Weikang Bio-Tech Group Co (OTC BB:WKBT)

We have mentioned Weikang Bio-Tech twice over the past year and a half, indicating that it may qualify as a GeoSpecial if it could rectify some outstanding liquidity issues.

At eh outset of tracking Weikang, the Company had negative working capital of $8 million due to a rather large financial obligation of approximately $7.6 million that it was supposed to satisfy by October of 2009. A financing arrangement to remedy this situation has yet to occur.

The good news is that the date to meet its financial obligation has been extended to June 30, 2010. Also, the negative working capital situation is much improved, having been reduced to $46,218 from $4.27 million in its 2009 second quarter. This coupled with Weikang's low valuation has prompted us to code WKBT as a low tier GeoSpecial. We must realize that the risk of a dilutive capital raising event still exists. We also need information on whether or not the Company is operating at full capacity, a factor that could impact near term growth as EPS comparisons will be more challenging.

Valuation Parameters:
Price as of November 20, 2009: $2.75
Trailing EPS: $0.59
Trailing P/E: 4.7
Nine months EPS growth rate: 238.5%
PEG Ratio (P/E divided by EPS growth rate): 0.02

Weikang Bio-Tech Group reported strong 2009 second quarter results after the close today.  Once again, the company was able to post solid growth in sales and earnings per share.

• Revenues increased 544% to $13.20 million.
• Earning per share increased 225% to $0.13.

Comments about future prospects were encouraging:

Our business will continue to accelerate as we enter the second half of 2009. We are seeing strong demand for our OTC pharmaceuticals and TCM products especially in the midst of China's new healthcare reform initiatives, which will secure our future growth.'

Unfortunately, as we highlighted on May 8, 2009, the company still has issues regarding its liquidity position.  Thus, an  investment decision here is a tough call.   On the flip side, the stock has a tax adjusted P/E of 7.3 and a peg ratio of 1.4.  Given the compelling valuation proposition the GeoTeam® will establish a position in WKBT realizing that there may be substantial dilution risk as management grapples with ways to cure the company's negative working capital position.   If not for the this issue WKBT would be a classic GeoBargain selection.

We have requested an interview with management.  The stock remains on the GeoBargain on the Radar list and is also an ideal candidate for consideration as a GeoSpecial.

"As of March 31, 2009 , the Company had negative working capital of $8 million. The negative working capital is primarily due to other payables of approximately $7.62 million that Sinary is obligated to pay to the prior owners of Heilongjiang Weikang on or before October 25, 2009. "

Source: SEC Form 10Q (For the Quarterly Period Ended March 31, 2009, page 15)

Weikang Bio-Tech Group has peaked the GeoTeam's® curiosity and is being added to the GeoBargain On The Radar List.  The company reported substancial growth in sales and EPS for 2008 and its first quarter 2009 ended March. For all of 2008 the company's EPS rose  100% $0.30.  In its first quarter Weikang reported EPS of $0.15  up from $0.01. Unfortunately, their are a couple caveats preventing the GeoTeam® from taking a position in the company's stock.

1.  The stock is extremely illiquid as insiders own 98% of the outstanding shares.  The bid ask spread as of May 22, 2009 was  $0.51 by $1.01.

2.  As of March 31, 2009 the company had Negative working capital of $8 million due to a rather large financial obligation, of approximately $7.6 million, that it must satisfy by October of 2009.  However, comments in the the 2008 SEC Form 10Q indicate that the company will be able to meets its future financial obligations.

"We believe that our current cash and cash equivalents, anticipated cash flow from operations and the net proceeds from a proposed offering will be sufficient to meet our anticipated cash needs for the near future."

 The GeoTeam® will monitor the Weikang story as it relates to these issues.  We are searching for details on the proposed offering.   The big question is will the offering significantly dilute its EPS and reduce the attractiveness of the  story or; will the company's current growth trend overcome potential dilution issues?  The GeoTeam® will likely stay on  the sidelines until this question is anwsered.

Source: SEC Form 10Q (For the Quarterly Period Ended March 31, 2009)