American Oriental Bio a China Play

American Oriental Bioengineering Inc. (AOB - Analyst Report) is a China-based specialty pharmaceutical company which develops, manufactures and commercializes both plant-based pharmaceutical (PBP) and plant-based nutraceutical (PBN) products. First quarter financials were strong and were in line with our expectations. We expect the company to continue to deliver strong performance for the remainder of the year due to a relatively high growth in traditional Chinese medicine market in China.

AOB targets two rather large markets in China: the TCM pharmaceutical market and nutraceutical market. We view AOB as a China play stock and growth story. In the past few years from 2003 and 2007, the company achieved more than impressive top line CAGR of 66.6%. EPS grew from $0.15 in 2003 to $0.60 in 2007, a CAGR of 42.7%. Both top line and bottom line continued to grow in the first quarter of 2008. We believe AOB will ride the wave of Chinese economic growth and increased healthcare spending in the next few years.

We believe the company will continue manage its growth through both organically and through acquisition. Although growth in the PBN sector may level off in the next few years, we believe the company will achieve high growth in the PBP sector going forward.

Specifically, we model top-line growth (CAGR) of 32.5% from 2008 to 2011 EPS growth will reach 29.7% CAGR. We maintain our Buy rating on AOB shares and maintain our price target of $16. The price target corresponds to a P/E ratio of 17.4 x, 11.9x and 11x of our estimated EPS of $0.92, $1.35, and $1.46 for 2009, 2010, and 2011 respectively.

Read the full analyst report on AOB.

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