China-Biotics (NASDAQ:CHBT)

China-Biotics reported strong fiscal 2010 first quarter results this morning. 

Net sales in the first quarter of fiscal year 2011 increased by 61.8% to $24.9 million from $15.4 million in the first quarter of fiscal year 2010. The increase was primarily due to increased sales volume in retail and bulk additive products, and bulk additive products accounted for 40% of total quarterly net sales. Bulk sales increased by 170% year-over-year and 46% quarter-over-quarter from the fourth quarter of fiscal year 2010.

Excluding the non-cash gains from the change in value of convertible bonds, non-GAAP net income was a quarterly record of $9.7 million, compared with $5.3 million in the first quarter of fiscal year 2010, a robust 83.5% year-over- year increase. Non-GAAP diluted EPS was $0.39, increased from $0.27 in the same quarter of fiscal year 2010, on a substantially greater number of shares outstanding.

"For fiscal year 2011, the management maintains the expectation that net sales to be at least 50% year-over-year growth. This target is based on the Company's current views on the operating and market conditions, which are subject to change. Mr. Jinan Song, Chairman and CEO of China-Biotics, concluded, "We remain bullish on the outlook of fiscal year 2011. We will continue to invest in R&D in probiotics studies and applications, strengthen our product portfolio. The Qingpu facility's strong utilization rate growth demonstrated not only the depth of the probiotics demand in China, but our competitiveness of our products in the marketplace as well. As Chinese government is stepping up on the food safety measures and Chinese consumers are increasing their healthcare expenditures, we expect that more and more dairy and animal feed companies will embrace and increase the use of our probiotics products."

One of the short-term road blocks that CHBT had faced was the possibility of weak EPS comparisons for its 2010 first and second quarters. With the first quarter results strong showing, beating analyst EPS expectations of $0.33, this roadblock becomes less of a concern. We will eagerly await analyst revisions of second quarter estimates, which currently stand at $0.34 vs. $0.31 for the comparable period

Added to the GeoBargain list on July 14, 2009 @ $9.70

Catalyst: Had a strong EPS outlook; Was exceeding analyst estimates; High anticipation of the benefits of a new facility to increase production capacity.

Peak performance: Reached a high of $19.74 on March 25, 2010

Current Price: $11.96

Current road block: Short investors have attempted to discredit CHBT by illustrating inconsistencies in SEC filings compared to filings located in China; The next two quarters may pose challenges for short-term investors who hold CHBT shares as analyst estimates for the next two quarters call for non-GAAP EPS growth of less than 30%, due to dilution:

• June Fiscal 2011 First Quarter Estimate: $0.31 vs. $0.27 for the comparable period.
• September Fiscal 2011 Second Quarter Estimate: $0.35 vs. $0.31 for the comparable period.

The good news for long-term investors is that EPS growth estimates for the back half of fiscal 2011 remain over 30%:

• December Fiscal 2011 Third Quarter Estimate: $0.44 vs. $0.24 for the comparable period.
• March Fiscal 2011 Fourth Quarter Estimate: $0.49 vs. $0.36 for the comparable period

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

CHBT is a story we want to be involved in. However, given that one of our philosophies has been to generally avoid companies that face controversies with regards to "ethics", we will sit on the sidelines until we gain additional clarity. We will monitor the company's enforcement of its decision to commence a share buy back program enacted to instill investor confidence. Please note, that a buy back program does not obligate a firm to purchase stock, which is why we typically view insider buying as a stronger measure of confidence during controversial times.

Liquidity seems intact:

"We had cash of $155.6 million and working capital of $145.3 million as of March 31, 2010, and cash of $70.8 million and working capital of $55.0 million as of March 31, 2009. Cash generated from operations was $28.2 million for the fiscal year ended March 31, 2010, and $23.1 million for the fiscal year ended March 31, 2009."

"Our business is not capital or labor intensive. Taking into account our current cash position and our anticipated cash flows from operations, we expect we will be able to meet all our funding needs in the next twelve months, including payments required to settle our contractual obligations and for our construction of our new plant.

