The Best Play in the Chinese Biotech Market

Biotechnology is a big opportunity. And China is a big market.

Combine the two and you have a biotech market - and big potential for investment profits.

Today I'm talking with Money Map Press Executive Editor William Patalon III about a big profit play in the Chinese biotech market.

It's a brand-new recommendation...

The Best Chinese Biotech Play

Bill Patalon: Michael, you and I both like the long-term potential of the "right" China-focused investments. And we're both big believers in the long-term upside for the biotech sector. You've told me about a stock that offers a "double-barreled" return by focusing on both of these opportunity/catalyst areas - China Biologic Products Inc. (Nasdaq: CBPO).

Let's start by telling folks what is it about biotech, and about China, that you like?

Michael Robinson: Well, Bill, I know that you - like me - have been following biotech for a long time. In fact, I believe you had the biotech beat at The Baltimore Sun.

BP: (laughing) You have a good memory, Michael.

MR: Well, I've been following biotech since the early 1980s, and I can tell you this emphatically: We've now reached the point where many of the innovations and breakthroughs that were on the drawing boards for years are finally coming to fruition.

That's why you see both small-cap and mega-cap biotech and Big Pharma companies coming out with so many new products over the past five years. And it's why there are hundreds more in their pipelines.

More to the point, the United States has an aging population, meaning folks need those drugs to improve their health and extend their lifespans, which continue to rise.

BP: Then there's China.

MR: That's right, Bill. Then there's China.

In China, we have a massive population of 1.3 billion people.

I mean, think about that.

BP: That's more than four times the 2014 U.S. population of 318.9 million. And for some additional context, China's middle class is bigger than the entire U.S. population.

MR: That's right, Bill.

BP: In fact, by 2022, according to McKinsey Greater China, that Asian giant could have a middle class of 630 million people. And it's all because of economic growth. That would represent 78% of all urban households, up from 68% in 2012 and 4% in 2000.

And those statistics show...

MR: ... that there's a huge customer base for biotech products. What's more, Bill, is that Beijing is pushing a transformation from rural provinces to the big cities where incomes are rising and where residents can afford better healthcare.

BP: Okay, we've really described the lay of the land here. So let's now move on and talk about China Biologic Products. What does it do? And why do you like it, as a business?

MR: Let's boil this down...

At its core, China Biologic Products sells blood and related products. As such, it's set to continue reaping the gains that comes with China's mass urbanization trend - as well as the continued increase in disposable income and the Chinese people's accompanying ability to spend more on healthcare.

BP: In essence, all the stuff that McKinsey was talking about...

MR: That's exactly right.

This biosciences firm, based in Beijing, owns a pharmaceutical-distribution business, a research facility, and 12 plasma-collection centers. It sells plasma directly to more than 1,000 hospitals across China. As those numbers steadily rise, so will the company's revenue.

China's plasma market used to be controlled by state-owned facilities run by the China National Blood Products Corp., provincial governments, and the Chinese army. But in the past decade, officials opened the sector to private entrepreneurs who used cutting-edge technologies to create high-quality plasma products.

China Biologic was launched in 2002 as a privatized spin-off of the Shandong Institute, a research entity formerly run by the Shandong Provincial Health Department. It's now the second-largest plasma collector in the country.

BP: Okay, we talked about the company. About the biotech sector. And about China, as a market and an economy. Now explain why you like the stock.

MR: It's interesting, Bill, but as an investor, one thing that I realize is that - despite different languages, customs, and geographic borders - people really don't differ from one country to the next as much as we sometimes think.

BP: And by that you mean...

MR: Well, I think we're all the same in that - at our core - we pretty much want the same things. I mean, we want the best for our families: good, safe food, effective healthcare to take care of our spouses and our children when they are sick.

And as incomes rise, and those goals become more attainable, people become less and less accepting of products that don't measure up.

BP: Like some of the food-quality/food-safety issues we've seen in China over the past few years...

MR: Exactly, Bill.

And here's another story that underscores this same basic consumer desire. It's a story - a tragedy, really - that directly benefits China Biologic.

BP: You're referring to the blood-supply issue you've told me about before.

MR: Right. In China, in the late 1980s and early '90s, there was a real spread of HIV through that country's rural regions - because of a contaminated blood supply. And that led to a government crackdown on plasma donations.

That, in turn, has crimped supplies at a time of rising demand. China's government has set strict rules for plasma collection.

For China Biologic, and for investors, that continuing demand/supply imbalance has created a huge profit stream.

In fact, the numbers show that China Biologic is a wealth machine. It has operating margins of 45% and a 36% return on equity (ROE). Over the past three years, it's grown its earnings per share (EPS) by an average of 24% and sales by an average of 13%.

I always like to find a stock that allows us to profit as the underlying company solves a problem for consumers.

BP: Interestingly, Zacks Equity Research just gave China Biologic its top (Strong Buy) ranking - meaning we're talking about a potential "Zacks Effect" stock here.

