Skystar Bio-Pharmaceutical (SKBI.NSDQ)is a leading Chinese manufacturer and distributor of veterinary medicines, vaccines, and feed additives. It makes and distributes more than 250 products throughout China.
In the most recent quarterly earnings announcement, they reported revenue of more than $9 million for the quarter ended June 30, 2011 up 10% when compared to the same three months of 2010. The gain was driven by a 15% year-over-year increase in veterinary medicines.
Gross operating margins declined slightly according to the report. Net income totaled $1.5 million or $0.21 per fully diluted share for the quarter, down from net income of $2.4 million or $0.33 per fully diluted share in the same three months last year. Skystar Bio-Pharmaceutical noted in the earnings announcement that the number of distribution agents and direct customers climbed to 2,253 at the end of the second quarter, a significant jump in the past year.
One of the biggest changes over the last twelve months was the company’s increased spending on research and development. R&D costs jumped to $1.8 million, an amount that represents almost 20% of revenue in the second quarter 2011. In the same quarter a year ago, Skystar Bio-Pharmaceutical spent $0.2 million, or 2% of revenue, on R&D. The company noted that the increased R&D efforts included continued funding of existing joint R&D projects with universities and launching four new R&D projects to develop new veterinary medications during the quarter.
Commenting on the higher level of investment, Weibing Lu, Skystar Bio-Pharmaceutical's chairman and chief executive officer of Skystar Bio-Pharmaceutical, noted that, “The increase in research and development costs is necessary to remain competitive as the company believes that it can no longer rely on making significant pre-payments for raw materials to protect its gross margins in the long term. We maintain a long term strategy for achieving sustained growth and profitability by periodically developing new high gross margin products according to demand and expanding manufacturing capability and distribution.”
R&D expenses reduced profits and margins, Lu added because, “In order to preserve market share and expand into new territories, we have not raised our sales prices as we believe our customers would not be able to absorb pricing increases in this environment and such an increase would erode our market share.”
For the full year, the company expects to see revenue in the range of $52.0 million to $55.0 million. This would be an increase of 8-12% compared to 2010. Given its historical operating performance, Skystar Bio-Pharmaceutical should be profitable at that level of revenue. The stock appears undervalued at a price-to-earnings ratio under 2 for a company with a history of profits and strong sales growth in the current year.