Renhuang Pharmaceuticals (CBP) Q3 results

Renhuang Pharmaceuticals (CBP), a developer, manufacturer and distributor of botanical products, bio-pharmaceuticals and traditional Chinese medicines ("TCM"), today announced its financial results for the third quarter ended July 31, 2010 and affirmed financial guidance for fiscal year 2010.

Third Quarter Fiscal 2010 Highlights and Recent Events
Net sales grew 43.8% year-over-year to $9.3 million.
Gross profit increased 32.7% to $4.6 million from $3.5 million in 2009
Gross margin was 50.1% -- Net income rose 115.8% to $1.5 million or $0.04 per diluted share, as      compared to $0.7 million or $0.02 per diluted share in 2009
New products, Banlangen Granules and Compound Honeysuckle Granules, accounted for 26.2% of gross sales in the quarter

"Our third quarter sales and net income are historically modestly lower as compared to those in the first two quarters due to seasonality of our product portfolio," said Mr. Shaoming Li, the Chairman and CEO of Renhuang. "Demand for our products often peaks in the fourth quarter, which represents the start of the flu season. Despite the third quarter being a historically slow quarter, we are pleased with the year-over-year growth in net sales and net income. It is also pleasing to report that our recently introduced products, Banlangen Granules and Compound Honeysuckle Granules, have been key drivers supporting our sales growth and strong margins."

Third Quarter Fiscal 2010 Results
For the third quarter ended July 31, 2010, net sales were $9.3 million, up 43.8% from $6.4 million in the same quarter last year. The sales increase was largely attributable to strong growth in sales of the Company's recently introduced products, Banlangen Granules and Compound Honeysuckle Granules, and an increase in the average selling prices (ASP) of certain of the Company's products. Banlangen Granules and Compound Honeysuckle Granules accounted for 26.2% of gross sales in the quarter. ASP rose 5.1% year-over-year in the third quarter of fiscal 2010, which included lower average sales rebates. Except for Shark Vital Capsules, ASP's across all product categories rose on a year-over-year basis.

Gross profit in the quarter increased 32.7% to $4.6 million, as compared to $3.5 million for the same period of 2009. Gross margin for the quarter ended July 31, 2010 decreased to 50.1% from 54.3% in the comparable fiscal 2009 quarter. The year-over-year decline in margin was mainly due to lower sales of the Company's higher-margin product, Shark Vital Capsules during the third fiscal quarter.

Operating expenses for the third quarter of fiscal 2010 were $3.2 million, as compared to $2.8 million in the same period last year. Sales and marketing expenses rose to $1.3 million from $1.1 million. The spending increase reflected continued investment in the Company's distribution network and TV advertising in order to increase product market share and create greater consumer awareness of the Company's premium quality products. General and administrative expenses declined 21.0% to $0.4 million, primarily as a result of the Company's strategic decision to purchase office space in the second fiscal quarter, which resulted in savings on rental expenses for its factory and administrative office. Research and development expenses increased 24.6% to $1.5 million as the Company's pipeline of projects continues to advance and grow.

Operating income in the fiscal 2010 quarter was $1.4 million, up 116.4% from $0.7 million in the 2009 quarter. Operating margin increased significantly year-over-year to 15.5% from 10.3%. The Company did not incur income tax expenses as its subsidiary registered in the PRC has been granted a tax holiday for fiscal 2010. For the third quarter ended July 31, 2010, net income grew 115.8% to $1.5 million, or $0.04 per diluted share, from $0.7 million, or $0.02 per diluted share in the prior year period.

Nine Months Fiscal 2010 Results
Total revenue for the nine-month period ended July 31, 2010 was $38.5 million, an increase of 33.1% from $28.9 million for the first nine months in fiscal 2009. The strong growth in year-over-year sales was mainly due to the introduction of Banlangen Granules and Compound Honeysuckle Granules in the last quarter of 2009, and an increase in average selling prices for certain other products.

Gross profit in the first nine months of fiscal 2010 rose 34.8% to $20.3 million, representing a gross margin of 52.8% as compared to 52.2% in the first nine months of fiscal 2009. Operating income grew 35.3% year-over-year to $12.2 million. In the first nine months of fiscal 2010, net income was $12.2 million or $0.32 per diluted share, up from $9.0 million or $0.26 per diluted share in the first nine months of fiscal 2009.

Financial Condition
As of July 31, 2010, Renhuang had $28.7 million in cash and cash equivalents. Working capital was $42.3 million with a current ratio of 18.0x, as compared to $8.1 million and 12.9x as of October 31, 2009. The Company had no debt on its balance sheet. At the end of the third quarter of 2010, shareholders' equity was $63.1 million, as compared to $50.5 million at the end of fiscal 2009.

Cash flow from operating activities was $22.9 million for the nine months ended July 31, 2010, as compared to $3.1 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 receivable collection efforts year-over-year. Average days sales outstanding fell to 76 days in first nine months of fiscal 2010 from 249 in the first nine months of fiscal 2009.

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.

Fourth quarter sales and net income are expected to exhibit strong growth, as it is historically our outstanding quarter with peak sales primarily driven by the beginning of the flu season.

Renhuang expects sales of its leading Siberian Ginseng products to expand as it benefits from further market penetration and the Company's rapidly growing new products to continue their growth momentum driving future revenue and net income growth. Renhuang plans to terminate sales of Shark Vital Capsules by the end of the fourth quarter of 2010 and launch its new product, Badger Oil -- a natural medicine for the treatment of burns with no known toxic side effects or allergic reactions -- in the same period. The Company also launched Qing Re Jie Du Oral Liquid, a TCM for the treatment of influenza and upper respiratory infections in June 2010 and Compound Schisandra Tables in July 2010, a new all-natural anti-depressant and nerve regulation product.

"During the current Spring and Autumn season, China battles with influenza (or common flu), which drives up the sales of our Banlangen Granules and Compound Honeysuckle Granules. These products have established a strong market reputation due to their high-quality and performance," added Mr. Li. "We will continue to maintain our focus on botanical anti depression and nerve regulation products, and invest in research and development of these products. Our target is to become the leading pharmaceutical company in botanical anti depression and nerve regulation medicine in China. In addition to focusing on organic growth, Renhuang continues to actively evaluate external growth opportunities through strategic acquisitions."

We knew that Q3 is their worst quarter. They reaffirmed their guidance for 2010. So EPS should be around $0.50 for 2010. The stock is trading under book value of $1.68 and has a P/E below 4.

POSITION: LONG