Solid Buy / Strong Forward GrowthHealthcare , being a defensive sector, is now a good place to look for bargains.
CHO is certainly a bargain and offers multiples of upside from current levels.
China Health Labs & Diagnostics Ltd. recently acquired Whole Vision Limited pursuant to its qualifying transaction (see China Health's news in Stockwatch Oct. 22, 2010).
In 2010, the company achieved its business and financial goals and made progress on its mission of becoming a leading provider of total lab solutions for medical diagnostics and food safety testing in China with the following highlights:
....Revenues grew by 41 per cent to over $33.7-million, led by a more-than-100-per-cent increase in revenues from total lab solutions ,to account for more than 40 per cent of revenues in 2010;
...........Net income grew by 41 per cent to over $5.5-million, if the $1,441,000 of expenses related to the qualifying transaction is excluded, net income would have increased by 78 per cent;
..............Net income per share increased by 43 per cent to 10 cents due to increased net income, partially offset by an increase in the weighted average number of shares due to the qualifying transaction and concurrent equity financing;
.............Installed base of the BK Clinlab rural lab total solution grew from 86 to 210 locations in three Chinese provinces and secured a bid to install 587 BK Clinlabs in Jilin province for 2011;
...............More than doubled sales of POCT solutions to the Chinese military and signed a research and development agreement with the Chinese military;
.................Increased sales of food safety lab solutions to the Beijing municipal government;
................Maintained relationships with more than 500 large urban hospitals and labs;
The Q4 numbers were especially strong........
..........Revenue for fourth quarter ended Dec. 31, 2010, increased by 46 per cent to $15,679,000, , compared with the same periods in 2009, largely due to the growth of the company's proprietary total lab solutions
...........Gross margin for the fourth quarter ended Dec. 31, 2010, increased 89 per cent to $7.47-million, respectively, compared with the same periods in 2009, due to the increase in revenues generated and improved gross margin as a percentage of sales
..............Net income for the fourth quarter ended Dec. 31, 2010, increased by 33 per cent to a record of $2.93-million (
.05/share ), , compared with the same periods in 2009 due to increases in revenues and gross margins offset partially by increases in operating expenses and income taxes
...........Cash totalled $3,326,000 as at Dec. 31, 2010, compared with $1.16-million of cash as of Dec. 31, 2009. The company's working capital as of Dec. 31, 2010, was $16,063,000, compared with a $10,683,000 working capital as of Dec. 31, 2009.
Looking forward
The company has entered 2011 well positioned for further growth and with sufficient capital to expand its business for rural total lab solutions, POCT lab solutions and food safety lab solutions, including the 587 locations expected to be installed in Jilin province. In the fourth quarter of 2010, the company secured a bid to install its rural total lab solutions in 587 Jilin locations and expects to finalize the agreement for that installation to be in 2011.
"In 2010, CHO continued to work with their customers to combine its proprietary equipment, software, training and installation services with an ongoing supply of reagents and maintenance services to provide turnkey medical diagnostic and food safety solutions
By providing solutions, rather than individual products, CHO has solidified their leadership in its targeted sectors of rural labs, military and emergency services, and food safety in China. This approach enables CHO to provide significant added value and build long-term relationships with our customers, while generating healthy margins and recurring revenues.
The company believes that the Chinese market for medical diagnostics and food safety products and services provides the company ample opportunities to achieve continued strong growth.
As China's economy grows, per capita spending and the total budget for health care and food safety are expected to continue increasing.
In addition, China Health has targeted sectors that are priorities for the Chinese government: improving the living standards for its rural population, enhancing emergency and rescue services, and implementing better food safety practices. . Accordingly, the company believes that it is well positioned to deliver strong revenue and profit growth in 2011 and beyond. China Health's growth strategy will focus on the following:
.........Providing total lab solutions (as compared with individual products and services) combining proprietary equipment, software, installation, continuing service and reagents, to sectors where there is limited competition and Chinese government policy and budget support;
......Focusing resources on leveraging its success in serving rural hospitals and clinics, military and civil emergency rescue customers, and food safety to major cities in China to maintain and build its leading market share;
.......Continuing to collaborate with customers to develop new and improved solutions, including the research and development agreement with the Chinese military signed in late 2010 (see news in Stockwatch Dec. 8, 2010);
..........Seeking acquisitions and opportunities where the company can add new products and services that are complementary to its current offerings.
.........In 2011, China Health intends to expand its business by focusing its efforts on building its sales network to additional Chinese provinces and cities in the three areas where it has proprietary products and limited competition.
Recent substantial contract gains suggest that CHO's expansion strategy is performing very well.
As such, its strong growth profile can be expected to continue in 2011 with sales above the $55 million level.
Net earnings should also continue to grow such that net earnings for the year should approach or exceed the
.20/share level.
Given its strong growth profile in a country where healthcare needs are urgently required, CHO should be accorded at p/e multiple above 15 times.
That is, fair value on 2011 sales and earnings growth should be well above the $2 level.