chinese smallcap, for the similar PE as CSKI, you can find stocks growing >30%, CCME, SKBI, LTUS, LPIH, to give a few names.

 

I own a basket of Chinese smallcaps, don't have CSKI, but own all the names mentioned above.