OTC:CHBT gave investors a significant amount of information on the investor day, and I think it worthwhile that the information gets out. Most of the people I spoke with at the investor day said that their investment conviction in CHBT increased significantly as a result of the investor day, and that the concerns they had from short rumors were put to rest. Overall, I thought CHBT did a great job of providing maximum transparency and answering investors’ questions and concerns.
The investor day started at the original facility. It is in an older industrial park located in Pudong. All fifty attendees were packed into a small conference room. The first part of the day was centered around the retail business, which is run out of Pudong. We started with several presentations. In one of the presentations we were shown the addresses of all 103 retail outlets that existed as of June 30th, 2010. These included 64 four-wall stores and 39 shop-in-shops. Eva Yan the Chief Administrative Officer who runs the retail business, also gave a speech.
Next the company invited 3 of its 27 total retail distributors to speak to the group.
1. The first distributor sells to large retail supermarkets. He has distributed Shining since 2003. His company distributes Shining products into 73 stores total. The breakdown is 19 Carrefour stores, 18 Tesco stores, and 36 Lotus stores.
2. The second distributor sells to pharmaceutical chains. He sells to 20 chains, which have in total about 300 pharmacies. He said Shining Essence and Shining Protein Powder were the top selling products in pharmacies.
3. The third distributor sells to small supermarkets. He sells the Shining brand to 700 of the approximately 2000 small supermarkets his firm distributes to. He has been working with Shining for about 7 years. He also distributes competitors’ products. They will distribute Shining and competitors’ products to the same stores, but typically they are stacked on different shelves.
Important Documents Shown
After that Travis Cai brought in the following documents for viewing: bank statements for the three largest bank accounts, tax filings and a tax confirmation letter, and a stack of lease documents for the 103 retail leases that were in force at June 30th 2010. I did not view the leases, but here is the detail on the other portions.
1. An account with HSBC Bank in HK in the amount of HKD 286,149,623.52 (~$36.9m). The account was in the name of Smart Group and the statement was dated June 14, 2010.
2. An account with HSBC Bank in HK in the amount of HKD 58,853,603.14 (~$7.6m). The account was in the name of Growing State Ltd and the statement was dated June 19, 2010.
3. An account with the Bank of Communications in the name of Shanghai Shining. This account showed not just the balance, like the first two statements, but actually all the inflows and outflows for the month of June over roughly 10 pages. You could see many small cash inflows coming in over the month. The balance on June 1, 2010 was RMB 618,509,085 (~$92.3m). On June 30, 2010 the balance was RMB 640,214,746 (~$95.6m).
I asked Travis where the rest of the accounts were since collectively these accounts showed only $140m and the company had $159.7m at June 30th, 2010. Travis confirmed they had additional smaller bank accounts in RMB, HKD and USD that make up the balance.
We were able to see the tax statements for Shanghai Shining, the company's retail business. There were four stacks of tax documents which corresponded with the four quarters of the fiscal year ending March 31, 2010. The most important part of each stack was a document from the Agricultural Bank of China which showed the actual taxes paid by Shanghai Shining into the Agricultural Bank of China, where the tax authority has its bank account for receiving taxes. This document was in each case chopped by the Agricultural Bank of China Shanghai branch and the state tax bureau. Taxes paid for each of the quarters were as follows:
The reader should note that these figures are taxes paid by Shanghai Shining only, and as such provide a good justification of the retail business and its profitability. The overall amount here will differ from the cash flow statement in the 10-K for FY2010 (where in supplemental disclosure cash income taxes paid on a consolidated basis were $5.3 million) for several reasons. First these figures include income taxes and net VAT paid by Shanghai Shining and secondly any taxes or VAT from Growing Bioengineering, the bulk business, are not reflected in these figures.
In addition, the company showed the Tax Confirmation for Shanghai Shining for 2007 – 2009. This is an official one page document that states that the company has paid its taxes. It was chopped by both the Shanghai tax bureau and the federal tax bureau.
At this point we went on a tour of retail locations. We visited 4 four-walled stores. At two of these stores we saw groups of older people receiving a free seminar on digestive health. The company uses these seminars to inform consumers and promote its products. We also visited an Auchan brand supermarket where we saw the retail products for sale. Several investors purchased Shining products at Auchan.
