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Crunching Bohai's Numbers: Value Still Swelling, Target Still Rising

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Crunching Bohai's Numbers: Value Still Swelling, Target Still Rising

Several weeks ago I presented to you a growth/profit story that was about as attractive as any stock any of us could ever imagine, complete with (legitimate) single-digit P/E ratios and 20% profit margins. Since then, Bohai Pharmaceuticals Group (BOPH) has not only continued to impress, it's gotten even more impressive with today's news. In all seriousness, BOPH is rapidly materializing as the kind of undervalued growth story someone like Warren Buffett would be interested in.

I'll get to today's news below, but here’s a little teaser - a respected analytical firm thinks Bohai Pharmaceuticals shares could be worth more than 300% of their current value. Before dissecting the valuation though, I want to paint a quick picture.
 

Numbers Tell the Bohai Tale

Not that Bohai wasn't on a roll before, but I think the last reported quarter (ending on 9/30, reported in November) was the one that made a definitive statement to the world. It was with that update U.S. investors could start to inspect the year-over-year numbers. Here's what they found:

  • Revenues of $17.0 million for the quarter ending on September 30th, versus $13.9 million for the same quarter a year earlier.
  • Net income of $3.0 million last quarter, against $1.9 million for the comparable quarter in 2009. 
  • Earnings per share of $0.15, and an EPS of $0.61 for the whole year.
That's some major growth. How major? In the same order, that a 22% increase in the quarterly top line, and a 57% increase in the bottom line. That EPS figure translates into a trailing twelve-month P/E of 3.0. Yes, you read that right... a P/E of 3.0.

And to be perfectly clear, the prior quarter wasn't some sort of accounting fluke - Bohai Pharmaceuticals has consistently grown its revenue levels over the last year and a half from the $12 million range to something in the high teens. Net income has similarly trended higher, increasing from $7.9 million for the year ending in the middle of 2009 to $9.5 million for the most recent completed fiscal year. That's a 19.4% improvement. 

Said more plainly, Bohai Pharmaceuticals is not just growing, it's reliably growing. 

The thing is, this is only the beginning.
 

Now That the State's Backing It...

Bohai has been cultivating this growth on its own, directly taking its traditional Chinese medicine (or TCM) to more and more consumers in this growing market. In fact, the TCM market organically grew at an annual rate of 20% over the last several years, and now makes up more than 1/4 of China's total pharmaceutical market... and that was before the state instituted a sweeping overhaul of China's healthcare system.

In 2009, the People's Republic of China State Council pledged to cover 90% of the nation's population with basic health insurance and access to basic healthcare. Moreover, the council also committed $124 billion toward the effort. 

To answer the next question, yes, traditional Chinese medicines are covered and subsidized as part of this plan. [What may be deemed 'alternative medicine' in the United States is quite mainstream in China, and can be just as effective as what Western cultures consider to be mainstream treatments.]

And to answer the follow-up question, yes, Bohai Pharmaceuticals is a direct beneficiary of the country's initiative. Five of Bohai's products are eligible for reimbursement under the national health plan, and the company has the rights to produce twelve more of those reimbursement-eligible products at any time. As of right now, it's got a total of 15 revenue-bearing products.

It doesn't take much to connect the dots here... billions of government dollars supporting the industry, Bohai's own proven organic growth, persistently high margins, and a P/E in the 3.0 area? That's a stunning value, and if the market cap were bigger than about $30 million, it's the kind of business someone like Warren Buffett would be interested in buying. 

The market's just simply missing the boat on this one, but let's be honest with ourselves - the market's not going to miss this boat for much longer. The time to wade in is now, before BOPH gets discovered in a big way. 

On that note...
 

The Analysts Are Catching On

Ever heard of Murphy Analytics? It's a boutique equity research firm that covers a lot of small cap stocks that need closer inspections, but just can't get them from some of the big houses. Murphy does a great job with their work too, getting down to details and perspective you won't find in too many other places.

Yeah, well, Murphy Analytics just updated their view on Bohai Pharmaceuticals Group, and raised its price target to $7.50. That's a mere 314% better than where BOPH shares are trading at now.

I don't disagree one bit with their assessment either. 

The full report's available using the link in the press release below. I do want to highlight the rationale for the price target though; I think you'll agree with it too. 

Bohai earned $0.15 per share last quarter. It earned $0.61 for the full year. Do the math here. The company's consistently earning about $0.15 per quarter, against the current share price of $1.70. That means the P/E is around 3.0. Even adjusting for a full potential dilution, the company should be clearing at least $0.50 per share per year.

Comparable Chinese companies are trading at 15 times trailing twelve-month earnings. If Bohai Pharmaceuticals makes its way to comparable valuations (15 times $0.50), that would mean a price of $7.50, which is clearly even stronger than my early high-end target of $6.00. Murphy sees it, and I suspect other analysts and investors are also starting to see it.

It's not just a P/E measure that's so attractive here though. How often do you see a stock with a market cap of half its revenue? Even at full dilution, the top line would still be bigger than Bohai's market cap. 

Never even mind the fact that this $30 million company's got $31 million in liquid assets, and $50 million more in total assets than total liabilities. The company's could do absolutely nothing at all from this point forward and still be worth more than it is right now.

You get the idea - BOPH is undervalued as is, and could easily justify being priced two to three times where it's trading now. I can't see investors ignoring this one much longer, and when they finally warm up to it, it could be a flash rally. Better to be in front of any move on this value play rather than chasing it from behind.

Here's the news.
 

