WuXi Pharmatech Reports Another Healthy Quarter

by: Trader Mark May 28, 2008 | about stocks: WX    
Trader Mark

Trader Mark

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WuXi PharmaTech (WX), a Chinese contract research organization [CRO] put out another good quarter, but this stock never seems to trade in a logical manner; perhaps the gross margins or lack of "increased" guidance is caused the stock to fall 3% yesterday. It just might be too small or unknown to be attracting enough attention or to trade "normally".

  • Net revenues increased 68.7% to $57.1 million in the first quarter 2008 from $33.8 million in the first quarter 2007. This increase was primarily driven by the strong organic growth and the addition of US-based services following the close of the AppTec Laboratory Services, Inc. acquisition on January 31, 2008. During the two-month post-acquisition period, our US-based services contributed $11.0 million for the first quarter 2008. (keep in mind some of that growth is not organic, i.e. due to acquisition)
  • Net revenues from laboratory services increased 77.4% to $38.5 million in the first quarter 2008 from $21.7 million in the first quarter 2007, driven by a growing demand for our core discovery chemistry and process research services, and testing services from the AppTec acquisition.
  • Net revenues from manufacturing services increased by 53.3% to $18.6 million in the first quarter 2008 from $12.1 million in the first quarter 2007, primarily due to an increase in the number and scope of projects.
  • Overall gross margin was 42.5% in the first quarter 2008. Our laboratory services margin was 49.2% and manufacturing margin was 28.7% in the first quarter 2008. While our laboratory services margin remained robust, the manufacturing services margin was affected by the low utilization in our biologics manufacturing facility. Looking forward, we expect the utilization rate to improve in later quarters. (this is down from previous quarters)
  • Net income increased by 131.9% to $13.9 million for the first quarter 2008 from $6.0 million for the first quarter 2007. Net profit margin increased to 24.3% in the first quarter 2008 from 17.7% in the first quarter 2007. Non-GAAP net income, as defined below, for the first quarter 2008 grew by 85.3% to $17.3 million, compared to the non-GAAP net income of $9.3 million in the first quarter 2007. Diluted earnings per ADS were $0.19 and non-GAAP diluted earnings per ADS were $0.24 in the first quarter 2008. (analysts at $0.15)
Guidance
  • We maintain our 2008 annual consolidated net revenues guidance in the range from $280 million to $300 million.
I've held this stock since last November, and so far really no benefit. But I continue to like the story so I am keeping it, although it holds a very minor weight in the portfolio. Analysts are in for a $0.74 estimate for 2008 so with this beat of 4 cents we might be headed closer to $0.80 EPS for the year and at $21 this gives us a forward PE of 26 for almost double the growth rate.

Some earlier posts

[Mar 12: WuXi PharmTech - Very Good Earnings]
[Nov 12: Earnings - WuXi PharmTech]
[Nov 5: Two New Foreign Positions Added Today]

While you could throw ANY Chinese stock out there and say "it will grow, it has to just by demographics alone" - and to some degree that will be true, I'm trying to find names which fill more long lasting niches, especially in the business to business end. After seeing WuXi on Zach's blog in the past few weeks, this one really struck a chord with me. WuXi is a contract research organization [CRO] for companies - think outsourcing. I have invested for my own personal account in a similar company in Ireland called ICON (ICLR), which if you pull up a 2 year chart only continues to perform year in and year out. There are also a few slower growing US competitors to compare WuXi against.

Disclosure: Long WuXi PharmaTech in fund, no personal position

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This article has 5 comments:

  •  
    May 29 12:59 AM
    The probable reason that WX didn't go up after the good earnings is that investors who know the stock well remember that WX postponed a secondary offering last month due to "poor market conditions" and that if they bid up the price too high, the company would then issue the secondary ADS offering which would then depress the price again.
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  •  
    May 29 08:35 AM
    A forward PE of 26? Might want to check out LTUS.OB (Lotus Pharmaceuticals) with a forward PE of UNDER 3 based on 2008 make good of $13.8M net income, or about .29/share.
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  •  
    May 29 10:29 AM
    Also held WX since last November.
    I think the trends to CROs, China labor, China economic growth, and increased US penetration makes WX an attractive long-term holding. However the secondary ADS does concern me even if it is postponed this time. I would rather see them use the Operating CF of $65MM (ttm) to grow.
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  •  
    May 29 11:29 AM
    Yes same issue with MELI in terms of secondary offering, then retracted, but as a constant threat overhead.
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  •  
    May 29 09:16 PM
    demographics? the china demographics is no good, no matter how you look at it. China too, has its postwar "boom" generation which is powering all of the economic growth, but down the line, we are looking at labor shortage due to the one-child only policy... and all the same problems as in europe and japan of having two retired persons for every working taxpayer.
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