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Small-Cap China Pharma Stock Could Double

Stocks in this article: CPHI PFE

BOSTON ( TheStreet) -- TheStreet's stock model boosted China Pharma Holdings' (CPHI) rating to "buy" yesterday. The shares have dropped 19% this year, creating an opportunity to invest in a thriving company in one of the fastest-growing economies in the world.

China Pharma makes medications, health products and chemicals for hospitals in China, whose gross domestic product rose 10.7% in the fourth quarter. Last year, the company's profit increased 13% and revenue climbed 21%.

Two other analysts cover China Pharma, both rating its shares "buy." Rodman & Renshaw (RODM) expects the stock to soar 94% to $6. Roth Capital Partners expects the stock to hit $5.50, a potential 77% gain. TheStreet's model predicts the stock to rise to $4.08. This is a small-cap that deserves a closer look.

The stock, which has a beta of 2.5 and a market value of $135 million, has fallen 2% since it started trading on the NYSE AMEX on Sept. 30. The S&P Pharmaceuticals Index has jumped 23% during that time.

Fourth-quarter profit declined 4.7% to $5.1 million, but stalled at 12 cents on a per-share basis. Revenue grew 27%. Its gross margin narrowed from 50% to 39% and its operating margin shrank from 40% to 29%. Profit suffered as it sold more low-margin drugs. Still, a net margin of 26% exceeds the industry average and that of industry giant Pfizer (PFE).

China Pharma's quarterly return on equity of 22% and return on assets of 20% are impressive. The company boasts outstanding liquidity, with $3.6 million of cash, equating to a quick ratio of 5.2. It has $3.8 million of debt and a debt-to-equity ratio of 0.1. Digestive products, whose sales doubled in 2009, is a promising growth category.

Clinical trials of Candesartan, an anti-hypertension drug, were completed on Jan. 21. The Chinese government plans to provide health care to 90% of its citizens by year-end. Candesartan will be listed in China's National Medical Insurance Catalog, so patients will be reimbursed through China's revamped coverage system, boosting sales. Health care reform could also signal a wave of industry consolidation.

"We believe the changes may cause attractive acquisition opportunities to appear," Chief Executive Zhilin Li said in the company's latest quarterly release. "To that end, we are monitoring the market for strategic opportunities to take advantage of the current fragmented nature of the industry."

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