By Financial Trader Research

Master Portfolio Additions 10.29.2007

Two high growth stocks, with powerful fundamental growth momentum make an entry into our master portfolio this quarter.  We have been conservative in stock allocations given the rich valuations in the US markets, and thus we have been positioned primarily in bonds and Euro denominated cash assets versus the dollar, as well as a few high quality stocks. 

This trend has not really changed since the two new equity additions are both foreign companies traded in the US and beneficiaries of the lower dollar and stronger Chinese Yaun.  As we noted in our last update, the dollar decline and ascendancy of the Chinese capital markets is essentially a generational shift in economic hegemony.  Both companies will report earnings this quarter that should meet lofty expectations and likely exceed earnings estimates well into future quarters, which fits our long term perspective and models.

Fundamentals:

3S Bio (SSRX), and Shengdatech (SDTH) showed up as a strong buy in our fundamental enterprise business model evaluations (Lupo-Kioutas©), as well as WatlooSoft©. Both trade at extremely low growth multiples and reveal a price to earnings growth ratio of  a microscopic one half (.50), well below the typical US equity, particularly the S&P500 where 3X is the norm.  In addition, their respective compound annual growth rates (CAGR) sing alto at 30% and 50% respectively.  While that is unusual for a small cap growth stock, even more unusual, yet attractive was the actual market opportunity within China for both of these companies.  The obvious question is whether these small caps can actually maintain their torrid growth rates?  The answer is a simple 'yes' based on the following fundamental information below.

3S Bio (SSRX)

SSRX, a Chinese biotech, went public this year raising US $105 million in net proceeds, at roughly the same price it trades at today's writing.  Yet earnings and growth of its two flagship products EPIAO and TPO continue to grow in double digit fashion since then.  EPIAO, an oncology drug, remained the primary earnings driver for SSRX for several years, but recent diversification of new product launches such as TPO now accounts for 22% of the companies total revenue, with foreseeable continued double digit growth.  As noted in SSRX's form 20F page 96, a methodical breakdown of fully funded new drugs is now in place with several products scheduled to be in production within a few years to further diversify its expanding portfolio and increase market acceptance of its existing portfolio. 

SSRX Highlights:

1...US$20 million, for the construction of a new GMP-certified manufacturing plant with planned capacity to meet increasing market demand and for certification of the new plant by the European Agency for the Evaluation of Medical Products, or EMEA.

2...US$5 million, for improvements to existing facilities, primarily relating to process development and optimization, and to achieve EMEA certification and improved production yield

3...US$10 million for conducting clinical trials for our product candidates, of which approximately US$3.4 million is expected to be used to develop anti-TNF humanized monoclonal antibody product candidate (SSS07), US$1.7 million to develop NuPIAO, US$1.6 million to develop  HPV vaccine (SSS08), US$0.4 million to develop high dosage EPIAO, US$0.4 million to develop NuLeusin, and approximately US$1.5 million for clinical trials necessary for the EMEA registration of EPIAO.

4...US$10 million for the expansion and enhancement of sales and marketing network, including the addition of personnel to oncology-focused marketing team, further penetration in existing geographical markets and expansion into new target areas in China.
 

Clearly, there are risks associated with any biotech, not to mention a Chinese based biotech company, but the fundamental construct of SSRX remaining earnings positive and its strategic position in the Chinese and global market biotech space creates a compelling investment argument.

Technical Analysis, WatlooSoft©

WatlooSoft©, Financialtrader.com's inference engine,  generated a buy signal in SSRX on the low volume, high volatility down day of October 22, 2007.  Without going into excruciating detail, price support areas that are approached rapidly and returned just as rapidly indicate significant equity demand.   Moreover, SSRX's relative strength versus other US listed Chinese equities reveals buying interest layered at various support levels above its peers.  While the stock is up 60% from its lows, it still trades below the initial offering price even after several quarters of continued growth.  This is likely the result of market perception, with the technical constructs indicating that perception is changing as we have seen for similar equities in our master portfolio, particularly Sinovac (SVA).

Great Minds Think Alike?

Its worth noting that Sansar Capital filed a 13G form for a 5% equity stake in SSRX.  As readers and investors are well aware, we covered the large equity stake of Sansar in Sinovac stock in January of 2007, which was several months after our initial strong buy rating.  Sansar maintains a relatively long term perspective, and has proven to be a quality investor not known for flipping positions. 

Conclusion:  In summary, we rate SSRX a strong buy with a modest price target of US$ 30.00 in the next 9 to 12 months.

Shengdatech SDTH to follow shortly.

We make order out of market chaos©.

For current quarter  10.1.2007, Total Return Includes dividends and interest for Bonds and S&P 500.

All totals include open and closed positions during the actual performing quarters.  The positions and portfolio above is for educational purposes and not a recommendation to either buy or sell securities, futures, or options.  WatlooSoft© 2007 is a registered FinancialTrader.com software product licensed as decision support for all of FinancialTrader.com technical signals. 

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