MR: That's an excellent point. The stock has mostly been in an uptrend over the past year, even though it doesn't get a lot of attention from Wall Street at a time that has investors so worried about China's growth.

Zacks is recommending the stock for many of the same reasons I like it. The company has great margins and high growth and has had a string of strong earnings reports.

Not only that, but Zacks has given China Biologic a $137 price target. If that's all we get, we're still talking a roughly 27% upside from here. Based on the firm's earnings track record, I actually think we could see double those returns over the next two to three years.

BP: Anything we need to be concerned about here?

MR: There are two main risks I see with this stock. They're interrelated and are tied to market conditions.

Let's start with the macro view. Many pros on Wall Street are worried about investing in China now that economic growth there has slowed from the 10% pace of a few years back to the current 7% or so.

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And it could slow more, meaning there's always the risk that a couple of major Wall Street houses could go on a "Sell China" spree that will rattle investors. Fortunately, at this point, I think much of that is now priced into the market.

The second risk involves the market's recent volatility. We've seen time and again during earnings season growth stocks that miss earnings by as little as a penny a share just get hammered.

BP: How would you structure the trade for this?

MR: I'd use my Cowboy Split strategy to both enter and exit this investment. While we were talking today [June 8], China Biologic came under heavy selling pressure on no news: The company has not issued a press release since May 6 when it reported strong earnings.

To take advantage of these kinds of buying opportunities, I'd likely make this a three-tiered entry. I'd start with one-third at market, the next third about 15% below that price, and the final third about 15% below the average entry price.

And in this market, I advocate grabbing smaller gains along the way. So with China Biologic, I'd definitely be thinking about taking some money off the table when the stock is up 35% to 50%.

BP: Is there anything else you like that's poised to be a China beneficiary right now?

MR: Well, Alibaba Group Holding Ltd. (NYSE: BABA) is on the path to become even bigger than Inc. (Nasdaq: AMZN).

Besides that e-commerce giant, there are three in particular that I think will do well in China's current economic climate. Two are straight-up stock plays, and one is an ETF. All three have a tie to China's burgeoning web market.

I like Bitauto Holdings Ltd. (NYSE ADR: BITA) as a play on China's huge auto industry, and NetEase Inc. (Nasdaq ADR: NTES) as a play on online gaming, and the Emerging Markets Internet & Ecommerce ETF (NYSE Arca: EMQQ) to cover the waterfront of China's online world.

BP: Like you, I'm a big believer in the e-commerce potential of China. But why do you like these three profit plays right now?

MR: Those stocks have gained. But don't let that deter you. Think about all the growth that's still to come in China.

Bitauto is the leading e-commerce player focused on the auto market, where we're seeing a bit of a slowdown, but still about 18 million cars and light-duty trucks a year being sold. The company has a seat at both sides of the table. It helps buyers and sellers.

BP: And China's auto market is now the world's biggest...

MR: That's correct. Bitauto's shares sold off a few months back on a classic Wall Street overreaction. Since it bottomed out on March 16, it's rallied for a 29% gain, and I see a lot more upside ahead. As you said, Bill, China is now the world's largest car market and will benefit from the shift to big cities we talked about a moment ago.

BP: And NetEase?

MR: That's one of China's pioneering e-commerce companies. It's still heavily focused on web games and is a great way to play the nation's gaming obsession. Forecasters at the Market Intelligence & Consulting Institute (MIC) project that China will pass the United States next year as the world's largest online game market with a value of $22 billion.

BP: Okay, so take us through EMQQ.

MR: I like EMQQ as a very broad play on the China's entire Internet industry. I know the fund manager personally, and he tells me the average stock in his portfolio is growing sales at 40% a year, or 20 times that of U.S. GDP growth.

BP: That's off the charts.

MR: It is. It really is.

BP: How would you play those stocks - structure the trades?

MR: With EMQQ, I would play this as a straight-and-simple long-term foundational investment. In other words, this is one I'd be adding to over the long haul, putting in a set amount every year.

BP: Getting rich on "autopilot"?

MR: Exactly.

BP: And Bitauto and NetEase?

MR: With Bitauto and NetEase, I would play them pretty much the same as with China Biologic. I do like all three for the long haul, but these are growth stocks that could be subject to the market's volatility. But with a tiered strategy, you can turn that to your advantage.

BP: Thanks, Michael.

PNEUMONOULTRAMICROSCOPICSILICOVOLCANOCONIOSIS: From investor presentations to product-launch slide shows, we've all come across plenty of tech neologisms that make our heads spin. This barrage of here-today-gone-tomorrow buzzwords often serves as a wall between us and the tech world... and it keeps newcomers from understanding what's really going on. Here are four tech industry terms that you need to know to make big profits in the future...

About the Author

Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...

  • He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
  • He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
  • As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.

This all means the entire world is constantly seeking Michael's insight.

In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.

Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.

And even with decades of experience, Michael believes there has never been a moment in time quite like this.

Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.

To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.

His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.

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