Murphy Analytics Releases Updated Research Report on Bohai Pharmaceuticals

New Report Outlines Recent Positive Developments and Raises 12-Month Price Target to $7.50

YANTAI, CHINA - January 7, 2011 - Bohai Pharmaceuticals Group, Inc. (OTCBB/OTCQB: BOPH), a China-based pharmaceutical company engaged in the production, manufacturing and distribution of Traditional Chinese Medicine (TCM) in China, today announced the release of an in-depth research update by Patrick Murphy, CFA, principal of fee-based, independent research firm Murphy Analytics.

As part of his detailed analysis of the company, Mr. Murphy raises his 12-month price target on Bohai Pharmaceuticals to $7.50 per share. 

"Through our recently expanded TCM portfolio and proactive sales initiatives, Bohai is addressing the demand of China's rising middle class and elderly populations for pharmaceuticals and healthcare products, including TCM," said Mr. Hongwei Qu, President and Chief Executive Officer of Bohai Pharmaceuticals. "This research report update provides investors with an in-depth analysis of Bohai's particular strengths in the TCM market in China and delivers a comprehensive overview of our revenue and earnings potential as we seek to drive growth in 2011."

In his updated report, Mr. Murphy states, "BOPH is delivering recurring revenue and earnings growth in the rapidly expanding TCM segment of the emerging Chinese healthcare market. The Company benefits from key protection status for its core products and very positive preliminary results on the launching of 5 new products, which bring the total number of manufactured medicines to 15 prescription and over the counter products. The Company has a strategy to capitalize on growth opportunities in urban and rural markets and seems to be well positioned to monetize these opportunities."

The report details the significant growth projected in China's pharmaceutical market, which benefits from a growing elderly population, a PRC government that is increasing government healthcare spending to $125 billion by 2011, and direct health care subsidies for urban and rural residents that cover up to 90% of the cost for certain pharmaceuticals and 100% of Essential Drug List products.

"Whether analyzing the trends in the general Chinese healthcare market, or solely within the segment known as Traditional Chinese Medicine (TCM), the near and long term trends seem highly favorable, with significant continued growth expected for the foreseeable future," adds Mr. Murphy. "Based on the market opportunity before the Company and the results delivered to date, Murphy Analytics is raising the price target on BOPH from $6.45 to $7.50."

The complete report is available in Acrobat format, free of charge:

http://www.murphyanalytics.com/uploads/BOPH_Update

About Bohai Pharmaceuticals Group, Inc.

Based in the city of Yantai, Shandong Province, China, Bohai Pharmaceuticals Group, Inc. (OTCBB/OTCQB: BOPH) is engaged in the production, manufacturing and distribution of herbal pharmaceuticals based on Traditional Chinese Medicine in China. Bohai's medicines address common health problems such as rheumatoid arthritis, viral infections, gynecological diseases, cardio vascular issues and respiratory diseases. Bohai's products are sold either by prescription through hospitals or over-the-counter through local pharmacies and retail drug store chains. Bohai has approximately 600 employees, including approximately 300 sales representatives, operating from 20 offices throughout China. Bohai's three lead products, Tongbi Capsules, Tongbi Tablets and Lung Nourishing Cream, are eligible for reimbursement under China's National Medical Insurance Program.

For comprehensive investor relations material, including fact sheets, research reports, presentations and video, please follow the appropriate link: Investor Relations Portal, Investor Fact Sheet and Overview Video.

For additional information, please visit Bohai's corporate website: www.bohaipharma.com.

Information Regarding the Murphy Analytics Report

Although the Murphy Analytics report described herein was commissioned and paid for by Bohai Pharmaceuticals Group, Inc., the company notes that the report was generated independently by Mr. Murphy, and statements by Mr. Murphy are his own and not attributable to Bohai Pharmaceuticals Group, Inc. Readers are advised to review the report in its entirety, including the disclosures and disclaimers noted therein.

Additional Information Relating to Bohai's Trading Data

Due to certain recent disruptions in the marketplace relating to quotations on the OTC Bulletin Board operated by FINRA (OTCBB), incomplete trading data may exist for certain companies like Bohai. Real-time trading data for Bohai on the OTCQB market is available through the below link. Readers are advised that OTCQB market is operated by the owner of otcmarkets.com, and Bohai Pharmaceuticals Group, Inc. makes no representation or warranty regarding the OTCQB market.

For real-time trading data for Bohai on the OTCQB market, including Level 2 quotes, please visit: www.otcmarkets.com/stock/boph/quote.

Cautionary Note Regarding Forward Looking Statements

This press release, the research report referred to herein and the statements of representatives of Bohai Pharmaceuticals Group, Inc. (the "Company") related thereto contain, or may contain, among other things, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact included herein are "forward-looking statements," including any other statements of non-historical information. These forward-looking statements are subject to significant known and unknown risks and uncertainties and are often identified by the use of forward-looking terminology such as "guidance," "projects," "may," "could," "would," "should," "believes," "expects," "anticipates," "estimates," "intends," "plans," "ultimately" or similar expressions. All forward-looking statements involve material assumptions, risks and uncertainties, and the expectations contained in such statements may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including factors and risks discussed in the periodic reports that the Company files with the Securities and Exchange Commission (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. The Company undertakes no duty to update these forward-looking statements except as required by law.

Company Contact:

Bohai Pharmaceuticals Group, Inc.
Gene Hsiao, Chief Financial Officer
856-499-4475

Investor Relations Contacts:

The Trout Group
Danielle Spangler
646-378-2924

Trilogy Capital Partners - Asia
Darren Minton, President
Toll-free: 800-592-6067
info@trilogy-capital.com

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