Looking Long Into China-Biotics

By Eric Jackson
RealMoney Contributor
8/23/2010 5:12 PM EDT
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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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You're the Yuan That I Want

By Eric Jackson
RealMoney Contributor
6/21/2010 9:00 AM EDT
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I have been bullish on China for some time. News over the weekend that Beijing was going to allow the yuan to float in some manner within the next year has been very positively received by the global equity markets. It's bullish for the Chinese economy, and global equities, but it's also very good news for Chinese equities. Here's why.

Although the United States has been bellyaching about the yuan's peg to the dollar for a long time, I actually expected no change in Chinese policy. After all, put yourself in China's shoes: Keeping the yuan tied to the dollar was continuing to support the growth of Chinese exporters globally. The Chinese government remembers well how quickly export demand dropped after Lehman Brothers failed. As a result, many factories went from running full tilt in China to laying off workers and lying dormant. Bustling barges in the Yangtze and Pearl Rivers, with incoming raw materials and outgoing exports, suddenly stopped.

It's because of this drying up of global demand that Beijing was forced to pump a $600 billion stimulus package into the Chinese economy to get the wheels turning to keep GDP ticking over at the pace it needs to support its growth and unemployment targets. Along with the stimulus, the Chinese government mandated the country's banks to push forward lending. It also accelerated a push to transition the overall economy from an export-driven one to a domestic- or consumer-driven one.

China is still dependent on exports and will remain so for several years to come. However, you would have to view its efforts to shift the country's economic emphasis so far as successful. It got the economy rolling again and, when foreign Cassandras started complaining there was a property bubble in the works, it preemptively pricked that bubble -- in about a month. All the most recent data out of the major Chinese cities suggest real estate has cooled, yet growth continues and inflation is tame.

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Chinese Pharma Firm Ramps Up Production: $CHBT

By Eric Jackson, Senior Contributor

04/21/10 - 09:28 AM EDT

Stock quotes in this article: CHBT

I recently met with Travis Cai, the chief financial officer of China-Biotics(CHBT) in Shanghai. The company is the largest provider of probiotic bacteria in China -- a segment of biopharmaceutical research that's often misunderstood and under-recognized by investors.

Travis, a well-spoken CFO, just joined the company in February. It's clear he's here to help the company cultivate its image in front of Western investors. He did his undergraduate work at Tsinghua University in Beijing and has a master's degree from the Stern School at New York University.

So, what are probiotics? You might have seen them mentioned in Activia commercials with actress Jaime Lee Curtis. They are live micro-organisms which, when administered in adequate amounts, confer a health benefit on the host (user). They can play an important role in immunological, digestive and respiratory functions.

Some of the uses for probiotics include improving the health of your gastrointestinal tract, stimulating your immune system, helping to break down nutrients properly, reducing the creation of toxins, and reducing symptoms of lactose intolerance. They get added to nutritional products (supplements/powders), dairy products, food additives, animal feed additives, and pharmaceuticals.

The key thing for investors to understand about probiotics is that the market is large and underserved in China. The Asian market for probiotics is expected to reach $9 billion by 2014. Asians, especially women, have a higher need for this type of bacteria to help their digestive systems.

The biggest area in the Chinese market is dairy, which isn't fully served by Chinese producers and still relies on European suppliers. China-Biotics hopes to exploit its current position as the largest Chinese producer of probiotics.

China-Biotics, founded in 1999, has its headquarters in Shanghai. It has been growing like a weed. Its top-line revenues have a CAGR of 35% for the last three years. The company, which had a trailing 12 months revenue of $71 million, recently guided a 50% increase in its top line for this year.

It sells its supplements and powder to retail customers through over 100 outlets in 13 cities (mostly in or near Shanghai) under the "Shining" brand. It certainly has an expansion opportunity in retail to the rest of the country. However, China-Biotics biggest opportunities are in dairy and animal feed, not retail. It wants to provide the additives to yogurt-based drinks and infant formula sold in China, as well as to the $58 billion Chinese animal feed market.

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