Sihuan

Hi Kids (Kit),

Visited your homepage and like your ideal on picking value stocks. Can you share with us your view on Sihuan? Have been holding this one since IPO and recent price is side way, Please share your view on what is the potential up side of this company and how soon.

Regards
Kah

Kit's response:

Thank you for following my share investment blog. Sihuan has been one of my favourite holdings to-date:

Reasons:

1. Key growth driver product has very strong position in the market.

Kelinao has been a star performer. Sales nearly doubled YoY. There is very strong barrier of entry and there is no readily available substitute for such drug in the market.

2. Strong R&D capability

The Company has a very strong R&D team and has collobaration with research centres and universities. Currently, they are developing 6 Class One which have not been marketed in the world. Due to its pioneer position, its not hard to obtain government grant to fund the R&D. The Company has also reinvested 15% to 20% of its revenue in this area vs 1% for most other drug companies.

3. Highly cash generative

The Company has no borrowings. Its strong cash position allows M&A activities which is likely to complement and strenghten its current market position. Over the past few months, the Company has been buying some rights of drugs for future developments. The Company has also committed to be paying not less than 30% of its profit after tax and MI as dividend for FY2007.

4. High profit margin and ROE

CV drugs alone accounted for 72% of its revenue and this group of products command profit margin of 86%! Overall profit margin is very high at 66% and ROE > 60%.

5. Expanding distribution network

It is aggresively growing its hospital and medical centre network from the current 3,550 to 6,000 over the next 2 years. This will provide strong platform for future revenue growth.

6. Many strong and consistent new drugs in the pipeline

Most recently, sodium ozagrel drug has been approved for manufacturing and commercial launch. There are many more to come. You may refer to their website for more technical information.

7. Strong instituitional support

Dubai Ventures and Lehman Brothers have been supporting it since IPO.

8. Favourable industry

Sales continue to be on the uptrend for its CV drugs. The new regulation that came into effect should benefit the Company as it would improve the drug industry image after many fake drug scandals in the last 2 years. The approval by China State Food & Drug Admin also further endorses its quality and make the drug procurement procedure more transparent in general.

In my personal opinion, I think Sihuan is undervalued at the moment as most analysts have target price > $1.30. Should current market sentiments improve, the share price can easily double from the current levels. I believe it has all the ingredients to be a multi bagger in time to come. When? Only heaven knows. If I had the answer, I would not be writing this.

I will continue to collect when the price drops lower. Lets see what will happen by end of the year.