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This forgotten growth stock deserves more attention

Hutchison China MediTech (LSE: HCM), better known as Chi-Med, is an old favourite of small-cap investors which currently deserves more attention from the investment community.

Hybrid strategy

The Shanghai-based pharmaceutical company has an interesting hybrid strategy — it both develops pharmaceutical products and distributes them via 2,200 sales representatives across China. That’s an unusual approach in the industry, but it has so far been a success for the company.

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The prescription drugs business is seen by the company as “a profitable and high growth platform” to launch its new products. And along with the benefits of revenue synergies, the business generates strong and steady cash flows, which offers diversification benefits and reduces its reliance on external financing.

One interesting growth driver that could push the stock forward is its promising pipeline of new drug treatments for cancer and inflammation. Chi-Med has eight drug candidates, with 30 active clinical trials currently under way. It also has extensive licensing, co-development and commercialisation partnership arrangements with big pharma players, including AstraZeneca and Eli Lilly.

The company today announced that it had initiated a Phase III trial of its savolitinib drug, with the aim that it could one day treat a rare form of kidney cancer. Chi-Med had been developing the drug with AstraZeneca, and the initiation of the late-stage trial triggered a $5m milestone payment to the company from the pharma giant.

Based on the results of our Phase II study, we believe savolitinib has the potential to bring meaningful clinical benefit to patients with c-MET-driven PRCC,” it said.

Since its IPO back in 2006, Chi-Med has done very well by shareholders, with the value of its shares up almost 1,300%.

Cash windfall?

In other news today, mining giant Rio Tinto (LSE: RIO) announced that its shareholders had voted overwhelmingly in favour of the sale of its Australian coal assets to China-backed Yancoal Australia for $2.69bn.

The move comes as part of Rio’s efforts to reduce its exposure to the carbon-intensive fuel, which has come under increasing regulatory pressures. From now, the mining giant’s growth strategy would focus primarily on just three commodities: iron, aluminium and copper.

In today’s announcement, Chairman Jan du Plessis did not say whether the company would return the proceeds from the sale to shareholders, in spite of growing calls to increase buybacks and raise dividends. But given that Rio has one of the strongest balance sheets in the mining sector, with net debt of just $9.6bn and a gearing ratio of 17%, the likelihood that shareholders would at some point receive a significant windfall seems high.

Thanks to recent big cuts to its capital spending budget, improvements to operating cash costs, asset sales and higher commodity prices, Rio’s operating cash flow has recently improved substantially. In 2016, it generated free cash flow of $5.8bn, up from $0.7bn in the prior year, and as such, the miner returned about $3.6bn in cash to shareholders over the past year.

Looking ahead, City analysts expect Rio’s underlying earnings are set to climb 59% in 2017. If these estimates are accurate, they would leave shares in the company trading at just 8.1 times its expected earnings this year.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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