American Oriental (AOB): 'Healthy' outlook?

Leading quantitative analyst Vahan Janjigian looks to American Oriental Bioengineering (NYSE: AOB), a maker of Chinese traditional medicines, among his latest featured stocks. 

In his The Forbes Growth Investor, the advisor explains, "This market has enjoyed significant growth over the past several years due to several favorable trends." Here's his review. 

"American Oriental Bioengineering is a pharmaceutical company that specializes in manufacturing and marketing plant-based traditional Chinese medicines (TCM) in China.

"Plant-based pharmaceuticals (PBP),which generated 82% of Q1 sales, are medicinal compounds derived from the leaves and roots of plants. These products, which are approved by the Chinese State Food and Drug Administration (SFDA), are used to treat various illnesses. 

"The Chinese pharmaceutical market has enjoyed significant growth over the past several years due to several favorable trends.

"A booming economy has increased disposable incomes and raised living standards. As a result, demand for pharmaceutical products has risen as Chinese people have climbed up the economic ladder. 

"These trends have been accompanied by greater participation in the State Basic Medical Insurance System and increased government spending on health care.

"AOB has benefited from a general preference in China for TCMs over synthetically manufactured alternatives. Complementary acquisitions have also contributed to the company’s growth. 

"Total revenues and net income over the past three years climbed fivefold to $160 million and $43.3 million in 2007, respectively. Q1 2008 net revenues jumped 50.7% from a year ago to $38.8 million.

"Strong OTC sales more than offset slower growth in the prescription business and falling PBN points to 67.82% due to a shift in the sales mix and higher expenses associated with the integration of an acquisition. 

"Investment risks include the planned issuance of $115 million of convertible bonds,which could dilute future earnings; and the sometimes capricious nature of Chinese laws and regulations.

"However, we are focused more on potential growth. Organic sales should rise 30% in 2008. Total sales growth should exceed 50%. Net income is expected to climb at least 43%. 

"The company has set aside $16.4 million to fund acquisitions that are already in the pipeline. These expected acquisitions should help AOB build scale and expand market share in China’s fragmented pharmaceutical and nutraceutical markets."