One Heckuva Cheap Stock

Would you pay nine times earnings to buy shares of a company growing 48% annually? What about six times earnings for a company growing by 50%? How about six times for a company growing at greater than 80% per year?

Are there any companies out there that actually look this cheap?

The answer is yes, but my guess is that you have no interest in owning them.

Of course, you claim you like cheap stocks
The problem? These three companies are Chinese, and each has given American investors pretty good reasons to be skeptical. The first is China Fire & Security (Nasdaq: CFSG  ) , a company that's been announcing new contracts left and right this month to install fire safety systems in power and industrial plants in China. However, it also came public via a questionable reverse merger, and its management team was featured in an unflattering light on Sharesleuth.com.

The second is American Oriental Bioengineering (NYSE: AOB  ) , a company that's been growing like gangbusters by using Western capital to consolidate the traditional-medicines business in China. It aims to become that country's Pfizer (NYSE: PFE  ) or Johnson & Johnson (NYSE: JNJ  ) . Yet many Americans are skeptical that these herbal remedies work. And despite AOB's impressive track record, they're also skeptical of the company's serial acquisitions, since it, too, came public via a reverse merger and once paid a stock promoter to hype its stock. In fact, when an 8-K released last week revealed that the company spent $70 million to purchase a building in Beijing, the stock dropped more than 20%.

The third company referenced above is China Security & Surveillance Technology (NYSE: CSR  ) , another serial acquirer in China that -- though it plans to become a branded-technology conglomerate along the likes of GE (NYSE: GE  ) -- suffers from a name and business line (supplying cameras for China's Safe City Initiative) that has American investors thinking the firm helps perpetuate oppressive communist totalitarianism.

All is not cut and dry
While each of these companies offers a compelling price and an enormous growth opportunity, on the heels of the Satyam Computer (NYSE: SAY  ) accounting scandal, it's difficult for American investors to be comfortable with foreign companies that may not offer the same level of transparency as their U.S. counterparts. Furthermore, many American investors feel uncomfortable with the prospect of investing in a company that they can't visit, that makes products they can't check out for themselves, and which is run by a management team that may not speak our language.

If that's you, you're missing out on some fantastic opportunities. But before we get to that, let's revisit the AOB 8-K that spurred a 20% sell-off.

Here's how it went down
At 5 p.m. ET on Jan. 9, AOB filed an 8-K announcing that it had completed a $70 million acquisition of "buildings occupying 14,615 square meters of office space on 22,008 square meters of land ... in the New Economic & Technology Development Zone in Beijing." The company further noted in the filing that it "intends to use the properties as a Convention and Training Center."

Soon thereafter, Piper Jaffray downgraded the stock, saying, "We feel the investment is a significant deviation from the intended use of capitals, which is to acquire pharmaceutical companies in China. ... As such, we see the management's decision as disappointing," and investors started selling.

But was it warranted?
Now, there are certainly some negative aspects to AOB's announcement.

First, it made a major acquisition, investing more than 40% of its balance sheet, without issuing a press release to investors. Second, buying a convention center doesn't seem to fit with AOB's goal of becoming a top-five pharmaceutical company in China. Third, paying $445 per square foot of office space in a real estate downturn is expensive.

Since the market was already on edge about Satyam's attempt to mask a $1 billion cash shortfall on its balance sheet with an acquisition, AOB was not given the benefit of the doubt here.

AOB got that message
Fast-forward to Friday, when the company issued a press release explaining that the building "is a long-term investment in AOBO which builds out our multi-functional headquarters and centralizes our management in Beijing, while deepening our presence in a very important development region focused on attracting leading pharmaceutical companies."

The company further noted, "While we have not always elaborated on our motivations at the time, due to economic, competitive and other reasons, we consistently and effectively have navigated China's complex economic and competitive landscape, and have created significant shareholder value in the process. We believe this property purchase is no departure from AOBO's proven past."

This "trust us" argument may not hold water with American investors, given that many of us are predisposed -- for good reason, in many cases -- to be skeptical of all things Chinese. But AOB does have a solid operating track record, and it has consistently reaped shareholder value from its acquisitions.

