And the most significant reason for overhang on the shares comes from the company's recent conference call. In response to an investor question, the company responded that they did not rule out the possibility of issuing equity in 2010 in case any potential acquisitions came up. This has put a temporary cap on the stock price which creates a tremendous buying opportunity. After speaking with the CFO I decided to invest in Biostar, strongly betting that they will not issue equity in the near term or at these current depressed prices. First, the company is on the verge of uplisting. It should very soon be able to issue equity in the $8-10 range, not in the $4 range.
An equity issuance would clearly hinder the uplisting and management would be unlikely to do this no matter how attractive the acquisition. Second, I confirmed with the CFO Elaine Zhao that the company has adequate working capital to operate the business without raising any money at all, and the only reason to raise money would be if an acquisition came along. Third, Biostar just completed an acquisition which they are currently in the process of integrating. It would not make sense for the company to feel compelled to issue equity at very depressed prices to rush into another acquisition before the first one was fully integrated. Finally, in speaking with the CFO it is clear that the company does not have any acquisition targets currently identified. In other words, this current overhang is likely unjustified and creates a great buying opportunity. Had the company been clearer on this issue on the conference call, I think the stock would have rebounded strongly and would now be in the $4.50-$5 range.
The reason I bought Biostar is that once the share price stabilizes above $4 the uplisting should come quickly. In fact the $4 level is somewhat of a self fulfilling prophecy for the uplisting. To be specific, Nasdaq requires a closing BID price above $4 for seven consecutive days, it is not based off of the closing price. I spoke with the CFO and she confirmed that Biostar has already applied for listing and meets all of the corporate governance requirements including having the required number of independent board members. Once it trades on the Nasdaq, I would expect Biostar to trade on a P/E of at least 10x vs. 2010 numbers. Earnings for 2010 are projected at $18 million to $20 million. In the short term, I think a price of $8-$10 is more likely. That is a return profile roughly equivalent to how Wuxi has done over the past year, and is not unachievable. In the meantime, buying Biostar at prices below $5 is a gift that will not likely last very long.
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