I had the chance to meet up with Jinan Song, CEO of China-Biotics (CHBT), and Dr. Hui Chang, COO of China-Biotics at the Roth conference in Dana Point this week. This is the first time that Dr. Chang has met with investors, after being at the company for about five months, and I rate him as very smart and knowledgeable. (As a brief reminder, in addition to significant work experience he holds a Ph.D. in vaccine development and an MBA both from Johns Hopkins and a B.S. in biology from the University of Maryland.)
There are many great things underfoot at this company and with the stock price at its current level there is a lot of upside, so I will focus on the highlights.
CHBT is strongly considering a dividend strategy.
I was present when another investor asked if Mr. Song would seek to take his company private.
Mr. Song stated that he was considering announcing a dividend strategy and then using the dividend income to personally buy more shares in the company.
CHBT has $132m of cash and generates plenty of cash such that it could easily support a 25-35% payout ratio dividend while continuing its growth plan.
Future capex requirements are $7m for Phase II of Qingpu and $58m for the Yangling facility which will produce probiotics-related biological additives for the animal feed industry.
Phase II of Qingpu should come on line in July and Yangling in roughly two years.
2. CHBT is strongly considering adding a well-known American investor to its board of directors. An announcement could come in April. This would greatly enhance the credibility of the company in the eyes of US based investors.
3. Mr. Song confirmed that they will be hitting their 50% revenue growth for the fiscal year ending in March. That means Q4 revenue will be a new record of over $41m and full year sales should exceed $122m. Growth will come from both bulk and retail. Judging by my estimation, this means that net income should exceed $40m, which on the current share count of 22.15m, gives full year pro forma EPS of roughly $1.80. (EPS being pro forma for the share buyback and $29.6m repayment of the convertible note which happened in December.) The current stock price as I write is about $8.50 and the cash per share is $5.97.
4. For FYE March 2012 Mr. Song expects conservatively 40% revenue growth.
CHBT is in discussions with Royal DSM N.V. about a probiotics joint venture in China. See photos here
. DSM is a multinational life sciences and material sciences company with a market cap of EUR 6.7 billion. On February 25th
, DSM purchased Martek Biosciences, a US business engaged in the production of nutritional food additives including probiotics for approximately $1 billion.
China-Biotics had discussions with both Cargill and New Hope Group (China’s largest animal feed company) regarding partnering on the Yangling project, but decided in the end, since they had all the cash they needed, they would get better economics without a partner. Note in the quarterly report
on page 22, that the company committed to inject no less than $50 million within 24 months of the project commencement date.
Now that Mr. Chang has joined the company and manages the operations, Mr. Song said he plans to spend much more time attending to the needs and concerns of investors. In the past he has not always been able to focus on investors because he managed the operations himself.
Before I sign off I want to give one more quick word on the short attacks. There is a very large difference between perception and reality.
I read recently on the message boards someone writing that the company had not attended the Natural Products West Expo in Anaheim last week. The COO laughed at this and said he could not believe it and then showed me multiple pictures from the Expo on his iPhone. CHBT had tremendous interest at the Expo and he personally gave out close to 300 business cards.
Yesterday the company is met with a potential US client they met at the Expo. They resume investor meetings today and Friday. I also read a report recently stating that it is hard to meet with the company and visit its facilities. Nothing could be further from the truth. I know because I have visited the company personally, twice, in November 2009 and in September 2010 during their investor day. When I wanted to visit the company the first time all I did was contact the CEO’s office and I had a meeting scheduled within two days. China-Biotics wants to get its story out and is welcoming to investors.
In summary, many good things are happening at this company. I believe the company is executing solidly on its growth plans while working diligently to improve its shareholder image and reward its shareholders.
Disclosure: I am long CHBT.