Huifeng Bio-Pharmaceutical (HFGB)
posted by The Traveller on Sunday, March 07, 2010
Huifeng Bio-Pharmaceutical (HFGB) is the leading Chinese producer of rutin and related plant-derived chemicals for use in pharmaceutical, nutraceutical and food production. For the first nine months of 2009 the company reported net sales of $8.89 million and net income of $1.41 million.
On February 4th, Huifeng announced preliminary 2009 results of revenues between $13 million and $14 million and net income of $2.8-3.0 million. These are huge numbers as they translate (taking the midpoint of the range) into Q4 revenues of $4.6 million and net income of $1.5 million, which is more than the company realized in the first nine months combined. Also net margins would rise from 22.4% in Q3 to 32.6% in the fourth quarter. Huifeng is anticipating year-over-year revenue growth of 31% and net income growth of 86% for 2009. "The increase in revenue reflected both a gain in new customers, as well as an increase in the number of orders from our existing customers," the company stated.
Huifeng also issued very impressive 2010 guidance in early February. "Management is providing revenue guidance of $20 million to $25 million and net income guidance between $4.5 million to $5.0 million for 2010. Growth is expected to be driven by increasing sales of current products. Because of the EU COS for Diosmin, the company has a high level diosmin quality. Certain European customers will be interested in Huifeng's diosmin and will increase their purchasing quantity from the company. The company will begin to perform the contract with Safic-Alan for diosmin. Another driver is production line expansion and acquisition which will increase the production quantity of diosmin. This will meet the big quantity requirement of new orders."
Taking the midpoint of this guidance, the company expects revenue to grow by 66% and net income growth of 64% or 2010e earnings per share between $0.20 and $0.23, which gives the company at the current share price of $0.90 a forward P/E ratio of 4.2 and given the high growth rates for 2009 and 2010 a P/E/G-ratio of below 0.1. Conversion of the company's convertible note and related warrants (exercise price of $1.00) might increase the share count by 2.5 million shares or about 11% which would increase the forward P/E to approximately 4.7.
Hidden in a 8-K filing (no press release), HFGB revealed on February 25th that the company has hired three independent directors. This move usually indicates that the company plans to move its stock to a senior US exchange, and with the sustained profitability and high projected growth rates such an uplisting would make a lot of sense. The current low share price would imply a reverse stock split being on the agenda for 2010, a move that has turned out to be very successful for many Chinese OTC-listed companies in 2009.
I am adding a half position of Huifeng Bio-Pharmaceutical to the China Model Portfolio at Friday's close of $0.90. My target for the stock is $2.00. Catalysts could be final FY09 numbers (to be released by the end of March) and follow-up news regarding a possible uplisting.