What could be the benefits here?
Moreover, the company could reap some benefits from this move. For example, a permanent office building in Beijing helps the company prove to the government of China that it is, in fact, a domestic Chinese company.

While that may sound silly, until now, in the eyes of the PRC government, AOB has been nothing more than a foreign capital corporation that leased some space in Shenzhen and was buying Chinese assets. While this was fine when the Chinese economy was humming along, the country's current slowdown has prompted its government to focus on supporting domestic consumption and domestic job creators.

In order to continue to benefit from reduced tax rates and be given the opportunity to acquire Chinese state-owned enterprises (SOEs), access capital from state-run Chinese banks, and benefit from the country's domestic stimulus plan, AOB likely needed to show that it was a major Chinese pharmaceutical maker. Buying top office space in Beijing does that.

Summing up
This is not to say that the AOB acquisition is cut and dried. The price still looks expensive, and if we believe that AOB will get benefits from having a permanent Beijing office, we need to keep checking up on the company to make sure those benefits are realized.

Not coincidentally, however, the company announced a few million dollars worth of savings on Tuesday, when it revealed that all of its subsidiaries would now be benefit from China's reduced 15% high-technology tax rate. (The company had previously paid a blended rate closer to 20%.) While there's no clear cause-and-effect relationship here, it never hurts to have a good relationship with the government.

When it comes to investing in China, there will be communication problems, there may be transparency issues, and there are business norms that may make Western investors initially uncomfortable. But remember, these companies are trading at absurdly cheap levels relative to their growth prospects. The opportunities in China are so tantalizing that it's worth the effort to learn more about them, and to invest in a diversified basket of carefully chosen opportunities.

Find those opportunities
At Motley Fool Global Gains, we travel regularly to China to meet with management teams and investors in the country to closely vet all of our potential ideas. After all, the reason that the market will sell you a 50% grower for six times earnings is because it's uncomfortable. If you can get comfortable with owning that stock, you stand to make a lot of money.

That's what we can help you do at Global Gains, and you can click here to see all of our top China stock ideas free for 30 days.

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of AOB and China Fire. China Fire is a Global Gains pick. Johnson & Johnson and Pfizer are Income Investor recommendations. Pfizer is also an Inside Value pick. AOB is a Motley Fool Hidden Gems recommendation. The Motley Fool owns shares of AOB and Pfizer. The Fool's disclosure policy is written in plain English.


Read/Post Comments (50) | Recommend This Article (335)

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 January 15, 2009, at 4:03 PM, turb0kat wrote:

    I own all of those :P

  • Report this Comment On January 15, 2009, at 5:16 PM, TMFMmbop wrote:

    kudos

  • Report this Comment On January 15, 2009, at 5:23 PM, greenwave3 wrote:

    AOB should be avoided like the plague. Insiders are playing games with your money. One prominent insider was known for pump and dump shemes with other companies. No surprise AOB hired somone to pump for them. Avoid and instead buy something of real value.

  • Report this Comment On January 15, 2009, at 6:44 PM, GoNuke wrote:

    greenwave3

    Such antics wouldn't surprise me. To be a successful investor in China you must be an insider. Pretending there is western style transparency in that market is folly. We don't even have western style transparency anymore. What happened to investors in the US in 2008 happens quite frequently in China.

    If you want to invest in China find a Taiwanese partner and build your own factory making things for export. Be prepared to pay a lot of bribes and don't be surprised if some of the people you bribe end up dead.

  • Report this Comment On January 15, 2009, at 6:53 PM, KnightThatSaysNi wrote:

    I'm sorry, I cannot accept any recommendations for Chinese companies, based on their data. I understand that there are great growth opportunities. However, the Chinese companies traditional keep two sets of books -- the real books, and the books that are shown to auditors. It is impossible to know which set of books you are basing your decisions on. Furthermore, foreign revenue (revenue in non-Chinese currency -- not RMB) is subject to 25% or higher retention by the Chinese government as a means of control of the economy. If there are questions about the performance figures, and questions about how any successes will be clipped to fund the Chinese government, it is ridiculous to recommend investment in this economy, except for hot/sizzle tip value. From a "clearly this is an under-priced stock" perspective, your recommendations are self-indicting.

  • Report this Comment On January 15, 2009, at 7:43 PM, FLGUY1 wrote:

    OK, so like the good little fool I am I bought AOB when recommended a few months ago. So what to do now? Sell and take my beating, or hold for a miracle return or further tanking? Ideas fools?

  • Report this Comment On January 15, 2009, at 8:46 PM, teejk wrote:

    I've been in finance for a large multi-nat consumer products company that has lost its butt in China over the years. I once asked our auditor (PwC) whether any legitimate company EVER made money in China...his reply was that "we do"

    ...nuf said...

  • Report this Comment On January 15, 2009, at 9:40 PM, SteveTheInvestor wrote:

    Yeah....not to seem overly harsh, but Satyam was once touted as an enormous growth opportunity as well. Face it, you can't trust much of anything.

  • Report this Comment On January 15, 2009, at 9:57 PM, dividendgrowth wrote:

    The only Chinese companies worth is investing in are China Mobile, CNOOC, PetroChina, and Sinopec.

  • Report this Comment On January 15, 2009, at 11:52 PM, trenton1ryan wrote:

    < So what to do now? Sell and take my beating, or hold for a miracle return or further tanking? Ideas fools?>

    Depends on how much you have left. If you're down over 50%, and it's no more than a few thousand dollars, roll the dice and just leave it alone. Otherwise, I'd dump it.

  • Report this Comment On January 16, 2009, at 1:47 AM, GoNuke wrote:

    Perhaps if those of us who have had experience in asia keep hammering away at the Motley Fools naivete regarding China -as in "People's Republic of", perhaps they will get the message.

    China only granted people the right to own private property in 2004.

    Subjecting Chinese companies to the same forms of analysis as you would a US company is unrealistic.

    I wouldn't buy Iranian government bonds either.

    These are countries that make up written rules as they go along and abide by some very old unwritten rules that only apply to insiders.

  • Report this Comment On January 16, 2009, at 2:50 AM, JakilaTheHun wrote:

    My thought in dealing with companies in nations where transparency is an issue is that it can be worthwhile, but only if you diversify well and discount the equity based on a higher level of risk.

    I took a look at AOB and it doesn't look all that terribly cheap to me based on those standards. Its trading around book value, free cash flows have been somewhat inconsistent, but I would assume an average of about a quarter per share per year --- that probably makes it worth somewhere in the $6-8 range, but I'd discount for economic uncertainty and lesser transparency and then, you end up about where the price is today. Plus, I'd keep away from companies marketing "herbal remedies"

    As to CFSG --- there's this:

    http://sharesleuth.com/2008/03/china_fire_security_group_inc...

    CSR is the most promising of the bunch, but I'd have to look into it further to form much of an opinion.

  • Report this Comment On January 16, 2009, at 8:43 AM, 181736065 wrote:

    Best to invest in an index or mutual fund for most of this this foreign country stuff.

    Sadly, the good, hard working folks at the "Fool" can be fooled. Lot's of crooks and lying scum in these foreign countries.

    It's now been proven that the Fool was fooled with their recommendations of AOB and SAY.

    (I don't trust AOB and promises of exponential growth sound suspicious to me since Bernie did his number.)

  • Report this Comment On January 16, 2009, at 8:50 AM, catoismymotor wrote:

    China is run like in an organized crime syndicate. I would no more trust a Chinese company with my money than someone that calls himself Fat Tony.

  • Report this Comment On January 16, 2009, at 9:20 AM, Schwaggz wrote:

    From a news article from China i read (i had translated by a chinese speaker at my office) Gushan is suposedly similary dishonest with their numbers. Again another small chinese company supposedly doubling in size every year.

    In this case its either the company that is being dishonest, or the author of a financial article. Either way, both are from China.

  • Report this Comment On January 16, 2009, at 9:28 AM, TMFMmbop wrote:

    Thank you all for proving the point here.

  • Report this Comment On January 16, 2009, at 10:42 AM, Sinfest wrote:

    AOB almost literally sells snake oil. Say whatever you want about the numbers, but at the end of the day, the business model is predicated on selling "herbal remedies" which are proven to do anything. As the Chinese get less superstitious (I assume they will), the revenue will evaporate.

    You guys are insane for constantly pumping this stock.

  • Report this Comment On January 16, 2009, at 10:43 AM, gswood67 wrote:

    AOB increased their stake in the market by buying property. This gives them credibitliy within market as a longterm player. It will also provide another source of revenue and bargining power within the Beijing? They had the money and the oppurtunity to get in deeper. Looks like a smart long term move.

  • Report this Comment On January 16, 2009, at 10:43 AM, Sinfest wrote:

    Sorry, that should be "which are not proven to do anything" in the above comment.

  • Report this Comment On January 16, 2009, at 11:47 AM, kayakmastr wrote:

    It would be helpful if the xenophobic comments were backed up by data and verifiable examples.

  • Report this Comment On January 16, 2009, at 11:50 AM, kayakmastr wrote:

    AOB sells snake oil? Acutually pharmaceutical researchers in the US screen herbal remedies looking for the active ingredient to market at a high profit.

  • Report this Comment On January 16, 2009, at 2:46 PM, ahoythere wrote:

    AOB payed a stock promoter to hype their stock... sounds like ordinary affairs of business. Had they IPO'd at $15 and found themselves today at $4 would that have been better I wonder?

  • Report this Comment On January 16, 2009, at 4:45 PM, catoismymotor wrote:

    Kayakmastr, I have no fear of so-called aliens. I have foreign stocks in my portfolio. The issue has to do with the business culture. You will run into a few of the same obstacles found in China if you should conduct business in parts of Louisiana.

  • Report this Comment On January 16, 2009, at 6:33 PM, rayincorporated wrote:

    Catoismymotor, the Louisiana comment is classic and hilarious. Based on the Ponzi schemes and traditional "cooking of the books" that has always occurred stateside, it makes sense to discount for additional risk but oh the upside opportunity.

  • Report this Comment On January 16, 2009, at 6:54 PM, bougnoul wrote:

    two books at crooked places?

    Would you have me put money with Madoff, Kenny boy, Global xing, Tyco, Bear-Stearns, Morgan, Citi, AIG, GM,F, GS,NT, A,,GE, MSFT,......ohpleaze, name me a few who can throw stones?

    Or is it that my b/s is anytime better than brownies'?

    From my vantage point, I am trying to recover my hard-earned cash I dolled out US companies. They are all crooked. Unless, you change rules: mandatory dividend. But then you would scream it ain't looking like Las Vegas no more.

    -bougnoul

  • Report this Comment On January 18, 2009, at 8:15 PM, NotJesseL wrote:

    If you can't understand the business. stay out of the stock. I submit that it is very difficult to understand Chinese business because they have an even greater risk of government stepping in and doing things that investors don't like than in the US, where we've seen the risk ain't zero by a long chalk.

    I don't understand regulation in the US let alone in China, so what do we really know about these companies. I invested in PetroChina, made some money and got out when I heard they were subsidizing the war in Sudan. Buffet got out a few months later.

    At any rate, I would keep my percentage allocation to this type of thing down in the single digits.

  • Report this Comment On January 18, 2009, at 8:54 PM, GorillaGorilla wrote:

    America means west in China. Oriental means East. AOB is selling American and Chinese medicine. AOB will sell both - not only snake oil. Even if you don't believe that Chinese medicine works the customers, the Chinese, do.

    The RPC requires that the health of one and 1/4 billion people to be improved - the improvement will benefit the economy - as it would in any nation. Perhaps you think a shell company can deliver this? I doubt it.

    The RPC require companies that can scale up and compete on a world stage - the Chinese don't want Johnson and Johnson selling products to China. They want a Chinese company selling to the Chinese health care system and indeed to the rest of the world. This will create Chinese jobs and taxes that can be paid to the state.

