China Medical Technologies, Inc. (ADR) (CMED)

Growth continues to be strong, and the company appears to be clicking on all cylinders. I'm still very bullish on this company, and I think the megatrends it's riding continue to be a great catalyst, as the Chinese become more wealthy and health care becomes a greater priority.

The company did announce one major shift in strategy during its most recent conference call. CMED's not going to rely on equipment sales as much and instead focusing on its reagent sales. I think this is a positive move. What CMED is doing is renting out its equipment to hospitals for little or no charge, which enables it to get much higher penetration. So any lost revenue from equipment sales is more than made up in increased sales of reagents that the hospitals need in order to utilize that CMED equipment. This is like what HP and Dell do with their printers. They sell them really cheap or, in some cases, give them away for free, knowing that they can recoup that lost revenue from your repeated purchases of their expensive toners. You gotta love those recurring sources of revenue.

Here's what CMED management said about one of their three segments, ECLIA:
"We have introduced a reagent arrangement to hospitals, especially in large and fast-growing small hospitals. These hospitals are provided free ECLIA equipment and in return they will only purchase our ECLIA reagents. We believe this arrangement will help us penetrate to high-end as well as low-end hospitals, which will provide additional recurring and sustainable resource of revenue for the company."

And here's what management said about another segment, FISH:
"FISH reagents are made by China Medical and contribute a high gross margin for the company. During this year, we have established a sales level covering more than 200 large hospitals and we expect to increase another 300 large hospital customers by the end of fiscal year 2008. The existing and new large hospital customers will drive the use of our FISH reagents rapidly, which again is recurring in nature and generate a high gross margin."

So you can see where the growth opportunities lie, when CMED has 300 large hospitals they have yet to establish FISH sales in. And as far as R&D goes, CMED continues to develop new reagents. It estimates 10-15 new reagents by the end of the year for its ECLIA line. They didn't specify the number of new FISH reagents they're developing, though they did say they have a prostate cancer detection reagent close to being available.

CMED's profit margins, return on assets and return on equity are all robust. The company carries a manageable amount of debt, and it also announced a dividend increase. The PEG ratio, as calculated by Yahoo!, is an astounding 0.58, reflecting its strong growth potential. Looking at the P/E, it looks a bit pricey at 23, but I think CMED's got the growth to justify the valuation. If anything, I think the market is underestimating CMED's prospects, driving its stock downward because of macroeconomic factors that have little to do with the company itself.