There are two main risks. The first is competition. Although foreign chains are shut out due to regulations, China has an amazing 350,000 pharmacy locations, more than one for every person in the U.S. Large, well-known chains like Nepstar, Tian Tian Hau Grand Pharmacy and Lao Bai Xing Grand Pharmacy all compete in Hanzhou. Most pharmaceutical sales, about 80%, are through state-run hospitals. Such intense competition makes it unlikely that Jo-Jo can maintain over 20% operating margins. Expansion in stores will inevitably come with slimmer margins.
Second, there is the general bad vibe around these reverse-merger China small-caps. They are easy targets for short sellers, who can move the issues 30% or more by alleging fraud of some sort on a blog. We've seen this in Magic Formula Investing (MFI) with stocks like China Sky One Medical (CSKI) and Universal Travel Group (UTA). The risk has often been compensated with very low price-earnings multiples, and China Jo-Jo is actually one of the more expensive ones with a forward P/E of about 5.4.
There are no existing fraud allegations, as best I can tell, but the stock just started trading this year. The auditor is Frazer Frost, who also audits several other similar firms in China and does not provide much protection against shorts. The company does have some short-term loans from Hangzhou Bank, although they are secured by the "personal properties of the Company's shareholders," instead of the firm's assets. For what it's worth, China Jo-Jo does have a decent Web site and over 1,300 Facebook fans.
For MFI investors, China Jo-Jo should be treated as a speculative position with a limited amount of risk capital. The growth potential is huge, but the barriers are high, and the risk of the stock tanking due to shady allegations is very real. MagicDiligence believes the former outweighs the latter, and I have a "buy" opinion under $5.The writer has no positions in any of the stocks discussed in this article.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV