Renhuang Pharmaceuticals is an integrated developer, manufacturer and distributor of a broad line of high-quality nutraceutical, biopharmaceutical, and natural medicinal products. The company provides three major product lines including the Acanthopanax-based natural medicinal products, biopharmaceutical products, and Traditional Chinese Medicines. Renhuang’s key product line is an Acanthopanax-based product series, a natural medicine effective in treating depression and melancholy, and provides numerous other health benefits. By controlling an estimated 70% of China’s natural resource of Acanthopanax (also known as Siberian Ginseng), the company possesses a unique competitive edge and, therefore, occupies a dominant market position in Acanthopanax-based medicinal and nutraceutical products.
For a company presentation:
http://www.slideshare.net/GeoTeam/renhuang-pharmaceuticals-march-2010-presentation
Second Quarter Fiscal 2010 Highlights and Recent Events
· Net sales grew 39.0% year-over-year to $12.1 million.
· Gross profit increased 44.5% to $6.2 million from $4.3 million in 2009 while gross margin increased to 51.4% from 49.4% a year ago
· Net income rose 63.0% to $3.4 million or $0.09 per diluted share, as compared to $2.1 million or $0.06 per diluted share in 2009
· New products, Banlangen Granules and Compound Honeysuckle Granules, accounted for nearly $3.7 million in sales in the quarter
· Appointed three new independent directors, strengthening corporate governance practices
“Renhuang continued to deliver robust growth in the second quarter of fiscal 2010 with strong increases in revenue and earnings,” said Mr. Shaoming Li, the Chairman and CEO of Renhuang. “We are pleased with the rapid market acceptance of our recently introduced products, Banlangen Granules and Compound Honeysuckle Granules, which were key drivers behind the sales growth and margin expansion to-date. Our operating leverage remained robust in the second quarter with a nearly 400 basis point operating margin increase year-over-year despite higher operating expenses.”
First Half Fiscal 2010 Results
Total revenue for the six month period ended April 30, 2010 was $29.2 million, an increase of 30.0% from $22.5 million for the first six months in fiscal 2009. Year-over-year growth was mainly due to the introduction of Banlangen Granules and Compound Honeysuckle Granules in late 2009, and an increase in ASP across the rest of the product portfolio.
Gross profit in the first half of fiscal 2010 rose 35.4% to $15.7 million, representing a gross margin of 53.7% as compared to 51.6% in the first half of fiscal 2009. Operating income grew 29.1% year-over-year to $10.8 million. In the first six months of fiscal 2010, net income was $10.8 million or $0.29 per diluted share, up from $8.4 million or $0.24 per diluted share in the first six months of fiscal 2009.
Financial Condition
As of April 30, 2010, Renhuang had $23.4 million in cash and cash equivalents. Working capital was $40.4 million with a current ratio of 17.4x, as compared to $32.0 million and 12.9x as of October 31, 2009. The Company had no debt on its balance sheet. At the end of the second quarter of 2010, shareholders’ equity was $61.1 million, as compared to $50.5 million at the end of fiscal 2009.
Cash flow from operating activities was $19.3 million for the six months ended April 30, 2010, as compared to $4.2 million during the same period in the prior year. The cash flow increase was primarily attributable to an increase in net income and a decrease in trade receivables that reflected a change in credit terms and more aggressive receive collection efforts year-over-year. Average days sales outstanding fell to 118 days in first half of fiscal 2010 from 186 in the first half of fiscal 2009.
Recent Events
In April 2010, Renhuang announced several major initiatives that further strengthened the Company’s corporate governance practices, including the appointment of three new independent directors to its board of directors. With the addition of the independent board members, the Company also established a nominating and compensation committee. This represented a major step in the Company’s active efforts to meet the requirements to move to a senior exchange during the fiscal year.
