Under the Radar: China's Biggest Drugstore Chain Looks Cheap


Until recently, many Chinese turned to manufactures, retailers and government agencies to meet their every day needs. But in recent years, they have become distrustful. One recent example: The sale of tainted milk powder that killed several, babies in 2008 and sickened more than 300,000 others, many with kidney stones or kidney failure. Turns out that city officials in the company's hometown in China knew about the problem, but they continued to sell the baby formula.

Such episodes have led many Chinese families to now turn to China Nepstar Chain Drugstore (NPD), China's largest retail drugstore chain. The company has become a trusted site in many urban neighborhoods much the way Americans trust the products they buy at stores such as Walgreens (WAG) and CVS (CVS).

Plus, the company is moving into a growth business: filling prescriptions. Until recently, most Chinese would fill their prescriptions at the hospital. But that is quickly changing.

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As a result, the chain, has now grown from a single shop in 1995 to about 3,000 outlets across China. Yet while it's the largest drugstore chain in China, it still only has a 2% share of the market. Which means lots of growth ahead. While there is competition, it still has greater bargaining power with the pharmaceutical manufacturers and distributors than the smaller fragmented mom and pop operators.

Hilary Kramer, editor of GameChangerStocks.com, says that Nepstar is a buy for those reasons. She also likes the company's owners, Neptunus Group and has had her eye on the stock for some time. The stock has fallen about 59% since the beginning of the year, due to rising wage and rent expenses, but the company now has a new CEO and is taking steps to put cost controls underway.

Along with the growth opportunities, the new CEO and control on costs, Kramer also says that the company recently declared a buyback, and is repurchasing up to $20 million worth of its shares over the next 12 months which will give support to the stock. In addition, the NYSE traded shares sport a 9% dividend yield.

Kramer's six month target: $3.50 per share, an increase of about 12%.

Originally published