3SOF

Wow, this is the first time ever my portfolio fell 7% on a day! I see a bunch of -20% and only a few +1%. 

Just need to shut the streamer, the damn thing is equally distractive, on a bad day and the good day.

My portfolio went down 10%...

i'm right there with you. still stunned,but I know the sun will come up in the morning

Just a quick question on companies being undervalued in China.  Do we have any access to what the average valuation of Chinese stocks is relative to their peers for given industries, andd do we know that they can grow to be valued similarly to US stocks?  AOB might be an example to compare to.

With this stock we have both a chinese stock and an OB stock, so those could be two counts against it valuation wise for the present, though the OB part can of course change with a move to one of the exchanges.  Do you maybe forsee that for CHME David?

CHME.OB was a big disappointment. I think investors got spooked by the almost doubling of the number of shares outstanding:



Even though on a superficial analysis this is bad, it isn't unexpected at all. Anyone following this company since its reverse merger knew that there were warrants outstanding that would be converted if the stock were above $2.5. Near $2.5 there's no more incentive to keep converting and selling these warrants.

On September 30th there were just 4,073,686 warrants outstanding:



The Weighted-Average Exercise Price is $2.46, so I don't think the stock goes below this level, at least, not for long. Moreover, with the volume the stock had since September 30th, I guess a lot more of these warrants were already converted and possibly sold.

This means I expect a lot less dilution going forward.

I was hopeful that revenue growth and net income growth would be enough to offset the rise in the number of shares outstanding, but due to a lower gross margin that didn't happen, net income fell 3%. But management says the rise in costs is temporary ...

Wait, I know what you're thinking ... "How come this fellow comes here with financial statements and management talk, doesn't he know that the Chinese and OTCBB are not to be trusted?"

Well, I've been learning and won't risk any more money to new OTCBB or Chinese stocks. But, in respect to CHME.OB, I'll believe what I read in the financial statements until there's evidence that they can't be trusted. The alternative would be to believe in the chart or other market participant's reaction and I refuse to do that, because they don't know more than I do about this stock. They know less and trade on impulses.

I didn't sell CHME.OB when I was winning 30% and I won't sell it now that I'm losing 30%. The Main currently has 3.6% of capital allocated to this penny stock and I'll keep holding it.

Good spirit, David! I agree with the other posters that OB stocks are spooky, and there are plenty of "normal" companies to invest into. But CHME is here in our portfolio and you've studied the story so far and it is not that bad. 3.6% of capital is not that much but potential to at least get the money back is pretty good - that's why it is diversification. Keep it up!

Quote from: berloga on November 13, 2007, 12:25:08 PM
Good spirit, David! I agree with the other posters that OB stocks are spooky, and there are plenty of "normal" companies to invest into. But CHME is here in our portfolio and you've studied the story so far and it is not that bad. 3.6% of capital is not that much but potential to at least get the money back is pretty good - that's why it is diversification. Keep it up!

Thanks berloga

As expected CHME.OB didn't stay below $2.5 for long. There's no incentive at all to sell below that level ... not just because at $2.5 CHME.OB is trading at about 5 times 2007 EPS of $0.45 (this is my expectation, CHME.OB already made $0.30 in the first nine months of 2007), but because the warrants outstanding have an average conversion price of $2.46 as we've seen.

I believe the floor for this stock is $2.5. And is there any upside? I believe so, because there's strong revenue growth and 3rd quarter EPS was impacted by one time costs:

«"Our third quarter results were consistent with our internal expectations," explained Mr. Senshan Yang, CEO of China Medicine. "We sold more OTC drugs during this quarter, which lowered our profit margin. But this is just a temporary result. We expect our profit margins to improve through our efforts to increase the sales of high-margin products, proprietary products and medical formulas in accordance with our long-term sales strategy. Our administrative expenses were relatively high in the third quarter because we obtained exclusive distribution rights in Guangdong Province for over 160 products from the beginning of this year. Greater expenditures are typically needed for the marketing of such new products, and these expenses will be decreased once the sales network is set up." Mr. Yang added, "we are undertaking a search for a bi-lingual CFO and a qualified investor relations firm, so that we may better communicate with investors, integrate our financial system and enhance our internal control system. We are confident of having a great year in 2007 and we expect continuing success in 2008."»

Of course, this can be a bunch of lies ... and I'm losing 27.6% in this penny stock, so probably I was wrong about the long term potential. It seems too cheap to be true.

But, because I see risk as limited, derived from my current 3.6% capital allocation to the stock and the $2.5 floor (I'll be very disappointed if CHME.OB stays more than a week below this level), I'll keep holding CHME.OB.

