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TheStreet Open House

China Drug Stocks Offer Value Remedy

Chinese pharmaceutical stocks are offering great bargains for value investors.

Pharmaceutical sales in China have been growing at an average annual rate of 15.5% since 2005. This growth is being fueled by rising incomes, a growing middle class and a rapidly aging population. The elderly population in China has grown from 171 million from 130 million over the past decade, and health care spending by the elderly is five times higher than it was in 2000.

In addition, Beijing has made health care one of its primary initiatives and plans to spend $123 billion on a universal health care in the next three years.

China's pharmaceutical industry is rapidly consolidating, and the market leaders are growing in value.

These leaders have several things in common: a strong nationwide sales and distribution network, strong research and development capabilities and access to capital.

Although some Chinese pharmaceutical companies trade with price-to-earnings ratios as high as 63, Lotus Pharmaceuticals (LTUS.OB) has a P/E of only 5.12.

You would expect a low P/E to be indicative of a stalwart company. However, Lotus Pharmaceuticals grew revenue at 59% from 2005 to 2008, and net income is up 700% since 2005.

The company's revenue comees from a combination of pharmaceuticals wholesaling and the development and sale of proprietary drugs. It plans to continue to grow by expanding distribution channels, expanding production capacity through the building of a large factory and bringing new drugs to the market by partnering with top research institutions.

We believe a company this cheap should not be overlooked. In summary, Lotus is a comprehensive company with both strong manufacturing capability and a nationwide distribution network, great research-and-development capabilities with a new drug pipeline and a very attractive valuation.

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