Grant Zeng, CFA
Bohai Closes A Very Lucrative Deal
On August 10, 2011, Bohai Pharmaceuticals Group, Inc. (BOPH) consummated a significant acquisition of a complementary Traditional Chinese Medicine (TCM) company in China, Yantai Tianzheng Pharmaceutical Co., Ltd.
Like Bohai, Yantai Tianzheng manufactures and distributes modernized herbal medicines based on TCM in China. Based in Yantai City, Yantai Tianzheng achieved audited revenue of $37.9 million and net income of $6.3 million in its fiscal year ended December 31, 2010. For the three months ended March 31, 2011, Yantai Tianzheng achieved unaudited revenue of $11.3 million, an increase of 67% over the same period last year, and net income of $1.9 million, a 56% increase over the three months ended March 31, 2010. As of March 31, 2011, Yantai Tianzheng had working capital of $2.1 million and net tangible assets of $5.9 million.
Yantai Tianzheng markets five primary products: Fangfengtongsheng Granule; Zhengxintai Capsule; Maitong Granule; Bezoar Antipyrotic Tablet; and Sanqi Shang Tablets. The company's Fangfengtongsheng Granule, which accounted for 59% of sales in 2010, is a prescription product on China's Essential Drug List and qualifies for reimbursement under China's national health insurance system. Fangfengtongsheng Granule is used to treat fever, headache, constipation, measles and eczema. Zhengxintai Capsule, which accounted for 33% of sales in 2010, is a prescription product on China's National Drug Reimbursement List (NDRL) and also qualifies for reimbursement under China's national health insurance system. Zhengxintai Capsule is used to improve kidney function and treat coronary artery disease and angina.
Yantai Tianzheng has annual production capacity of 400 million tablets, 300 million capsules and 250 million bags of granules respectively, which adds to Bohai's current capacity of 1,350 million tablets, 370 million capsules, and 30 million bags of granules and other product categories.
Under the terms of a share purchase agreement, Bohai will acquire 100% of the outstanding shares of Yantai Tianzheng from its three shareholders for $35 million in an all cash transaction consisting of four installment payments over 18 months. Notwithstanding the installment payment structure, Bohai will obtain full ownership of Yantai Tianzheng immediately, with an effective transaction date of July 1, 2011. Mr. Jiangbo Chi, Yantai Tianzheng's majority owner and CEO, will remain with Bohai to oversee the Yantai Tianzheng business. Bohai expects to fund this acquisition from cash on hand, future cash flow and from third party debt and/or equity sources.
The acquisition of Yantai Tianzheng marks a major milestone for Bohai. From a valuation perspective, we think this is a very lucrative deal for Bohai. In 2010, Yantai Tianzheng generated $37.9 million in revenue, a 60.5% increase from 2009. In addition, Yantai Tianzheng generated over $9.0 million of EBITDA and $6.3 million of net income in 2010. If we look at the valuation metrics for Yantai TianZheng, the price Bohai paid is much lower than the average price for the industry from all three comparables.
We Have Adjusted Our Financial Model, And Raise Our Price Target To $8
We think the acquisition has the following positive impacts on Bohai:
• The acquisition significantly increases Bohai’s size. The combined company will have a much diversified revenue stream, which makes Bohai in a better position to withstand economic cycles in the future.
• The acquisition expands Bohai’s product lines. Yantai Tianzheng brings a very attractive lineup of SFDA approved, exclusive and/or protected TCM medicines to Bohai's product line. In addition, Yantai Tianzheng's lead products qualify for reimbursement under China's national health insurance system, which offers a competitive advantage. Yantai Tianzheng's TCM products complement those currently produced and distributed by Bohai.
• The acquisition allows Bohai to leverage and expand its sales and distribution channels by introducing new products. Yantai Tianzheng's current sales network spans over 14 major provinces as well as over 14 Tier 2 and Tier 3 cities, with products sold in over 1,100 hospitals across China.
• In addition, Yantai Tianzheng brings excess manufacturing capacity which meets GMP standards and will allow Bohai to further expand its production. Bohai plans to consolidate and integrate the two companies' operations, which creates the potential for significant improvement in the operating efficiency of the combined companies.
• Further, this is an all cash transaction, which will avoid dilution to existing shareholders.
Based on this transaction, we have increased our forecast for total revenue and EPS from fiscal 2012 to 2015. And we increased our price target to $8 per share from $7 per share.
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