What we need to look at AOB?

Recently a claim by barron really slam down the price of AOB which even true, should not be a big problem of AOB. What we really need to focus on is the action taken by AOB after its offering of $140 m last two weeks. Its acquisition only spend $30 m, compared to $140m, what does that mean , huh? Yes, more plan is going on. Well by so far, with little information about acquisition, I would suggest we start to load partial of AOB by taking some risk while watching carefully any buyout it may have in the future. If the buyout is not good , then get out quickly.

======================
Part One

An Exchange on a China Stock
To the Editor:

On June 25, Barron's published a negative column by Leslie P. Norton entitled "Chinese Medicine Show" about American Oriental Bioengineering (ticker: AOB). My firm is a shareholder of AOB. I have traveled to Harbin and Hezhou in China to visit AOB's offices, factories, managers, and distributors. The picture that has emerged is diametrically opposed to the portrayal in the column. I have found the company has quality products, fast growth, known brands, savvy management, and hardworking employees.

I believe that the issues raised by the article are immaterial to the fundamentals of the company. However, I would like to address them:

• Peptide products inhibit tumor growth.


AOB has never claimed inhibition of human tumors. A press release in 2004 stated that AOB researchers had shown inhibition of tumor cell growth in mice. Studies done by American researchers (including at UC, Davis) have shown similar results.

• AOB recently said that China will be its main market, whereas earlier filings mentioned international opportunities.

There is no inconsistency between AOB's past and current statements. In 2003 and 2004, AOB had two major products. A significant percentage of sales came from Korea and Japan, and expanding those products into foreign markets was a major objective. AOB has since acquired or introduced new products with sales in China that are much larger than the sales of legacy products. As a result, the company's current statement that China is its main market is not contradictory to past statements.

• Director Wang Xianmin aided the IPO of Daqing Lianyi, whose executives bribed officials.

Wang was a government official in Heilongjiang Province and not an employee of Daqing Lianyi. There is no evidence of anything improper by him. A background check on Wang run by AOB revealed nothing. This is a classic case of guilt by association based on speculation.

• Packaging for soy peptide claims use of technology from UC, Berkeley.


The company does not use technology from UC, Berkeley. AOB had been in past negotiations with UC, Berkeley, to license patents. During this negotiation, one of AOB's local marketing agents inadvertently put this claim on its packaging for the Hong Kong market only (less than 1% of sales). The company is correcting this problem.

Continue

• AOB was involved with CEOCast and MidContinental Securities. Controlling owners of these firms have questionable histories.


The fact that Michael Wachs controlled CEOCast was only discovered a year after AOB stopped doing business with the firm. AOB no longer has any relationship with either CEOCast or MidContinental and was not aware of either company's history at the time of involvement. There is no allegation of any wrongdoing occurring from AOB's involvement with either firm.

More important than whom AOB was peripherally involved with in the past is the people it is directly involved with today. AOB Board Member Lawrence Wizel was a partner with Deloitte and Touche for 26 years. Director Cosimo Patti was an arbiter for the NASD and NYSE for 18 years. It is unlikely that these people would serve as Directors if integrity or accounting problems existed.

AOB is a fast-growing company at an extremely cheap valuation with a phenomenal track record of creating shareholder value. Excluding cash, AOB trades at 9x forward (2008) earnings. EPS has grown at a 43% CAGR over the last four years, and consensus projections are for 37% growth in the next 2 years.

Most importantly, AOB possesses a unique opportunity to acquire at extremely attractive prices. This opportunity is illustrated by recent history. In 2004, AOB acquired HSPL for $7MM. Today that company generates an estimated $6MM in net income. AOB paid a little over 1x current earnings. In April 2006, AOB paid 2-3x year-end 2007 run rate earnings for GLP.

The case for AOB is simple. How many other NYSE companies trade at 9x earnings, are growing 30%+, and have the opportunity to acquire at 2-5x earnings?

My work in China has confirmed this story. I've seen AOB products on the shelves, toured their factories, and confirmed that its brands are known and demand for the products is real.

Sincerely,
Shaumo Sadhukhan
Managing Partner,
Lotus Partners
New York City