    The competition in China is weak - lots of state run companies. Any efficiently run, Western styled, company can out compete and expand in a massive market. You don't need to cook the books the opportunity are massive and laid out in front of you.

    Any health care system buying medicine must be happy that the company they are buying from provides high quality products from a reliable company - dead patients aren't very good for repeat business. If the Chinese can't produce high standard health care business then they will miss out on one of the largest markets in the world.

    So, look no further than Mindray which is expanding in the medical devices space by offering similar products and half the price of western products it is making inroads throughout the world. I doubt it will be the last Chinese medical firm to achieve this - CSKI and AOB would seem to be two companies that are trying to do the same for medicine.

    Good luck to all

    rich

  • Report this Comment On January 20, 2009, at 9:07 PM, jtmacker wrote:

    I would like to go over there and set up an old x-ray machine and give these guys an x-ray. Then sell them snake oil out the back; We'll call it ? and then sell it at the same time getting someone to hype it.

  • Report this Comment On January 23, 2009, at 3:41 PM, ruforeal wrote:

    Hey, nobody said spend the farm money, just make a small investment. Take a risk, be American!!!!

  • Report this Comment On January 23, 2009, at 4:01 PM, nonameyouwont wrote:

    Do you think it is American to by a Stock you know is going DOWN and lous you money. I think that is STUPED. so if you think that is American I don't wont to be in you fanic lind. JIM

  • Report this Comment On January 23, 2009, at 5:07 PM, hillbillydeluxe wrote:

    nonameyouwont

    You need to stay out of the stock market all together and go back to school and learn how to SPELL!

  • Report this Comment On January 23, 2009, at 5:24 PM, britpick wrote:

    I'm sure many of you cynics have good points, but one of the key differences between AOB and many of the others you read about in these promo's is that The Motley Fool has actually put its money where its mouth is and bought stock of this company.

    I realize that in itself this is not a good enough reason to invest, however, I have to believe that the appropriate due diligence has been done by the Fool prior to this investment and that it is not just another advertising enticement full of false hope and promise.

    The value of TMF is from the boards and discussions and opinions of others that encourage one to investigate further prior to investing, it is not from people who descend into infantile abuse. Can we keep it constructive please (yes nonameyouwont, I'm talking to you).

    I am thinking of taking out my second third in AOB, but will pay appropriate attention to the research and to the wisdom of many on the TMF boards vefore finalizing that decision.

    Best regards

    britpick

  • Report this Comment On January 23, 2009, at 5:43 PM, Scones wrote:

    Sutor (SUTR) will be a huge winner over the next several years in my opinion. Trading at a discount, growing at a 53% clip and staring down a $586 billion infrastructure stimulus package. Stocks like this don't come along very often.

  • Report this Comment On January 23, 2009, at 8:08 PM, bozobills wrote:

    At this point in time I'm not so sure that it's not the US companies that one has to question with reguards to honesty! I for one have no problem investing in asian /chinese markets, in fact they are the ones that are consistantly payin the bills so to speak!!

  • Report this Comment On January 23, 2009, at 8:25 PM, asiawiz wrote:

    I've been involved in Asian investment banking since 1992 and I have seen and heard them all.

    AOB is making "investment" in this tough times to show that they are committed to China but there are so many layers of political BS, person that AOB is "paying off" through purchase of this building, may not exist tomorrow. Better yet, he or she could be replaced by central gov't next week. Did AOB consider leasing the building instead of purchasing it?

    For those that want to learn more about how China works, do yourself a favor and go buy a book titled "Mr. China" by Tim Clissold. It will tell you everything you want to know from person who experienced it first hand and almost died doing it.

    Back to AOB.. Everything has a price but why buy something when there are plenty others without "hair"? Heck, buy GE...

    If you are long, cut your losses before you really look like a fool.

  • Report this Comment On January 23, 2009, at 11:48 PM, paulcmurray wrote:

    How I wish for a Fool Mutual Fund. I'm a lousey stock picker.