Let’s hope CHBT does not blindside us with an offering as so many other management teams have. This seems unlikely given its recent initiation of its stock buy back program.

Our intent over the short-term is to build a check list to assess the perceived risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially

-Is the company's auditor ranked in the top 100?
-Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm.  Short sellers have been using this information as a tool to validate their opinions. 
-Are the company's internal controls satisfactory?
-Are their any outstanding legal issues?
-Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?

Criteria	Meets Criteria	Notes
Top 100 Auditor	No	BDO Limited
Auditor Located in U.S.A.	No	Hong Kong
Satisfactory Internal Controls	Yes	"Our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective"
No Legal issues	Yes	None Found
Customer Concentration	No	A substantial percentage of the Group’s sales are made to a small number of customers that accounted for more than 10% of total gross sales. For the year ended March 31, 2010, there is one customer that accounted for 13% of our sales revenue.
Cash Flow Ratio is Greater than 1	No	0.71
Cash Ratio is Greater than 1	Yes	2.02
Buying Back Stock/Insider Buying	Yes	July 7, 2010 Release

China-Biotics, Inc. announced that China-Biotics' Board of Directors approved a new share repurchase program of up to US$ 20 million of worth of its issued and outstanding common shares from time to time over the next 12 months. The repurchases will be made on the open market at prevailing market prices or in block trades and subject to restrictions relating to volume, price and timing. China-Biotics plans to fund repurchases from its available cash balance.

Mr. Jinan Song, Chairman and Chief Executive Officer of China-Biotics, commented, "Given our proven track records of business expansion and strong balance sheet, we believe that our stock is deeply undervalued. This share repurchase demonstrates our long-term commitment to sustainable growth and enhancing shareholder value. Recognizing our future growth opportunities in such a favorable macro environment for probiotics market, we think now is a great time for us to use our strong financial position to invest in China-Biotics."

China Biotics reported its 2010 fiscal year end results this morning which, as expected, portrayed flat fourth quarter EPS growth:

4Q10 Financial Highlights:

-- Revenues were a quarterly record $25.5 million for a 64.4% year-over-year increase;
-- Gross margin was 69.4% versus 68.5% in 4Q09;
-- Excluding the non-cash losses from change in fair value of convertible bonds, non-GAAP net income for Q4 was $8.8 million, or non-GAAP diluted EPS $0.36 vs $0.33 for the comparable period.
-- GAAP net income was $2.9 million, or $0.13 per diluted share;
-- Cash and cash equivalents were $155.6 million.

Fiscal Year 2010 Highlights
 
-- Annual net revenue increased 50% year-over-year to an annual record $81.4 million;
-- Gross margin was 70.4%;
-- Operating income rose 62% to $35.3 million from $21.8 million in 2009;
-- Excluding the non-cash losses from changes in fair value of convertible bonds, non-GAAP net income for the fiscal year 2010 was $27.8 million, or non-GAAP diluted EPS $1.28 vs. $0.88 for the comparable period.
-- GAAP net income was $15.6 million, or $0.80 diluted per share.
-- Free cash flow $14.4 million.

The company also issued guidance which is a little less than analyst revenue estimate growth rate of 55% yoy:

"For fiscal year 2011, the management is expecting net sales to be at least 50% year-over-year growth. This target is based on the Company's current views on the operating and market conditions, which are subject to change."

Mr. Jinan Song, Chairman and CEO of China-Biotics, stated, "With our established state-of-the-art facility in Shanghai and our growing capacity utilization, we believe that we are well positioned to ride the wave of rising market demand and increasing government support for probiotics. We will continue to broaden our distribution network as well as diversify our retail portfolio through launching new products. We also look forward to winning more bulk customers as we have received encouraging feedback from potential customers during the initial trial period."

The next two quarters may pose challenges for short-term investors who hold CHBT shares as analyst estimates for the next two quarters call for EPS growth of less than 30% due to dilution:

• Fiscal 2011 First Quarter Estimate: $0.31 vs. $0.27 for the comparable period.
• Fiscal 2011 Second Quarter Estimate: $0.35 vs. $0.31 for the comparable period.

