China Animal Healthcare Ltd. (“CAL”) seems to be on the verge of completing a double bottom formation, if it can break the neckline at $0.280 with volume expansion.
For the uninitiated, CAL has three main business divisions outlined in Table 1 below.
Table 1: Outline of the respective business divisions
|
S/No
|
Business division
|
Percentage of FY10 revenue
|
Remarks
|
|
a)
|
Powdered drugs
|
69.6%
|
Usually for poultry such as chickens as they have no taste buds. Marketed through its extensive retail network.
|
|
b)
|
Injection drugs
|
5.7%
|
More applicable for livestock such as pigs, cows and sheep. Marketed through its extensive retail network.
|
|
c)
|
Biological drugs
|
24.7%
|
Mainly in the form of vaccines and applicable to all poultry and livestock.
Non mandatory vaccines: Marketed through its extensive retail network.
Mandatory vaccines: Marketed to governmental provincial veterinary stations through semi annual public tenders (Aug & Feb)
|
Source: Company
Below is CAL’s chart as of 10 Jun 11.
Chart 1: CAL price chart
Source: Metastock as of 10 Jun 11
Other indicators such as On Balance Volume (“OBV”), RSI, MACD etc exhibit bullish divergences from 25 Mar to 8 Jun. I have appended RSI and MACD charts in Charts 2A – 2B. They are sourced from Metastock as of 10 Jun 11.
Chart 2A: RSI Chart
Chart 2B: MACD Chart
Based on my personal interpretation of charts, there are three possible scenarios.
Scenario 1: Price breaches $0.280 after some consolidation
Having surged 7.8% from the low of $0.255 on Wednesday to $0.275 on Friday, CAL may consolidate around $0.280 in the near term and fail to break above it convincingly. Once the consolidation is over, CAL may then breach $0.280 convincingly. The odds for this development are slightly higher than Scenario 2 as it has moved up significantly for the past 2 days. Furthermore, a layer of resistance exists around $0.280 to 0.285. It is also noteworthy that the duration for this potential double bottom formation seems to be shorter than the usual norm of 1-3 months. Thus, I would personally prefer CAL to consolidate first (i.e. “to digest the gains and gather buying momentum”) so that the breakout which occurs subsequently is likely to be more sustainable.
*It is noteworthy that consolidation can occur over a period as short as days, or as long as weeks.
Scenario 2: Price surges above $0.280 without any consolidation
Nonetheless, there is always a possibility that CAL may be able to breach above $0.280 without any consolidation around that level. However, due to the aforementioned reasons in Scenario 1, the odds favour a near term consolidation around that level. In addition, such rapid rally / breakout (without consolidation) may not be sustainable over time.
Scenario 3: Price fails to breach $0.280 and trades below $0.280 for a long period of time
CAL’s rally may fizzle out at $0.280 and may not breach $0.280 for a long period of time. As a result, price may slowly drift sideways or downwards.
Conclusion: Scenarios 1 & 2 are more likely with Scenario 1 being the most likely
Based on the current information (note chart development changes constantly), it is likely that Scenarios 1 & 2 are more likely than 3, with Scenario 1 being the most likely. In addition, the recent positive news development on CAL seems to corroborate the potential upward movement in share price.
Here are some recent developments outlined in Table 2 in chronological order for ease of reference.
Table 2: Recent developments on CAL
|
Date
|
News
|
|
23 May 11
|
Reuters reported that according to four sources familiar with the matter, CAL is in talks with investment banks to do a possible de-listing in Singapore and lists in Hong Kong. CAL management and Blackstone declined to comment.
|
|
26 May 11
|
DBS Vickers maintained buy call with target price of $0.450.
|
|
3 Jun 11
|
Fidelity Investments raised its stake in CAL from 8.98 % to 9.01%.
|
|
9 Jun 11
|
Kim Eng maintained buy call with target price of $0.460.
|
Source: Ernest’s compilations
Lastly, if CAL manages to breach $0.280 convincingly in the next 1-2 months, a measured target (i.e. potential upside) is likely to be around $0.30.
P.S: Ave analysts’ target price (which is subject to change) ranges from $0.420 to $0.470.
Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
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