  • Report this Comment On January 24, 2009, at 12:15 AM, ShadowLogistis wrote:

    The only thing I can say is I picked SIRI to win and the Fool picked AOB, both are down almost 50% from when I bought them. The Motley Fool is only hocking their products so they can sell stocks to us. We listen and buy and we lose and we pay TMF to do it. I pick losers as well as TMF so if I must lose atleast it will be my own picks form here on out

  • Report this Comment On January 24, 2009, at 1:37 AM, hkappes wrote:

    Beware foreign companies. I held ACLN to zero. It was written up by the Fool as being a great bargain also. It was listed on the NYSE and was no penny stock. I have gotten good stock ideas from the Fool but you really have to do your own research.

    SEC Sues ACLN for Alleged Fraud

    By Neil Roland

    October 09, 2002 in print edition C-13

    ACLN Ltd., a Belgian-based company that maintained its U.S. investor relations office in Los Angeles, was charged Tuesday with “an exceptionally bold and elaborate financial fraud” in a Securities and Exchange Commission suit.

    The transport firm, which said it shipped used cars to Africa from Europe and sold new cars in Africa, was “little more than a shell company” whose executives defrauded investors of millions of dollars by cooking the books from 1998 to the third quarter of 2001, the SEC said.

    The company’s stock, which traded on the New York Stock Exchange, was suspended in March by order of the SEC–the first time the agency had ordered such a halt for a Big Board stock since 1975.

    ACLN reported profit of $42.4 million on $168 million of revenue in 2000, much of which it credited to a new-car exporting business that never existed, the lawsuit contends.

    The company never owned a car-carrier ship that it said was its largest physical asset, and reported $117 million in bank deposits last year when its balance was less than $2 million, the SEC said.

    ACLN’s shares, which traded as high as $50 on the NYSE in September 2001, fell 5 cents to 25 cents Tuesday in over-the-counter trading. The stock once was recommended by brokerages including J.P. Morgan Chase.

    The SEC also filed charges against three former executives who it said controlled the company and exploited the fraud through stock sales. The executives–former ACLN Chairman Joseph Bisschops, former Chief Executive Aldo Labiad and former Chief Operating Officer Alex de Ridder–sold $80 million of company stock at inflated prices, the suit alleges.

    Bisschops and de Ridder also are targets of criminal money-laundering investigations by Belgian authorities, SEC assistant enforcement director Richard Sauer said. Bisschops is a fugitive, and Labiad and De Ritter live in Belgium, he said.

    It is not clear if ACLN and the three former executives will contest the U.S. civil fraud charges, Sauer said. Lawyers for the company and Labiad didn’t respond to requests for comment. The two other defendants don’t yet have attorneys, the SEC official said.

    The SEC and other authorities have frozen $45 million in bank accounts in Denmark, the Netherlands, Luxembourg and Monaco. The agency said it will try to distribute this money to defrauded shareholders, many of whom live in the United States. It also is seeking to fine the defendants.

    In addition to suing the ACLN executives, the SEC said it settled civil fraud charges against the Cyprus affiliate of BDO International, ACLN’s former auditor, and two former BDO partners.

    They failed to conduct “even the most basic audit procedures,” the SEC said. ACLN is incorporated in Cyprus.

    BDO agreed to pay $62,196 of fees received from the company, and BDO’s partners–Minas and Christakis Ioannou–accepted a permanent ban on auditing public companies trading in the U.S., the SEC said. The Ioannous did not admit or deny the charges.

  • Report this Comment On January 24, 2009, at 4:22 AM, Nigelph wrote:

    Enron, Global Crossing, Citibank, Bear Sterns ,AIG, Merryl, Madoff, TARP, Blagojevich, - yep you Americans are sure right to distrust the rest of the world!!!!!!