We will keep CHBT coded as GeoBargain for long-term investors as EPS growth estimates for the back half of fiscal 2011 remain over 30%:

• Fiscal 2011 Third Quarter Estimate: $0.44 vs. $0.24 for the comparable period.
• Fiscal 2011 Fourth Quarter Estimate: $0.49 vs. $0.36 for the comparable period

Until recently, probiotics producer China Biotics shares had been in a moderate uptrend, a reflection of strong sales EPS growth and allowing the company to consistently surpass analyst estimates. However, since the CFO announced his resignation on October 23, 2009, shares have retreated by 30%. I often track high level management departure situations in order to take advantage of fallen stock prices caused by investor trepidation and uncertainty. If I can determine that there were no material reasons for the departure and that the position will be filled expediently, I often surmise that the stock will recover its losses. On January 22, 2010 CHBT announced the hiring of a new CFO. As luck would have it the news has become lost amidst the markets retreat. With a P/E of less than 10 and its recent above average EPS performance, I am banking that investor appetite for CHBT shares will return.

This evening, my thoughts have been reinforced, as CHBT reported that its fiscal 2010 EPS rose 45.45% to $0.32 on a 47.47% increase in revenues to $15.8 million.

Source: Source: PR Newswire (February 10, 2010) 

"Our robust fiscal third quarter revenue and earnings growth reflect the Company's continued expansion of our bulk and retail customer bases," said Mr. Jinan Song, Chairman and Chief Executive Officer of China-Biotics. "Commercial production at our Qingpu production plant is scheduled to begin by the end of February and we continue to expect to reach approximately 50% capacity utilization by the end of calendar year 2010. With rising demand from the dairy and animal feed manufacturers, and movement by the government to encourage the use of probiotics, China continues to be a very favorable environment to grow our bulk and retail probiotics business in 2010 and beyond."

The Company is reiterating its fiscal year 2010 revenue growth guidance of at least 50% and expects overall gross margin to remain approximately 70%.

Source: Source: PR Newswire (February 10, 2010)

"We look forward with anticipation to the remainder of fiscal 2010 and are excited about the traction we are gaining in our bulk additives business. Our new manufacturing facility is expected to begin commercial production in the first quarter of calendar year 2010, and our pipeline of potential new bulk additives customers continues to be strong," Mr. Song said. "As the new capacity comes online, we will be able to resume our Shining retail outlet expansion later in the fiscal year. We are already directing our attention to the second phase of the capacity expansion, which we expect to begin by December 31, 2009. Demand for our bulk additive products has been significant, which should result in revenue growth of at least 50% during the 2010 fiscal year."

Source: PR Newswire (November 17, 2009)

China-Biotics came through once again reporting improves third quarter financial results, exceeding analyst estimates by $0.10.

Qtr. Ended September; Fiscal Yr. Ends in March	2nd Quarter 2010	2nd Quarter 2009	Period Change
GAAP Revenue	$17.1 million	$11.5 million	52.2%
GAAP EPS	-$0.20	$0.26	n/a
Company Supplied Non-GAAP EPS	$0.31	$0.13	138.5%
Fully Diluted Shares	19.2 million	19.2 million	0.0%

Source: PR Newswire (November 17, 2009)

These results are encouraging and give us hope that the company will be able to work the potential dilution of a recent stock offering.

 

 

Valuation Scenarios

Added to GeoBargain List June 14, 2009. ($10.00). 

Data Inputs:

Fiscal Year Ends in March
2009 Tax-Adjusted EPS:  $0.83
2010 Analyst Estimate: $1.30

Date	8/17/09
Price	$12.17
12 Months Trailing EPS a,b	$0.87
Tax-Adjusted 2010 Analyst EPS Estimatesa,b	$1.13
Future EPS Growth Rate Based on Tax-Adjusted 2010 Analyst EPS Estimates a,b	36.1%
Trailing P/E Ratio a,b	13.99
PEG Ratio (P/E divided by growth rate) a,b	0.39

^a CHBT is not paying a full U.S. tax rate.  Therefore, all EPS numbers have been adjusted by the GeoTeam® to reflect a tax rate of 36%.