CHME.OB was a complete flop, a very disappointing story here at the Main. I thought "100% gain" and now have a 35% loss

Anyway, I attribute this to a general sense that Chinese stocks, especially OTCBB traded stocks are not to be trusted and a barrage of warrants outstanding still from the company's reverse merger. However, as we've seen, there aren't many more warrants outstanding and the stock trades at 5 times earnings (if one believes financial statements).

But today I want to focus on something else, a few weeks ago the company issued the following press release:

• China Medicine's ADTZ Project Has Been Selected as One of Six Patent Commercialization Projects in Guangdong Province
PR Newswire (Fri, Oct 12)

«Mr. Shenshan Yang, CEO of China Medicine stated, "Our ADTZ project has made tremendous progress and we believe that the financial and political support of the government will expedite commercialization of the product. We look forward to working closely with the government and a successful product launch."»

We know how government support is needed to get things moving in China. Now, I don't know anything about this ADTZ, but Citron Research wrote some comments about it:

Citron Covers China Medical Corporation

A drug for corn ... doesn't look all that exciting, but I don't know much about this.

Basically I own CHME.OB because it is very cheap from an earnings multiple standpoint and so I don't see it falling below the $2.5 mark and stay down there more than a week. If it does I'll have to review my stance again.

I'll continue holding CHME.OB.

QuoteBasically I own CHME.OB because it is very cheap from an earnings multiple standpoint and so I don't see it falling below the $2.5 mark and stay down there more than a week.

As expected, CHME.OB stayed no more than a couple of days below $2.5. There are no sellers below that level, besides very weak hands from disappointed momentum and technical traders.

But, where's CHME.OB going now? The way I see it, the company will earn $0.45 per share this year (I expect $0.15 EPS in Q4 2007), so it is trading at 6 times earnings. This happens because it is an OTCBB plus Chinese combination ... moreover there was heavy dilution over the past few quarters, still coming from the way the company made its reverse merger, with a lot of warrants outstanding and waiting to be converted at $2.5 and $3.5 per share. But, as we've seen, there aren't much more warrants outstanding, so hopefully dilution will slow dramatically going forward (according to the financial statements, the company has $4.12 M in cash and no debt).

I believe it won't be easy to see CHME.OB trading at, say, 18 times earnings in early 2008, but 12 times I believe it's possible. That should put the stock at $5.4 in the 1st half of 2008. But we'll see as things go from now on from a fundamental standpoint ... $2.5 is the floor, I'll continue holding CHME.OB.

CHME.OB appears to be building an inverted head and shoulders bottom. Trading at 5.7 times earnings and growing nicely (not like ETLT, which had shrinking revenues). The problem that has been keeping it down is heavy dilution, but that was to be expected, since it is all written in the company's reverse merger forms and forms 10 filed with the SEC.

In 2008 and 2009, if everything goes as expected and the company is legit as I believe it is, dilution will stop and EPS will rise. With a growing EPS CHME.OB won't be trading at 6 times earnings. The multiple should expand to 12 or more.

I'll keep holding CHME.OB for the long term.

Perhaps CHME's 2nd shoulder is in. Now the stock just needs a bullish breakout above $2.9 to complete the bullish inversion pattern.

CHME.OB issued a press release yesterday, which is rare:

• China Medicine Retains CCG Elite for Investor Relations Campaign
PR Newswire (Wed 10:02am)

I think it's normal for a company valued by the stock market at just 6 times earnings to seek help to improve the share price. CCG Elite has many clients, some of them big and "respectable" Chinese companies, like TSL for example. I wonder why CHME.OB doesn't trade at 40 times EPS like TSL does

I'll keep holding CHME.OB for the long term.

QuotePerhaps CHME's 2nd shoulder is in. Now the stock just needs a bullish breakout above $2.9 to complete the bullish inversion pattern.

We've had the bullish breakout above $2.90, so CHME.OB inverted its trend from bearish to bullish.

It appears there are bargain hunters pushing undervalued micro caps up.

Since the "weak results" in Q3 were, at least according to management, due to temporary effects, I expect a nice pick up in EPS in Q4:

«"Our third quarter results were consistent with our internal expectations," explained Mr. Senshan Yang, CEO of China Medicine. "We sold more OTC drugs during this quarter, which lowered our profit margin. But this is just a temporary result. We expect our profit margins to improve through our efforts to increase the sales of high-margin products, proprietary products and medical formulas in accordance with our long-term sales strategy. Our administrative expenses were relatively high in the third quarter because we obtained exclusive distribution rights in Guangdong Province for over 160 products from the beginning of this year. Greater expenditures are typically needed for the marketing of such new products, and these expenses will be decreased once the sales network is set up."»