  • Report this Comment On January 24, 2009, at 6:25 AM, johnnyg67 wrote:

    to britpick--as a novice,what did you mean "taking out my second third"

  • Report this Comment On January 24, 2009, at 8:13 AM, FRINEDOFFOXY wrote:

    Your recs from the oil patch sound like sure bets. But, if you are counting heavilly on supply & demand guiding you then watch out. Supply & demand did not power us to $144 a barrel. Nuts to that you say? Well, when I was paying 4 bucks a gallon for gas, I never saw a single station with empty tanks. All had a plentyfull supply. What I did see though was rapidly changing prices & two stations on the same corner sporting wide differences in price. That tells me that old fashioned supply and demand was not the driver -- rather it was greed and speculation. When the G&S driven bubble bursted, prices went south rather quickly didn't they? As for the patch, it is ok to get in early, but don't stay late once supply and demand drives prices to insane levels.

  • Report this Comment On January 24, 2009, at 10:53 AM, goldjunky wrote:

    Every one is so affraid of SAY fore what happened now the gov. has taken the reigns and are bringing a new CEO & CFO. The Co. isn't bad, it was two people that did this. I was ooking at the stock and it looks fine to me, but what do I know. Rt ow just grab it and hold on, fore it be a little while before it grows again but when it does you will reap all the rewards for time.

  • Report this Comment On January 24, 2009, at 12:53 PM, 44humble wrote:

    The CEO of AOB owns roughly 40% of the company, so he has the most to lose. If TMF went to China and checked out companies, and has invested in AOB then I would feel pretty sure they checked this one out. The dont just produce herbal remedies, they produce prescription medications that have been approved by china, mainly a respiratory infection medication. China believes in plant produced medicines. Basically a large majority of medications here basically took those plant derived medications and reproduces them synthetically. Asprin was derived from the bark of a willow tree. The chinese choose to do this differently than we do, and that choice is due to market demand. Will it change, yes. Over a very long period of time it will become less expensive to do it differently. But now is not that time. China's stimulus is much focused on health care with major constuction of hospitals, which use AOB products. The government will also limit the amount of money that can be made from the sell of drugs, the increase in market demand will offset this to a degree. The real question here is..will aob products be covered by China's new health program. Already competitors have posted decrease in revenue due to a product that was not covered in this program. The people had to pay out of pocket for the product. And secondly, will the government set the amount that can be charged for these products through their health program. Look at AOB's board. They have alot of folks there with heavy infuence, lots of former chinese regulators, former government folks. People experienced in navagating the chinese way of government. With growth in China down, it will be more difficult to sustain the growth they have had. But what options are there...with a 6% growth rate, we are drooling over, thats still growth. And pharma's are better geared to handle a downturn in growth than other industries. just my humble opinion.

  • Report this Comment On January 25, 2009, at 8:50 AM, SunnyJames wrote:

    The info here is good, but a little proofreading - maybe a spell-check or two - is in call for some of us, eh?

  • Report this Comment On January 25, 2009, at 12:50 PM, GorillaGorilla wrote:

    AOB did not overpay for the space. According to this report - for Beijing Industrial market the price of Industrial land is $16.21 per square foot. BTW 2007 prices!

    http://www.asiapacintl.com/PDF/mkt_reports/2008/Beijing_Mark...

    If AOB wanted to leasing 157,314 at 16.21 for 50 years - and assuming no growth in lease prices - it would cost $127 million. Yep, half price. More realistically, since Y/Y for leased land in Beijing 2006-2007 is 7% it's actually extremely cheap indeed. For instance if we assume 2% growth in rental rates then someone in 2050 will be leasing the same space at $6.8 million a year.

    The analysts even knew that the space is being used for R&D - as well as management and "training" - here is the transcript from August of this year. At this point they were considering buying but clearly they changed their minds.

    http://seekingalpha.com/article/91604-american-oriental-bioe...

    Julie Chen – CRT

    So, in terms of this land, Lily mentioned that this is an investment in an R&D facility in Beijing. Is this an R&D or is it more an operational centre or is it more an administrative office, could you –?

    Anindya Chatterjee

    Katherine, let me jump in. This is Anindya. Hi. I think we need to tie this to the big picture of the company. And it will result in long-term cost rationalizations and productivity gains through various ways. There is room for centralization of R&D, administrative functions, and also management training. Bear in mind, the company has not made significant investment on infrastructure thus far. Most of our facilities are leased. This is a long-term commitment of the management towards taking – Beijing is strategically important location and we want to have our presence there. The company's decision is also considering the owning versus leasing argument, and I think given the current rent inflation in Beijing in particular, it makes sense to have a longer term commitment and own rather than lease. That's our perspective.

