China-Biotics Inc (NASDAQ:CHBT)

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 

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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