This new CFO issue may also help investors to better understand CHME's story:

«Mr. Yang added, "we are undertaking a search for a bi-lingual CFO and a qualified investor relations firm, so that we may better communicate with investors, integrate our financial system and enhance our internal control system. We are confident of having a great year in 2007 and we expect continuing success in 2008."»

The company already announced the investor relations firm ...

• China Medicine Retains CCG Elite for Investor Relations Campaign
PR Newswire (Wed, Dec 5)

... now we're expecting the new CFO announcement.

I expect CHME.OB to earn $0.45 per share in 2007 (it earned $0.30 in the first nine months of the year, but Q4 is seasonally the strongest), which puts it trading at 6.9 times EPS.

I'll keep holding CHME.OB for the long term.

Retesting the neckline ... I'll keep holding.

Technically it is "important" for CHME.OB to keep holding $2.9 on close, which is the neckline of the inverted head & shoulders pattern.

Fundamentally I believe CHME.OB went down because of dilution that was already announced since the company's reverse merger in late 2005. I was aware this dilution would be coming and I'm aware that there won't be much more in the future (there aren't all that many warrants outstanding now). However, I was negatively surprised by weaker profit margins and sales growth in Q3 2007. Management said that was due to temporary effects and everything would go back to normal in Q4 2007, which is the company's strongest quarter from a seasonal standpoint.

I don't think CHME.OB will spend an entire week below $2.5 and believe the stock's intrinsic value is $9.5. I get to this value by multiplying the $0.45 EPS I expect for 2007 by the Drug Manufacturers Industry average P/E, which is 21.12.

I'll keep holding CHME.OB for the long term.

CHME.OB is back above $2.9, but we know we can't give much credit to these short term fluctuations.

Today I took some time to again study CHME's latest 10-Q filed with the SEC, check its products and website and finally compare it with a company doing a similar business: AOB.

On the 10-Q I've confirmed that CHME.OB has a very healthy balance sheet, with $4.13 M in cash and just $1.17 M in total liabilities. The company is also quite profitable (it earned $2.2 M in Q3 2007 alone) and it doesn't need to dilute shareholders value. The whole increase in the # of shares outstanding was planned and announced when the company become a public entity after a reverse merger with Lounsberry Holdings III, Inc.

The preferred shares and warrants outstanding constitute no surprise and come from two events:

1) The acquisition of Konzern from previous Konzern shareholders, which is the company's core business (this explains the warrants convertible at $1.75 and $2.5) and;
2) 3.2 million preferred shares which proceeds were used to fund a 70% subsidiary which was created for the purpose of development and application of aflatoxin-detoxifizyme ("ADTZ").

Most warrants and preferred shares were already converted into common shares. Given the strength of the balance sheet, the company's profitability and the almost complete conversion of the warrants and preferred shares outstanding, I don't expect significant dilution in 2008 and beyond.

As I took a look at CHME's website and compare it to AOB's website, I would say both companies sell products in similar areas (even though of course AOB's product offering is more broad).

Now let's compare CHME.OB and AOB from a financial standpoint:

- If you're still very worried about CHME's appetite for printing shares, consider AOB's historical share count. AOB's share count rose from about 10 million in 2001 to 75 million now.

- If you're worried because CHME.OB is an OTCBB traded stock, remember AOB used to be AOBO.OB when it was trading around $1 in late 2005. Over the next 18 month period AOB rose 14 fold

- If you're suspicious because CHME.OB is trading at just 6.6 times 2007 estimated EPS (the company already earned $0.30 per share in the first nine months of the year - I expect $0.45 EPS for the full year), then consider that in 2005, while AOB was at $1 - $1.10, it earned $0.31 per share. AOB's p/e ratio at the time was 3.4, so the company had to be a fraud, it had to be cooking its books, right? No! The company was incredibly cheap, and that's why it rose 14 fold and then got expensive, trading at 23 times forward earnings at its high of $14. I believe the same is true with CHME.OB, the company isn't a fraud, it is just very attractive.

- In 2007 AOB is estimated to earn 61 cents per share, and it closed today at $11.54. The current earnings multiple is 18.9. CHME.OB is estimated to earn $0.45 per share and if it were to trade at the same multiple as AOB, it would then be a $8.51 stock. Why not?

I continue to believe I have a multibagger in my hands here with CHME.OB and I'll continue holding the stock for the long term.