Traditional Chinese Remedy Maker Has Healthy Stock

Based in the city of Shenzhen, American Oriental makes medicine and supplements based on traditional Chinese medicine practices that use plants and minerals to alleviate ailments. While different from fare found in the average U.S. pharmacy, these products are part of a robust industry in China, where traditional medicines remain a popular choice over pricier Western drugs.

For investors looking to take advantage of China's growth, American Oriental is poised to benefit from the perfect storm of broader economic trends. The country's population is large and aging, while incomes are rising and the middle class burgeoning. What sets the company apart from its fellow U.S.-listed peers — Tongjitang Chinese Medicines (TCM) and China Shenghuo Pharmaceutical Holdings (KUN) — is that, thanks in part to an aggressive acquisition strategy, American Oriental has multiple brand-name products, national reach and a good-sized foot in both the over-the-counter and prescription markets.

While Chinese Internet stocks such as Sohu.com (SOHU) and Sina (SINA) have enjoyed more of the Wall Street limelight, China's pharmaceutical industry is starting to catch up. A recent report out of PricewaterhouseCoopers says that a solid majority of multinational and U.S. companies believe Asia is quickly becoming the center of gravity in the pharmaceutical market.

"The Chinese pharmaceuticals industry is modernizing," William Lyons, director of equity research at Westminster Securities, said in an Aug. 21 note.

Traditional Chinese medicine is a more than $6 billion industry in China and accounts for 21% of all pharmaceutical spending in the country, according to Piper Jaffray analyst Gur Roshwalb.

American Oriental is easily one of the stronger contenders in the sector. Since the company listed its shares in the U.S. in July 2005, its profits and revenue have nearly tripled. In the second quarter, revenue grew 49% to $33.9 million and earnings rose 66% to $9.7 million, not including foreign-currency translation. The company's products include a soft gel formulated from the shinyleaf yellowhorn plant that's designed to alleviate bed-wetting, and an antiviral powder derived from weeping forsythia and other flowering plants.

Despite convincing financial results, American Oriental shares have been under the weather of late. Year to date, the stock is down nearly 4% at $11.70 as of Tuesday's close.

Julie Chen, an analyst at Brean Murray Carret & Co., views the weakness as a buying opportunity and rates American Oriental as a top pick for this year. "It really is capitalism at its best in China," Chen says.