Additionally in May 2010, Renhuang engaged the global leader in Sarbanes-Oxley Section 404 (“SOX 404”) compliance consulting, PricewaterhouseCoopers (“PWC”), to assist the Company in establishing and maintaining its SOX 404 compliance program. Renhuang’s management team remains committed to work with PWC to further strengthen the Company’s internal controls, corporate governance and risk management procedures.
During the second quarter of fiscal 2010, Renhuang entered into a purchase agreement to acquire two office floors for approximately $5.6 million cash. The new office space, intended to become the Company’s new headquarters, is already housing some of Renhuang’s offices for administrative and human resources functions. Of the total purchase price, $3.9 million was paid in April 2010 as a deposit with the remaining $1.7 million due by December 20, 2012.
Outlook – Affirming Fiscal 2010 Guidance
Renhuang is affirming its fiscal 2010 guidance for net sales in the range of $54.7-$55.6 million, which represents a 26% to 28% increase over reported revenues of $43.4 million in fiscal year 2009. The Company continues to expect fiscal 2010 net income, excluding any non-cash, non-operating gains and expenses (such as the change in fair market value of warrant liability), to be in the range of $18.6-$18.9 million, up 26% to 28% from net income of $14.8 million in fiscal year 2009.
Third quarter sales and net income are historically modestly lower as compared to those in the first two quarters due to seasonality of Renhuang’s product portfolio. Demand for the Company’s products often peak in the fourth quarter, which represents the start of the flu season.
In the second half of fiscal 2010, Renhuang continues to expect the commercial launch of its Qing Re Jie Du Oral Liquid, a TCM for the treatment of influenza and upper respiratory infections, and Badger Oil, a natural medicine for the treatment of burns. The new product introductions and continued market penetration of Renhuang’s current product portfolio are expected to drive revenue growth for the remainder of fiscal 2010. The Company anticipates gross margin to remain above 50% during second half of fiscal 2010. Operating expenses are expected to increase in the second half of the fiscal year, with higher sales and marketing expenses to support new product roll out and increased R&D expenses as the development pipeline advances and grows.
”Renhuang completed a very strong first half performance with significant momentum for the remainder of fiscal 2010,” added Mr. Li. “Increased market acceptance of our portfolio of natural products and introduction of new products are expected to continue the Company’s strong pace of growth in the coming quarters. In addition to focusing on organic growth, Renhuang continues to actively evaluate external growth opportunities, including the potential acquisition of complementary operations and overseas expansion.”
I attended the Conference Call so at the end there was an Q/A-session. Here are the highlights:
Question from James Fuld, Bold Corporation:
QUESTION: Your receivables are now 118 days. What do you think they will be by the end of the year?
ANSWER: We are working on reducing the days, it should below 100 days.
QUESTION: Your tax rate for this year is zero. What would it be in 2011 and 2012?
ANSWER: In China, to apply to be granted of official tax of 0%, we have to apply annually, therefore we will continue to apply for this 0% tax rate next year. However, there is no guarantee we will be granted this tax rate, if it is not granted our tax rate would be 25%.
QUESTION: You have deposits of US$18 million. Can you explain that to me, please?
ANSWER: The deposit of US$18 million is for down payments for purchase of three patents, land-use rights and production facilities.
QUESTION: And how much is the total payment?
ANSWER: The total payment is something about US$35 million. So we still have the remainder US$17 million, but the payment is due to 2011 and 2012.
QUESTION: And when do you hope to do an acquisition?
ANSWER: We continue interested in getting opportunities for acquisition, but at the moment we do not have any specific target.
Questions Dutch Trader, China Investor King
QUESTION: When do you plan for uplisting to a major exchange?
ANSWER: We are planning to uplift to AMEX, and we are working with AMEX to complete this in this year.
QUESTION: And how do you want to achieve this? Is this by a reverse split, or by just meeting the listing requirements?
ANSWER: It will be just by meeting the listing requirements.
QUESTION: Do you think there is more dilution on the way this year, or it is under control?
ANSWER: At the moment, all the dilution has been listed in the financial statement. Going forward, depending on acquisition opportunities that come along the way, there might be more dilution, but that is something that I cannot confirm at this stage.
