3-S Bio ( Nasdaq - SSRX ) -- Hikes Expenses

3-S Bio (SSRX $14.90) reported better than expected Q4 revenues.  Despite price reductions mandated by the Chinese central government volume advanced 18% to $26.3 million.  Higher sales and marketing costs enabled the company to penetrate less populated areas.  They also blunted competitive inroads.  Market share for 3-S Bio's leading drugs was preserved in the 40% range.  Product development costs accelerated, as well.  The company signed a partnership with U.S. based Davita last year to establish a chain of dialysis centers in China.  3-S Bio will supply a large component of the drugs to that venture.  Development costs jumped to get those formulations approved and into production.  Earnings declined 33% due to the elevated spending, coming in at $.12 a share.

The acquisition of the company remains on track.  An offer was announced last September.  The purchasing group included 3-S Bio's chief executive, a large bank controlled by communist party members, and a hedge fund also run by communists.  In February an agreement was reached to purchase all the outstanding stock at $15.40 a share.  3-S Bio's shareholders must approve the transaction by a 2/3 margin.  A vote is expected in the second quarter.

The uptick in spending suggests the deal is likely to go through.  The Davita venture holds good potential in its present form.  That encompasses a small part of the total Chinese market.  The addition of state controlled entities could open up additional territories, generating a bid payday for the private equity group.  3-S Bio has plenty of cash on hand to fund operations.  So any new capital won't be sidetracked from the huge opportunity the Davita partnership affords.  Investments in other initiatives could be made through the private structure, as well.

The shares are trading close to the ultimate buyout price.  An upward revision to the price appears unlikely.  Aggressive holders are advised to close out positions and put the money to work in another Special Situation.

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L&L Energy ( Nasdaq - LLEN ) -- Breaks Out

L&L Energy (LLEN $2.10) reported excellent better than expected Q3 (Jan.) results.  The company is an American managed coal producer that operates in China's interior.  Regulatory crackdowns on the entire industry, to promote worker safety, impacted performance in 2011 and 2012.  Output declined while the government inspected all the mines in the region.  L&L Energy received passing grades.  But the interruption caused earnings to decline.  During that stretch the company swapped a variety of properties, trading proven commodities for high potential mines that required devlopment but held substantially greater profit potential.  Those efforts started to bear fruit earlier in the fiscal year (April).  Momentum accelerated in the January quarter as volume picked up and margins expanded.

Earnings jumped 167% to $.32 a share.  Sales climbed 98% to $59.9 million.  The advance was led by a 253% increase in coal production.  Wholesale and coal washing operations also improved.  Expansion efforts promise to keep output rising in future periods.  The April quarter will be affected by the Chinese New Year celebration.  So the immediate sequential comparison might be flat.  But further gains are likely in fiscal 2014.  We estimate income will finish around $.90 a share this year and $1.25 a share in fiscal 2014.

Acquisitions are possible.  The Chinese central government has implemented a consolidation program for the coal industry.  Small operators are required to merge with larger groups by the end of calendar 2013.  The actual transactions need to be consummated by 2015.  L&L Energy has identified several candidates.  Substantial leverage could be achieved.  A successful roll-up strategy could reinforce the share price.  A higher price, in turn, could yield even more accretive acquisitions.

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