Tuesday, August 24, 2010

Looking Long Into China-Biotics

By Eric Jackson
RealMoney Contributor

8/23/2010 5:12 PM EDT
Click here for more stories by Eric Jackson

Although its price has come down since the spring (along with many other Chinese names), China-Biotics(CHBT - commentary - Trade Now) continues to be a favorite long position of mine. It is still performing well and it is worth owning.

The company is one of the leading probiotics producers in China, serving both the retail market as well as the bulk markets for the dairy (e.g., yogurt) and animal-feed industries. Asia's growing probiotics industry is expected to hit $9 billion by 2014.

Within China, China-Biotics is one of only a few large suppliers of probiotics. As a result, China is forces to be a net importer of probiotics. Large European companies are still key sellers into the Chinese probiotics market. However, players like China-Biotics are growing.

The company's revenue and earnings keep improving. China-Biotics' trailing-12-month revenue figure stands at more than $90 million, and it has a 61% quarterly growth rate. Its net income for the last year is $29 million, up 226% from the previous year.

Investors who know nothing about probiotics are usually struck by China-Biotics' operating margins (over 44%) and its large amount of cash on hand ($160 million). The company's cash represents over half of its market capitalization.

Some investors look at these results and immediately see a huge value opportunity. Others, however, see these numbers as a red flag -- a sign that must be something wrong. It's because of this second camp of investors that there has been such a high short interest in China-Biotics as of July 15 (it was almost 23% of the company's public float).

If 23% sounds like an enormous short position to you, that's because it is. When I have discussed a short position I currently have in Tesla Motors (TSLA - commentary - Trade Now), potential investors have expressed concern about that company's short interest of 13%. (But with a market capitalization of more than $1.7 billion vs. China-Biotics' $321 million, Tesla's greater liquidity makes it easier on short traders when the time comes for them to cover their positions).


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