QUESTION: How do you see yourself, the Company, in five years from now?
ANSWER: Its our goal to be a global leading provider brand for anti-depressant and nervous regulation product, we will continue to work towards it with our products, currently these new products of Siberian Ginseng which with a single plant has proven properties in this area, we are continuing to working hard in terms of in our R&D to further develop and explore the opportunities. We are also working very hard to fit the Medical Quality Standards for this product, once that is fit, we will be more [unintelligible] in the market. We are already like the market leaders of natural anti-depressants and nerve regulation products for a single-plant base product in China, and we will reach towards expanding this advantage, as well as developing [unintelligible] product to enhance our product portfolio.
QUESTION: 3Qs are always the weakest, you mentioned in your 10Q. What are the Company’s plans to make the 3Q a consistent quarter in line with the other quarters?
ANSWER: We plan to introduce a new product, the Qing Re Jie Du Oral Liquid which with this we will be able to be as a successful product as we have achieved [unintelligible] in the 3Q, and we will continue also to [unintelligible] Siberian Ginseng to increase our sales of existing products.
Boyd Hinds, Equinox Capital:
QUESTION: You have announced that you have two new products that you are scheduling for launch here in the 2H10. Can you just discuss with us what your expectations are for revenues for these two products, and how much of that has already been built in your guidance?
ANSWER: For our first product, which is the Qing Re Jie Du Oral Liquid, we budgeted, we see sales on that to the rest of 2010 fiscal year of around US$1 million to US$1.5 million. In terms of the Badger Oil, which is another product that we plan to introduce in the 4Q, we have not quite seen the exact time for launching therefore we cannot budget for the exact sales contribution from that product. And in terms of our forecast guidance, we are actually basing on the sales of existing products, so we have not expected much of the revenue contribution from the new product launches.
QUESTION: You have got a big boost from new sales of your compound honeysuckle granules. Can you just discuss with us, once that segment has matured, what could we expect to see in terms of sales from that segment on an annual basis?
ANSWER: We believe it is still a growing market, so it has not quite reached the maturing stage yet. At this moment I do not have a number to give you. I apologize.
QUESTION: Let me just ask you a question about your current production capacity and utilization of that. You said that it is roughly 50%. Does any of that capacity include the Ah City facility that you discussed in terms of, you know, you have not fully completed the acquisition yet, but are you including any of that production capacity from that facility in your existing capacity?
ANSWER: Actually, previously we have [unintelligible] that facility, now we are acquiring [unintelligible].
QUESTION: It is included. OK. So, you have quite a bit of room to grow here. And what can we expect to see in terms of organic growth from your existing products? And how much of the growth in 2010 is going to come from just your existing product line?
ANSWER: We are planning for a growth around 26% to 28% this year.
QUESTION: Is that for fiscal year 2010 or fiscal year 2011 as well?
ANSWER: This is for year 2010 at the moment.
QUESTION: Let just talk about organic growth for a little bit. What do you think is sustainable going forward from what will be obviously a higher base level in fiscal year 2011?
ANSWER: We believe there will be a late growth of 26%.
QUESTION: I just had a follow up. I think there was a statement that you made earlier, about acquisitions and possibly issuing more stock to be able to acquire a company. I would urge the Company to resist that. If your stock is still trading at levels it is at right now, which is less than 4x earnings, it makes no sense to issue stock at these levels, unless you can purchase that company at less than that multiple. I would like to have your comment on that, please.
ANSWER: Yes, we are aware of that situation. We will consider any acquisition opportunity, this is a buying consideration that we have to have.
QUESTION: So, is the hope that any acquisitions you do are going to be accredited to earnings?
ANSWER: Yes. Definitely.
If you ask me a very promising company which trades around book value right now and has a trailing P/E of less than 4. The growth path is clear for the coming years and an uplisting can attribute to a higher stock price.
POSITION: LONG
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