    So, Piper Jefferies who were their at a conference call 6 months ago were this was discussed and only now they decided to downgrade? The price they paid for the land was very cheap anyway and it still led to a tax break.

    The average S&P company has a P/E of 20 and it's in the middle of a recession. Interestingly, all the Chinese Medical stocks are sold off much, much, harder than that. They all have a P/E of less than 10 but the chinese health sector is continuing to grow....

    Note: fool.com p/e seem to be slightly lower than yahoo.

    AOB p/e 6.3 34%

    CSKI p/e 6.5 (No Est but previous EPS growth is 256% )

    CMED p/e 8 Est Growth 21%

    MR p/e 17 Est Growth 25%

    SSRX p/e 14 Est Growth 60% $6 in cash on a $5.50 stock!

    If you are interested in this sector then you want to look at Chinese health spending rates and in particular the 3 year rural health initiative, finally the rural population (40%) will get basic medical coverage - we are talking $123 billion spent by 2011 [1].

    AOB's move was to make sure they get a slice and they are not alone if you read CSKI ceo talking about the opportunity [2]

    Good luck all

    rich

    http://www.iht.com/articles/2009/01/22/asia/beijing.1-413337... [1]

    http://www.quamnet.com/newscontent.action?articleId=1103766 [2]

  • Report this Comment On January 25, 2009, at 3:49 PM, britpick wrote:

    Reply for JohnnyG67

    Johnny,

    You asked what I meant by "taking out my second third". One of the approaches that the Fool recommends is that you build your position in thirds, ie in three parts, rather than invest a position all in one go. So I currently hold about one third of where I expect my final holding in AOB to end up, I will be buying my second third this week, and (subject to market conditions) will buy the final third at a future point.

    If you are a novice I suggest you head on over to the Investing Beginners discussion board on the fool website.

    Best regards & good luck

  • Report this Comment On January 28, 2009, at 2:04 AM, Asienexperte wrote:

    As for the implied criticism of Chinese companies that list on the stock exchange via reverse merger: a reverse merger (i.e. the setting up of a foreign holding company and buying out the Chinese operating entity with CASH, after which the holding company goes public) is currently the ONLY legal way for a Chinese company to go public overseas.

    The things that matter instead are quality of management, quality of the business model, and quality of earnings. Clearly, these quality aspects are difficult to assess for outsiders - but that applies to companies everywhere.

  • Report this Comment On January 28, 2009, at 9:51 PM, Careful99 wrote:

    I suspect the reason the building was a bit expensive was that some significant chunk of the price was a bribe to whoever subsequently cut the company's tax rate. Not a bad deal by Chinese standards. But I won't be rushing to invest. Management's attitude toward investors isn't likely that they really want to create shareholder value; they want to appear to do that so that they can stay in business using your money. The rules can change overnight over there; very possible to see the company taken over and all stock frozen or disavowed. Put your money in the mattress first.

  • Report this Comment On February 02, 2009, at 6:31 AM, GorillaGorilla wrote:

    --- I suspect the reason the building was a bit expensive --- was that some significant chunk of the price was a --- bribe to whoever subsequently cut the company's tax --- rate.

    Hello Careful99,

    Can you justify why you think they overpaid? I have argued that it's cheap.

    rich

  • Report this Comment On February 03, 2009, at 2:13 PM, polo1000 wrote:

    To be sure there are issues in China that we would want to be exceedingly cautious about. However, the only issue much of this discussion highlights is that racism is alive and well in America. I'm quite happy to capitalize from some left over cold war mentality and get cheap stock. After all, I don't care if all Americans make money, I'm only concerned that I make money. Certainly, I will have to do some homework and be very critical about my China picks, but as Warren Buffett has said, "A public opinion poll is no substitute for thought."

Add your comment.

DocumentId: 811209, ~/Articles/ArticleHandler.aspx, 7/28/2014 3:31:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement