Consun Pharmaceutical Group Limited

Consun (‘Group’) sells modern and traditional Chinese medicines via its ‘Conson’ (87% of sales) and ‘Yulin’ (13%) segments respectively.

The group’s kidney medicines – Uremic clearance granules - contributes 70% of sales. These are sold along with contrast medium used in magnetic resonance imaging (MRI), orthopedic medicines, dermatologic medicines, and medicines for women and children among others. It holds leading market positions in uremic clearance granules and contrast medium segments.

The effects of Covid-19 decreased sales of all product lines except the kidney medicines (which reported a modest increase), and impaired some of the aged receivables. In 2019, management wrote down all the goodwill on the Yulin segment ($350m) due to significant declines in sales and diminished prospects. These factors depressed TTM and 2019 earnings.

TTM sales were $1.7b – down from a high of $2.2b in 2018. TTM ebitda was $539m (2019: $638m) and ttm net profits were depressed at $41m (2019: $91m) – down from a high of $551m in 2018.

The cash flows paint a more accurate story in this case as it excludes the effects of impairment and other non-cash charges – revealing $511m of free cash flows in the last twelve months and an average of over $400m/year in the last five years.

The balance sheet was strong with over $1b in net cash. Management has committed $485m toward capital expenditures to enhance production capacity.

The stock is selling for $2.6b ($3.12/share) i.e. under 7x normal free cash flows. (This assumes conversion of the latest batch of 18.2m options with exercise prices as low as $3.28/share.)

Dividend payouts and share repurchases have been generous though the final dividend was cut in half. In the last twelve months dividends and repurchases totaled $288m, yielding over 11% at market.

Offsetting this is the constant issuance of share options to employees including a large batch in March 2020 at the height of the pandemic just prior to the final dividend being cut in half. (It’s worth remembering that it’s in management’s interest to cut dividends to enhance the value of their options.) In total, there are 107.8m options outstanding (13% of issued shares) with an average exercise price of $4.55/share, which will crimp the upside on the stock.

Regardless of this and the blunder of the Yulin acquisition, this stock meets our tests of investment quality due to the prodigious free cash flows it generates with respect to the current price.