Qingpu Factory Tour
After arriving in Qingpu we were treated to a factory tour. The plant was very impressive. We were not allowed to take pictures inside. After the investor day a certain analyst who recently downgraded the stock said to me regarding the Qingpu factory, "impressive technology."
Subsequently in the Qingpu auditorium we heard first from a representative of each of four bulk customers.
1. Bright Dairy: Values the product’s stability, safety, and price competitiveness. The price competitiveness is unparalleled. The product’s stability and quality is the same level as Danisco. CHBT is very good in five areas: (i) a professional and fast-reacting team of technicians, (ii) a well-trained sales and marketing staff, (iii) on-time delivery, (iv) low prices, (v) flexible customization based on request. CHBT has a great future and the cooperation between Bright Dairy and CHBT will accelerate.
2. Hui Shan Dairy: Chr. Hansen and Danisco have had a monopoly on the market. The emergence of CHBT in bulk additives has been great for them. Prior to CHBT they sourced 100% of their probiotics from foreigners. CHBT’s rapid growth shows its ambition and the market’s potential. The market is growing rapidly. He estimates the growth of probiotics in yogurt at 40% per annum. Probiotics are gaining wider applications in products like ice cream and other products. CHBT is the new alternative value option, compared to Chr. Hansen and Danisco. CHBT has the highest quality standards in the PRC. Its technological advantage will be very helpful for its growth in the future. The product is very stable and has good value. The sales and professional team make a strong impression. Their relationship with CHBT will grow. Going forward they want CHBT to build custom strains for them that will add differentiation to their products. The biggest factor for them is price. CHBT is on average 15% cheaper than Danisco.
3. Hong Mei Dairy: Hong Mei has worked with CHBT for a long time. They have a good relationship and it will grow. In the strains they use, stability is the top priority. CHBT’s strains are very stable. CHBT’s supplemental services and technical support are also very good. He thinks the new Qingpu facility is great.
4. Shanghai Wei Te Biotech: CHBT’s products satisfy us. They are very pleased with the technical support and after-sales service.
At this point several employees presented. The following is a brief synopsis.
1. Ted Ciuba: International Sales and Marketing. Ted is an American. He has been in China for about one year working for CHBT’s bulk business doing international sales and marketing. Ted has an MBA from the University of Tennessee. He said the industry is consolidating. Many of the Chinese competitors will not meet new regulations and quality requirements.
2. Brenda: R&D. Brenda was Chinese but spoke fluent English. Among other things she presented that CHBT has over 40 people in R&D and of these over 90% have either a master’s degree or a PhD.
3. Dr. Ma Kai: Production and Quality Control. Dr. Kai spoke fluent English. He said at 150 tons Phase I will be the largest probiotics facility in China and should produce 750m RMB of revenue.
Highlights from Mr. Song’s Speech
CHBT will specialize in the bulk additives in the future. In the next 3-5 years they wish to increase market share against their European competitors which are Chr. Hansen and Danisco. If you wish to find out more about our industry, talk to Chr. Hansen and Danisco. Visit their websites and find out more.
Mr. Song knows the CEO of Danisco China very well and on September 30th he is meeting with him to discuss strategic cooperation. CHBT hopes to learn from its competitors. He also has talks with Chr. Hansen from time to time.
We want to grow very fast but we must pace ourselves. In 1-2 years we will be producing 300 tons per annum.
We want to help customers design products and maybe they will even outsource their R&D to us.
Competition in this industry is not as harsh as some may think.
Probiotics is the fastest growing sector in biotech. There are 10-11 industries that need probiotics on a large scale. There are lots of opportunities in dairy products and animal feed, which are areas where the government is encouraging the use of probiotics.
We supply the top 3 dairy companies in China: Yili, Mengniu and Bright Dairy (Guangming). With the top dairies, the selection process is more stringent. It takes longer to get in. CHBT works with most of the top dairies on a small scale right now. He wants to firm up the safety and stability of CHBT’s products before working with them on a large scale.
Lastly, on the subject of the short attack Mr. Song said the following: I care about my business. My first focus is on my operations. I am not an expert in corporate finance. I do not think the short attack is fair to us. Customers saw the news and this had a negative impact. I want to get over this short attack and deliver results. I hope the investor day was helpful for investors.
Disclosure: Long CHBT