Opportunistic Play on C&O Pharmaceutical                                                                                 28 Jan 11

Before I start, I will like to emphasis that this short write up is to highlight a possible opportunistic (technical) play on C&O Pharmaceutical (“C&O”) with a horizon of 1-2 weeks (max) and not an in depth analysis on its fundamentals. In addition, I reiterate that this write-up is a general one and does not take into account of the reader’s risk profile. It may or may not be suitable to you.

Among the companies listed in Table 1 below, C&O is the 2nd worst performer, just below Si Huan Pharmaceutical. In addition, it has also underperformed the FTSE Strait Times China index year to date (“YTD”) by about 6%.

Source: Bloomberg (as of 28 Jan 11).

Based on historical records, C&O has seldom hit an RSI of 21.3988 which was the RSI seen on 28 Jan. To be more specific, according to Bloomberg, there were only two days (out of 1,169 trading sessions) whereby the RSI are lower than 21.3988. Both sessions occurred on 14 & 15 Nov 06, after the release of its dismal 1QFY06 results. Nevertheless, there were open market purchases announced on 14 Nov where the share price subsequently recovered.

In addition, it is noteworthy that the lowest RSI level for C&O was 21.3761. Thus, at this level, it may be a good time for aggressive traders to initiate long trades starting at current levels via tranches on C&O.

However, I wish to caution readers that RSI should not the sole indicator to indicate that a company is ripe for retracement. In addition, RSI can remain depressed for some time. Nevertheless, it is a good indicator (sensitive but not too sensitive) to highlight companies which are oversold. Furthermore, I have used a large sample size (1,169 trading sessions) to increase the probability of the veracity of this signal. In addition, other indicators such as MACD or MFI also corroborated to the oversold condition.

As mentioned above, I have not researched into C&O’s fundamentals. However, there are four salient points on the fundamentals which readers should take note.

Firstly, C&O announced on 1 Dec 2010 that Sumitomo Corp bought a 29% stake in C&O at $0.50 / share, resulting in Sumitomo being the 2nd largest shareholder. C&O is likely to be able to benefit with Sumitomo as a 2nd largest shareholder. In addition, Sumitomo has indicated that it would want a majority stake in C&O eventually, i.e. a general takeover. (Do refer to the poems research report on 3 Dec 10)

Secondly, C&O is going to release its 2QFY11 results on 10 Feb 2011 during lunch break.

Thirdly, in the recent results release, C&O cautioned that revenue may be affected in the short run in view of the uncertainty in the government’s pricing policy. However, company is cautiously optimistic that the increase in sales quantity and demand for pharmaceutical products caused by the increase in government funding on medical care, will be more than enough to offset possible losses caused by lower prices in the long run.

Fourthly, with reference to Table 2 below, analysts’ consensus target price is around $0.63, representing a potential capital upside of 40%.

Source: Bloomberg (as of 28 Jan 11)

The risk to reward ratio seems favourable to initiate long trades (i.e. buy) starting at current levels via tranches on C&O with a horizon of 1-2 weeks (max). As this is an opportunistic trade with a short term horizon, readers should set their return expectations realistically and may have to settle for a small profit (if any) or even cut loss if necessary. Lastly, it is extremely important that this opportunistic trade involves risks which may or may not be suitable for all readers. Thus, I urge readers to evaluate this trade against their risk profile before initiating long trades.

C&O’s supports and resistances which are subject to change, are provided for reference only.

Price on 28 Jan 11: $0.450

Supports: $0.445 / $0.440 / $0.435

Resistances: $0.455 / $0.460 / $0.465

This is an amended version which I sent out to my clients over the weekend.

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.