Two Undervalued China Pharma Stocks

NEW YORK (TheStreet) -- Two China pharmaceutical stocks China Sky One Medical(CSKI) and Skystar Bio-Pharmaceuticals(SKBI) reported robust earnings for the second quarter ended June 30. The stocks gained 4.2% and 11.5%, respectively, on the day the results were announced. Surprisingly, since then, China Sky One Medical has shed 12.8%, while Skystar has declined 16%. As there were no unfavorable developments that took place within these companies, one could imagine that investors preferred exiting the stocks on a rally.

This decline compares to the 5% drop of the S&P 500, a 4% decrease in Bank of New York (BNY) China ADR Index, and a 3% fall on the NYSE Arca China Index during the same period. Both BNY and Arca China Index track the performance of China ADRs listed on the U.S. exchange.

The drop in stock prices offers investors an attractive buying opportunity. Moreover, these stocks seem to be relatively undervalued as they are trading at PEs of 4.27 and 4.47, respectively, lower than peers such as Pfizer(PFE), Merck(MRK) and Novartis AG,(NVS), which are trading at PEs of 12.88, 8.29 and 12.50, respectively.

China's pharmaceutical market, currently the sixth-largest globally, is valued at more than $25 billion and is expected to rank third by 2011, based on the IMS Health estimates. According to a report by Pharmaceutical Drug Manufacturers, China's pharmaceutical market is expected to grow at more than 20% annually, contributing 21% to overall global growth through 2013.

During the second quarter, China Sky One Medical reported adjusted earnings of 60 cents per share, topping analysts' estimates of 53 cents per share. Revenue grew 26.7% year-over-year to $40.76 million from $32.18 million. The company does not have any debt obligations. It did not provide an update on its FY 2010 guidance as it is currently in contract renewal discussions with a few distributors.

On August 31, Global Hunter Securities maintained a buy rating on the stock, lowering its price estimates from $20 to $15 on concerns that the negotiations with distributors may not necessarily yield positive results.

However, the company has already been addressing this issue by training a professional team to better co-operate with its distributors. It is also creating new policies and incentives to encourage better performance by the distributors.

Skystar Bio-Pharmaceuticals, on the other hand, reported earnings of 33 cents per share as opposed to a loss of 3 cents per share a year ago. Earnings more than doubled from the previous quarter. Analysts expected the company to report earnings of 29 cents per share.

Revenue soared 32% year-over-year to $8.26 million. For the full year, the company reaffirmed its revenue guidance of $45.5 million to $47.5 million. On August 23, Rodman & Renshaw reiterated a market outperform rating to the stock with a price target of $15, implying a 56% upside over the current levels.

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