American Dairy and Skystar: Two Chinese Growth Stocks

by: super-trades

American Dairy (NYSE:ADY) is a stock that has been on a tear recently. It reported earnings after the close on May 14, 2009 when the stock closed in the $18's. It had a blowout quarter, helped by the recent melamine crisis in China. The stock took off and has not looked back, closing at $42.10 for Wednesday, June 10, 2009.

Skystart Bio Pharma (OTC:SKBO) is my latest position/idea. I think this stock has potential to be the next EFUT (EFUT was a China growth stock that went from $11 to $49 in 2006). SKBO.OB closed at $16 for Wednesday, June 10, 2009.

Although they are in completely different industries, they are both Chinese growth stocks and I decided to do a comparison in certain categories.

1) Float and Outstanding Shares -

ADY - 17.2m shares outstanding and 7.5m Float per Bloomberg.

SKBO.OB - There are 1.9m current shares outstanding as per Bloomberg and there is an S-1 filed to sell 1m shares which would make approximately 2.9m shares outstanding. Page 39 of the S-1 states that between management and two funds, they own approximately 1.5m shares. By my calculations, after the 1m share offering the float would be approximately 1.5m and must be like 400-500k right now pre-offering. See Bloomberg and SEC filing.

2) EPS -

ADY - Current estimates are for $3.34 this year and $4.49 next year per Yahoo Finance

SKBO.OB - Per the S-1 filing, they reported $3.07 EPS in 2008. They are now increasing outstanding shares by 1m per the S-1 filing. In 2008 Skystar had $5.6m of net income that included $1.1m of non-recurring expenses, or $6.7m adjusted net income. If I divide that by the new post-IPO share count of approximately 2.9m, I get EPS of $2.31. Now, in the first quarter of 2009, net income was up 72% YOY. If the company hypothetically can even grow net income by 30% for all of 2009 over 2008, that $2.31 would go to $3.00 EPS with the new shares offered.

See SEC filing, and Yahoo Finance.

For next year, the S-1 filing talks about the opening of a new facility at the end of 2009 and the potential revenue opportunity that would provide. By my calculations, with the addition of these two facilities the company will have the potential to add up to $14m additional revenue at 60-70% gross margin rate from vaccines and approximately $3m in feed additives (facility increases capacity by 49% and they did $5.9m in this category in 2008 at a 65% blended gross profit margin - see Presentation). If they can produce and sell this extra capacity I calculate that as an additional $10m in gross profit. In Q1 2009 the Net Income margin was around 28%. So this extra capacity (if produced and sold successfully and at these same margins) could add another $1 EPS in 2010 by my calculations.

So, if SKBO.OB can grow Net Income by at least 30% this year and open the new facilities and sell the product at the disclosed and historical margins (hypothetically as neither guaranteed), then by my calculations, they also could be in the $3 EPS range this year and the $4 EPS range next year, similar to ADY's estimates on yahoo finance.

3) Analyst Price Targets -

ADY - Targets are out there from a low of $30 to a high of $50 per Yahoo Finance.

SKBO.OB - None that I could find

All the usual disclaimers - This Blog is not investment advice but documents my stock ideas/positions. Some of my ideas do not work. I never think it is a good idea to chase stocks. Low float stocks in particular can be dangerous and volatile.

Disclosure: I am long SKBO.OB