American Oriental Stands at Neutral - Analyst Blog
August 24 2011 - 5:00AM
Zacks
We reiterate our Neutral recommendation on American
Oriental Bioengineering, Inc. (AOB) with a target price of
$1.00.
The company recently reported its financial results for the
second quarter of 2011. Earnings per share during the quarter came
in at 5 cents per share, 2 cents short of both the Zacks Consensus
Estimate and the year-ago earnings. Earnings were hurt by lower
revenues, which declined 30% year over year to $54.1 million.
Weakness in the manufacturing segment (down 31.8%) was responsible
for the slide in revenues. Revenues were well below the Zacks
Consensus Estimate of $82 million.
American Oriental earns revenues from two operating segments –
manufacturing and distribution. While the manufacturing business
accounted for approximately 93.6% (50.3 million) of the company’s
total revenue, the distribution business – Nuo Hua generated the
remaining revenues of $3.8 million. (Read our full coverage on the
earnings at: American Oriental Misses)
We note that the company operates in a highly competitive
environment. American Oriental’s SHL injection powder primarily
competes with Harbin Pharmaceutical Group, which produces a very
similar injection powder product. Another product, Cease Enuresis
Soft Gel competes with Jianpizhiyi Tablet (produced by Shangdong
Zhiling), Yeniaoying (produced by Tianjin Zhongxin),
Shengjiyiniaokang (produced by Shanxi Dingxing) and Suoquan Pill
produced by (Jilin Tianguang). Additionally, products such as Jinji
Capsule and Jinji Pill compete with Huahong Pill produced by
Huahong Pharmaceutical Group and Qianjin Pill produced by Qianjin
Pharmaceutical Group. Soy Peptide products compete with Leneng
Peptide Powder, produced by Leneng Bioengineering and Soybean
Protein Peptide produced by Harbin High-Tech. The excessive
competition confronting the company’s products concern us.
Moreover, over the last few years, American Oriental’s operating
margin has declined steadily. From 32% in 2007, 24% in 2008, 20% in
2009, the margin hit a low of approximately 10% in 2010. If this
declining trend continues, the company’s bottom-line will be
severely affected.
However, we note that the pharmaceutical industry in China is
growing rapidly. The growth is attributable to the government’s
efforts to improve the healthcare infrastructure coupled with its
goal to achieve near-universal health coverage. We believe
prescription drug sales will continue their growth trajectory as
China aims to reform its health care sector to incorporate
unaddressed rural markets. Management believes that by 2020
the entire Chinese population will have access to safe, effective
and affordable healthcare services. The rapidly growing Chinese
pharma market provides a lucrative opportunity to American Oriental
to increase its revenue.
Further, American Oriental believes in the strategy of growth by
acquisitions. The company has completed multiple acquisitions in
the past few years which have expanded its product portfolio and
contributed to growth. For example, with the acquisition of Nuo Hua
Investment Company Ltd. in 2008, the distribution of pharmaceutical
products became a part of the company’s operations. American
Oriental currently distributes more than 13,000 pharmaceutical
products. We believe that such profitable acquisitions in future
will aid the company’s growth.
We prefer to remain on the sidelines till further visibility is
obtained on the growth of the Chinese pharmaceutical industry and
its impact on American Oriental. Consequently, we remain Neutral on
the stock, which carries a Zacks #3 Rank (Hold rating) in the
short-run.
AMER ORIENT BIO (AOB): Free Stock Analysis Report
Zacks Investment Research
American Oriental Bioengineering, Inc. (NYSE:AOB)
Historical Stock Chart
From Jun 2024 to Jul 2024
American Oriental Bioengineering, Inc. (NYSE:AOB)
Historical Stock Chart
From Jul 2023 to Jul 2024