Lotus Pharmaceuticals—BUY

Lotus Phamaceuticals, Inc. (Bulletin Board—LTUS.OB)
Valuation-$2.08
Price November 30, 2007-$1.08

We are recommending LTUS.ob for purchase. LTUS is trading at 52% of our valuation.

We have not recommended an OB-aby in quite some time. Mostly because we could not find one that looked like a real company at a low valuation.

We purchased this at about $1.25 a while ago. The company has continued to perform, but the stock has not.

Q3 sales (9/30/2007) were up 80% to $16.5 million and net income was up 50% to $.05 per share (fully diluted, but untaxed).

This company/stock looks much like American Oriental Bioengineering, which we bought a few years back at around $1. It is now about $11.70 and trades on the NYSE under the symbol AOB. AOB is about three times the size of LTUS ($43.5 million in sales last quarter and $.16 per share in earnings—partially taxed), but its market cap is like 18 times higher ($877 million vs. $50 million). Part of the reason for this is that AOB has 70% gross margins, while LTUS has 40% gross margins.

LTUS has about as much cash as debt. Not as cash flush as we like, but not overleveraged either.

The daily trading volume is about 50,000 shares.

We think anything under $1.15 is a good price.

Like all Chinese stocks there are many transactions with affiliates and related parties that always give us pause. LTUS has not participated in the Chinese stock run-up at all. The 52 week low is $.90 and the high is $3.30. So while we plan to buy more next week—we will not “pile-on”.

About Lotus Pharmaceuticals, Inc.

Lotus Pharmaceuticals, Inc. (“Lotus”) controls and operates Liang Fang Pharmaceutical, Ltd. (“Liang”) and En Zhe Jia Shi Pharmaceutical, Ltd. (“En Zhe”), two Chinese pharmaceutical companies located in Beijing. Liang and En Zhe form a large comprehensive enterprise, which deals in an integration of the production, trade, sales and marketing of pharmaceuticals. Together, they possess some of the most advanced pharmaceutical-production equipment used in China, workshops authenticated by the National GMP, a suite of various medicines produced by Liang and/or En Zhe (together, “Lotus East”), and a number of high-tech personnel. Lotus East has business and office facilities of 2,000 square meters, warehouse of 1,000 square meters and operates ten retail pharmacies in the Beijing area. Lotus East performs scientific research on new medicines, and the production, wholesale and retail sale of medicines. For more information, visit http://www.LotusEast.com.

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