^b EPS figures are non-GAAP.  Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

Short-Term Valuation Scenarios

Date	8/17/09
Price Based on P/E of 25 on Four Quarters Trailing EPS c,d	$21.75
Price Based on P/E of 20 on Four Quarters Trailing EPS c,d	$17.40
Price Based on P/E of 15 on Tax-Adjusted 2010 Analyst EPS Estimates	$16.95

Long-Term (12 Months Forward) Valuation Scenarios

Date	8/17/09
Price Based on P/E of 25 on Tax-Adjusted 2010 Analyst EPS Estimates	$28.25
Price Based on P/E of 20 on Tax-Adjusted 2010 Analyst EPS Estimates	$22.60

Peg Ratio Analysis - Common rule of thumb that PEG ratio should be less than 1.0

PEG Ratio Less than 1?

YES

These scenarios are not investment advice, but are scenarios based on some commonly used investment guidelines.  They are provided to aid investors in making their own investment decisions.

The GeoTeam® participated in the China-Biotics (NASDAQ:CHBT) 2009 first quarter conference call. 

Conference Call Highlights:

• Expects full year fiscal 2010 revenues to grow at least 50% to $81.3 million
• As the stock may be perceived to be currently "undervalued", investors voiced concerns over dilution related to the potential issuance of shares to complete future acquisitions.  The Company did a thorough job addressing this concern, implying the possibility of using cash over stock to complete an acquisition.  Furthermore, if shares were issued there is still a good chance that a transaction will be accretive to earnings per share.

1st FISCAL QUARTER  2010 vs. 2009 FINANCIAL SNAPSHOT ENDED JUNE

	1st Quarter 2010	1st Quarter 2009	Period Change
GAAP Revenue	$15.4 million	$11.4 million	35.5%
GAAP EPS	$0.34	$0.19	78.9%
Company Supplied Non-GAAP EPS	$0.31	$0.26	19.2%
Reported Tax Rate	22.6%	29.9%	-24.4%
Fully Tax-Adjusted Company Suppled Non-GAAP EPS b	$0.26	$0.22	18.2%
Fully Diluted Shares	17,080,000	17,080,000	00.0%

Source: See Release, August 17, 2009 

---

FULL YEAR 2009 vs. 2008 FINANCIAL SNAPSHOT ENDED MARCH

	Full Year 2009	Full Year 2008	Period Change
GAAP Revenue	$54.2 million	$42.3 million	28.1%
GAAP EPS	$1.17	$1.03	13.6%
Company Supplied Non-GAAP EPS a	$0.99	$0.83	7.2%
Tax Rate	20.5%	22.0%	-6.8%
Fully Tax-Adjusted Non-GAAP EPS a	$0.83	$0.72	15.3%
Fully Diluted Shares	17,080,000	17,080,000	0.0%

Source: See Release, July 15, 2009 

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

 

Recall comments from our previous note on July 14, 2009:

Further due diligence confirms the company meets 8 out of 10 GeoBargain criteria.  However, the company does not meet the minimum 30% earnings per share (EPS) growth threshold. 

Given that it beat analyst estimates, the GeoTeam® will need to access the company's outlook to determine if it can achieve 30% EPS growth, .  We will also monitor any changes in analyst estimates.  If it becomes apparent that 30% EPS growth is currently unachievable we will re-code the stock as a GeoSpecial based on its low tax adjusted PEG Ratio (~.55).

Today the company announced strong first quarter fiscal 2010 financial results. The company easily exceeded analyst estimates giving the GeoTeam® confidence that China-Biotics may be able to achieve a minimum of 30% earnings per share growth rate for the coming year.  Before today, analyst estimates also echoed this sentiment indicating earnings per share growing of over 30% to $1.30.

See the GeoTeam®  updated valuation scenarios.

'With the ramp-up of our new facility this year, we will be able to accept larger purchase orders from major dairy producers and animal feed manufacturers, which remain the most prominent sources of demand for bulk additives,' Mr. Song said. 'Same-store sales for Shining retail stores that have been in operation at least one year are expected to grow significantly year-over-year, and we hope to continue to expand the number of Shining retail outlets during the year. Although global economic growth remains suppressed, we believe there is pent-up demand for our bulk additive products, which should generate substantial growth in revenues and net income during the 2010 fiscal year.'

