Grant Zeng, CFA
BOPH: Initiating coverage with Outperform rating
We are initiating coverage of Bohai Pharmaceuticals Group Inc. (BOPH) with an Outperform rating. Our price target is $ 7.00 per share. Our call is based on the strong fundamentals of the Company.
Bohai is a well established specialty pharmaceutical company in China engaged in the production and commercialization of traditional Chinese medicine (TCM). The Company is operating in a favorable environment for the pharmaceutical, especially TCM, industry in China. China’s GDP will continue to grow at about 8% in the coming decade. Government spending in healthcare will also increase dramatically. The goal to achieve a universal health insurance is on track with at least 90% of population is covered by 2011. Government supports the development and use of TCM for various health problems. And TCM has its advantages over chemical drugs through promoting wellness and prevention of diseases and fewer side effects. This favorable environment creates huge opportunity for Bohai in our view.
Bohai’s product portfolio targets a wide range of disease categories such as respiratory disease, rheumatoid arthritis, digestive disorders, and women’s health. Collectively, these disease categories represent a huge market for the Company.
Bohai has many advantages over its competitors. On top of that is the patented or “protected” status for its top products for exclusive or near-exclusive marketing rights. Also important are the insurance coverage of a large percentage of its products including its key products, low R&D costs, strong distribution network and pricing power.
Bohai has a practical and appropriate growth strategy for both near term and long term growth. This strategy, combined with experienced management, will provide sustainable growth in the years to come for the Company.
Financial performance has been strong and is expected to continue to do well in the next few years. Both top line and bottom line will grow amazingly at about 27% and 15% respectively in the next 5 years. Earnings per share will increase to $ 0.90 per share on total revenue of $ 199 million in fiscal 2015.
Current valuation is low, which does not reflect the Company’s strong fundamentals. We believe Bohai is well positioned to grow its business in a unique way and are poised to deliver shareholder value in the coming years. Current valuation presents an opportunity for investors, who want to diversify their portfolio geographically and share China’s great economic success.
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