While researching new Chinese stocks to play, an interesting play popped onto my watchlist. A recent IPO, China Nepstar (NYSE: NPD) operates the largest retail drugstore chain in China and based on its current stock price of $18.93, the company is worth $1.95 billion. By the looks of it, a bit pricey, but let’s take a look at their recent quarterly earnings to see if they’re deserving of such a premium valuation.
ss=”MsoNormal”>Quarterly revenues rose nearly 7% to $65 million—yawwwn—but margins surged from 36% to 47%, helping quarterly net income quintuple to $6 million. Same stores sales were down slightly, but on a conference call, management indicated the reason for the decline was due to the change the higher margin products. With approximately 1,800 current stores in operation and plans to open 1,050 in the next year, weak same store sales growth will be of little importance. More importantly, Nepstar is moving into private label drugs, which should help them run a more efficient operation.
Management guided analysts to expect $260 million or so in revenues and $20 million in profits for 2007, making the stock an expensive proposition here at nearly 8x sales and 100x earnings. But, then again, that’s China for ya! Several other Chinese companies have similar valuations and Nepstar’s pedigree makes me think it’s well deserved.
Their quiet period ends next week, so I’ll be looking for announcements and trading volume as signals to enter. The stock is only $2 off its highs, so I’ll be looking to buy on any breakout. I bring this play up now because once this kind of stock starts moving, it can really take off quickly, so you should do your DD early.
No position…yet
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