Source: PR Newswire (July 15, 2009)

The GeoTeam® listened the China-Biotics (NASDAQ:CHBT) 2009 fourth quarter conference call.  On the whole, the company was very bullish regarding its future growth prospects.  A good deal of the optimism surrounding the China-Biotics story is the anticipated impact from its new manufacturing facility which is expected to begin to make a meaningful contribution to revenue in the third quarter of fiscal year 2010.

Strategy Going Forward:

1.  Launch the new manufacturing facility, which at full capacity is forecast to generate $110 million in revenues with gross margins of approximately 70%.

2.  Sign new bulk additive customers in anticipation of increased production capacity.  New customer agreements have increased 45% from 11 to 16.  China-Biotics is currently in negotiations with 200 additional companies.

3.  Develop new consumer probiotics products.

4.  Increase the "Shining" brand presence in retail outlets.

Recall that GeoBargain's® generally require an earnings per share growth rate of at least 30%.  Even though full year ending March 2010 non-GAAP EPS growth rate is forecast to be approximately 20%, we are still coding China-Biotics as a GeoBargain®.  This is due to the fact that analyst estimates for the third and fourth quarters translate into an average EPS growth rate of 59%.

A potential caveat to the story is the company's recent S3 Filing allowing it to potentially raise up to $80 million.   This could open the door for future earnings per share dilution, but that depends on how the funds are used. 

China-Biotics year end press release is now available.  In the The GeoTeam's® previous note we mentioned that it appeared that fourth quarter earnings per share growth was negative. However, the press release has shed further light on the situation and highlights that fourth quarter earnings per share, on a non-GAAP basis, was actually up 22.2% to $0.32.

Company comments also are encouraging:

"With the ramp-up of our new facility this year, we will be able to accept larger purchase orders from major dairy producers and animal feed manufacturers, which remain the most prominent sources of demand for bulk additives," Mr. Song said. "Same-store sales for Shining retail stores that have been in operation at least one year are expected to grow significantly year-over-year, and we hope to continue to expand the number of Shining retail outlets during the year. Although global economic growth remains suppressed, we believe there is pent-up demand for our bulk additive products, which should generate substantial growth in revenues and net income during the 2010 fiscal year.

The GeoTeam® will participate in the China-Biotics conference call this morning at 10:00 am EST.  The The GeoTeam® is still awaiting revisions to 2010 analyst estimates.  We will provide details if warranted. 

China-Biotics ($10.00) is currently coded a as a GeoBargain on the Radar stock.  The company just filed its 2009 10K which at first glance shows non-GAAP earnings per share coming in at $1.00.  Analyst estimates were $0.83  No press release has been issued yet. However, due to the company's apparent strong 2009 financial results, we are taking a chance and now coding the stock as a GeoBargain.  More details will be provided upon further due diligence.

____________________________________________________________________________

($10.55) Further due diligence confirms the company meets 8 out of 10 Geobargain criteria.  However, the company does not meet the minimum 30% earnings per share (EPS) growth threshold. 

• Non-GAAAP 2009 EPS growth was approximately 20%
• It appears that fourth quarter EPS growth was negative.
• Fiscal 2010 eps growth is currently projected to be about 17%.

Given that it beat analyst estimates, the GeoTeam® will need to access the company's outlook to determine if it can achieve 30% eps growth, .  We will also monitor any changes in analyst estimates.  If it becomes apparent that 30% eps growth is currently unachievable we will re-code the stock as a GeoSpecial based on its low tax adjusted PEG Ratio (~.55).

CHBT remains confident that the company can maintain its positive growth trend for the coming year, despite a weakening global scenario.

Source: Third Quarter 2009 Conference Call ( February 17, 2009)

CHBT may qualify as a GeoBargain. The GeoTeam will keep you posted on our findings.

The GeoTeam holds a position in CHBT