This Chinese Stock Is in a Rut

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It was another disappointing quarter for American Oriental Bioengineering (NYSE: AOB  ) shareholders as the company fell short of expectations for the fifth straight quarter. The familiar trend of rising revenue and falling profit continues to hold true to form.

Revenue was up 16.1% to $91.5 million, but gross margin fell to 51.7% from 56% in last year's third quarter. Net income was down nearly 50% to $13.1 million, or $0.07 per share.

The reduction in net income was due to higher costs across all operating expenses, especially in research and development. R&D costs increased to $4.7 million as the company builds its own product development capability.

Those worried about constant share increases at Chinese firms will be happy to note that share count has been virtually flat over the past year, and the company ended the quarter with $92.5 million in cash. That is nearly half of the company's market cap of $202 million.

R&D is supposed to bring growth and better margins, but AOB has a long way to go to prove that the investment in R&D will pay off. For the time being, all investors see is falling net income and gross margin as R&D costs increase.

If you're looking at shares, value is definitely there with a price/book value of 0.55, but beware of the risks. Chinese companies have a history of restatements, allegations of misleading the SEC, and rumors of evil management. Fuqi International (Nasdaq: FUQI  ) and Motley Fool Global Gains pick China Green Agriculture (NYSE: CGA  ) have both been on a roller-coaster ride lately because of supposedly shady accounting.

China Green Agriculture has been in limbo since investors found out about allegations of misleading statements last month, which crushed the stock. AOB has had its own problems having to restate earnings in the past as well, so it's something to be aware of.

Be careful with this one. American Oriental Bioengineering may look like a value, but investing in this Chinese company isn't for the faint of heart.

Interested in reading more about American Oriental Bioengineering? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

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Fool contributor Travis Hoium owns no shares. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

China Green Agriculture is a Motley Fool Global Gains recommendation. The Fool owns shares of China Green Agriculture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2010, at 10:33 PM, Clément wrote:

    I keep my share just because Mr Liu is a major shareholder.

    He should know what is going on !

  • Report this Comment On November 12, 2010, at 5:32 AM, mattm09 wrote:

    What you should know: I think you are involved with Alfred Little and others who are involved in fraud by spreading lies to manipulate stock prices. I have submitted two SEC complaints concerning this (CGA and RINO). These financial terrorist acts have been occuring in many Chinese Stocks (ONP). They go from one to another. It is always the same MO. They always follow up with scam lawyers doing an "investigation" and asking for "lead plantiffs". Why don't you report the facts instead of reporting in such a way as to lead credence to their criminal activity. On my next complaint to the SEC, I am going to include your name in the complaint because you seem to be assisting their efforts.

  • Report this Comment On November 12, 2010, at 7:10 AM, GoldenTara wrote:

    Agree with the last poster.

  • Report this Comment On November 12, 2010, at 7:16 AM, GoldenTara wrote:

    Motley Fool is treating this stock as if the company is making losses and has huge debt. Neither is true. It is still a very profitable company with low debt and excellent PE. Plus owner has got his skin in the game. Trashing of this stock needs to stop at Motley Fool. Do not engage in innuendo unless facts on the ground justify it.

  • Report this Comment On November 12, 2010, at 8:24 AM, tototruffa62 wrote:

    re:CGA posts

    Well said and done (!)

    On yahoo boards I several times invited US residents to report this scam activity to the SEC.

    What's unbelievable though, is such inability, unwillingness, to treat the matter at MF' side..

    and for such a pluri-recommended stock with a bright future (!), advised not only to GG subscribers but all TMF investors through "China trip" reports (not earlier than last summer..

    Now it's time to show that our money is well spent..(subscriptions I mean)

  • Report this Comment On November 12, 2010, at 10:45 AM, GoldenTara wrote:

    I cancelled my Motley Fool subscription. It is a useless website.

  • Report this Comment On November 12, 2010, at 2:43 PM, Clément wrote:

    Restatements from AOB was very small !

    Why mention it ?

  • Report this Comment On November 13, 2010, at 2:23 AM, beobob wrote:

    My take away is that nobody knows what is going on at unless you work in their mgt. team or have a relative that does, I'd leave it alone. maybe the MF has some info as they have been to visit??

  • Report this Comment On November 14, 2010, at 12:29 AM, Clément wrote:

    For AOB, inventories were down from june 30, 2010 ; % accounts receivable went up just a little bit more than sales ; Comprehensive income went up very much.

    So, the news in not all that bad

  • Report this Comment On November 16, 2010, at 11:53 AM, Patrick856 wrote:

    AOB was once the darling of Motley Fool. After the bottom fell out, MF moved to distance themselves from a losing stock. That's all there is to it.

  • Report this Comment On November 17, 2010, at 10:15 AM, mirecek78 wrote:

    AOB is cursed. I sold all the shares at a loss. My patience ran out. Farewell, AOB - you had your chance with me. :)

  • Report this Comment On November 19, 2010, at 2:05 PM, jamespeer wrote:

    I completely agree mirecek78!! Anyone who holds or has held AOB stock knows that it is a complete junk POS! Same with all the other lousy chinese ADR's, they have conned us all, APWR, CGA, HEAT, FUQI, etc all frauds! Rising revenues and falling net income for five consecutive quarters!? Tony Liu holds three senior management positions when there should be three separate directors, he is as shady as they come!! My advice to investors is don't be fooled by the word 'China' in a company name or description, 9 times out of 10 that means stay the hell away!!!

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