American Dairy: Finally Something Positive about Chinese Baby Milk

| About: Feihe International, (ADY)

Now for some good news out of China about Holsteins.

American Dairy (NYSE:ADY), a leading Chinese producer and distributor of premium infant formula, milk powder, and soybean, rice, and walnut products, released a business update yesterday. ADY continues to increase its output to meet consumer demand for reliable, high quality, premium infant formula products. Feihe, its brand, was one of the few beneficiaries of the baby milk formula scandal in China. Its products did not contain melamine.

A single-child Chinese family will buy the best locally-made baby milk formula for the little prince or princess, I think. Feihe is cheaper than imports but safer than the vast bulk of what passes for baby milk formula in China today.

To solidify and expand its increased brand recognition, ADY mounted an aggressive nationwide marketing campaigns, with TV commercials running on Chinese Central Television Channels (CCTV) 1, 2, 3 and 6, and over six provincial stations that air all across China. In a recent survey by AC Nielsen, the company was ranked the number one fast growing infant formula company after the dairy crisis occurred in September 2008.

Recently, American Dairy hosted its annual sales conference in Henan province, where Feihe is the best-selling infant formula brand, and more than 700 people participated in the sales training conducted by leading industry experts. Its Feihe operation is the first infant formula company with its own organic dairy farms that meet international standards, with each of its two farms able to accommodate about 10,000 to 12,000 cows. ADY plans to continue to import Australian Holstein cows for its Gannan and Kedong dairy farms in Heilongjiang Province, which currently have over 8,000 Oz Holsteins. Each farm is estimated to provide about 60,000 to 70,000 tons of organic milk a year to be used mainly in branded products.

CFO Jonathan H. Chou said:

Our focus has always been on the pursuit of high quality products for consumers, and the construction of our dairy farms demonstrates the Company's dedication to that vision. An integrated strategy will ensure that our products remain the premiere infant formula manufactured in China.

Since 1962, the Feihe branded products have been recognized for their quality and, in its 47 year history, Feihe has consistently passed all government quality inspections, including the recent inspections for melamine. ADY has always adhered to a quality-first standard. As previously announced, the company's production facilities exceed consumer goods manufacturing standards and are designed to meet and exceed pharmaceutical standards.

American Dairy's facilities are one of the few that have processing areas which meet a 300,000 cleanliness purification standard, which means that there are less than 300,000 dust particles per cubic centimeter of air. In a standard room, dust particles can reach over two million dust particles per cubic centimeter of air. Continuing its commitment to quality, the company has also added additional testing equipment to its already extensive testing and quality control procedures.

Feihe brand was named one of China's 500 most influential brands at The World Brand Summit jointly hosted by World Famous Brands Assembly, the U.S.-China Chamber of Commerce, and the Universal City TV Stations Joint Research Center of the World Business on January 1. The selection committee evaluated more than 3,000 companies in Mainland China, Macau, Hong Kong, and Taiwan based on the selection criteria including popularity, reputation, credibility, satisfaction, loyalty, influence, growth and innovation of the brands. American Dairy's Feihe brand is one of the seven dairy enterprises recognized at the conference.

Moreover Feihe was recently voted as one of the top ten 'Most Trusted Brands' by consumers in an online poll conducted by SINA Corporation (NASDAQ:SINA). Among products manufactured in China, Feihe was voted the number one most trusted brand. Previously, Feihe was named one of the "Top Ten Best Infant Formula" and the "Most Energetic Brand" at the Annual Baby and Infant Industry Ceremony hosted by SINA.

A bit less upbeat, WSP Holdings (NYSE:WH) of Wuxi near Shanghai revised its sales estimates for 2008 up and its income estimates marginally down. WH says it will have net revenues of $850-$950 million, up 50% from earlier estimates, thanks to demand for its drilling pipe (used mainly for gas exploration.) However, its profits will come in below earlier estimates of $110 million, at a level of $95-$105 million. The reason is that the Russian bank which provided letters of credit for sales of its products to Russian drillers has run into problems, and WH has had to take a bad debt provision. The amount is relatively modest.

Disclosure: Vivian Lewis, Global Investing editor, owns 500 shares of ADY and 1000 shares of WH.

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