American Oriental Evenly Poised - Analyst Blog

We are maintaining our Neutral recommendation on American Oriental Bioengineering Inc. (AOB) with a target price of $1.25.

American Oriental Bioengineering, based in Beijing, China, together with its wholly owned subsidiaries, is a pharmaceutical company that develops, manufactures and commercializes both plant-based pharmaceutical  and plant-based nutraceutical  products.

In May 2011, American Oriental reported first quarter 2011 earnings per share of $0.01, lower than both the Zacks Consensus Estimate and the year-ago earnings by $0.03. Earnings in the first quarter of 2011 were hurt by lower revenues.

We are encouraged by the rapid growth of the Chinese pharmaceutical industry. The Chinese government’s efforts to improve the healthcare infrastructure coupled with its goal to achieve near-universal health coverage are responsible for the growth.

The pharmaceutical industry in China was worth approximately $181 billion in 2010. China is expected to become the world’s third largest pharmaceutical market (including Chinese traditional medicine and western therapies) by 2011. The rapidly growing Chinese pharma market provides a lucrative opportunity to American Oriental to increase its revenue.

Moreover, the growth-by-acquisition strategy of American Oriental is encouraging, and has helped expand its product portfolio and drive growth. For example, the acquisition of Nuo Hua Investment Company Ltd. in 2008 caused the distribution of pharmaceutical products to become part of the company’s operations. We believe that such profitable acquisitions in future will aid the company’s growth.

However, the dependence of American Oriental on a few products to generate the bulk of its revenues is a risk. Furthermore, the excessive competition confronting the company’s products is also a concern. Consequently, we see limited upside potential from current levels and retain our Neutral view on American Oriental.

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