Governmental Approval Boosts China-Biotics Shares

China-Biotics, Inc. (CHBT), a Shanghai-based firm that develops, manufactures, markets and distributes probiotics products, announced Friday that it has received Chinese government approval to begin construction on a proposed 150-metric-ton-per- year manufacturing facility in Shanghai. The company plans to expand production of probiotic nutritional supplements in order to meet demand for probiotics in the bulk additive market. Investors greeted the news warmly, with shares rising over 17% to US$10.00 per share.

The Company plans to begin construction in early December on the new manufacturing facility, with completion anticipated in fiscal year 2009. The US$18 million plant will be in Shanghai, and will be capable of producing 150 million metric tons of probiotics annually. Once operation, the facility will significantly expand China-Biotics production capacity from its current level of nine tons per year. The company reports the new plant will be the only large-scale probiotics plant in China supplying the domestic bulk additive market.

Probiotics are dietary supplements containing potentially beneficial bacteria or yeasts. Probiotics such as Lactobacillus have been used in the food industry for many years due to their ablity to convert sugars and other carbohydrates into lactic acid. This not only provides the characteristic sour taste of fermented dairy foods such as yogurt, but also has a preservative benefit as it inhibits food spoilage. Probiotics have also been claimed for decades to improve the health of users by boosting levels of beneficial bacteria in the intestines.

The probiotics market has been growing worldwide. Sales in the US were reported to be over US$760 million in 2005, rising 19% annually. The probiotics market in China is expected to grow due to increased demand for products such as yogurt, which is said to be growing over 35% per year. Probiotics have recently seen increased attention due to the success of probiotic yogurt products from French food giant Danone. Danone's Activia, which contains the probiotic Bifidus regularis and is marketed to promote bowel regularity, has shown sales growth of 30% a year and brought in US$2 billion in worldwide sales to Danone in 2006. Danone reports that in total, probiotic products account for nearly one third of its US$20 billion in worldwide sales.

Founded in 1999 in Shanghai, China-Biotics went public in March 2006 via reverse merger with Otish Resources Inc., a mineral exploration company. With reported 2007 revenues of US$30.6 million, the company claims to be one of the largest suppliers of probiotics in China. Marketed under the "Shining" brand primarily in the greater Shanghai region, the company has 22 direct retail outlets along with 11 distributors.

Product sales, led by their Shining Essence supplement of lactobacillus acidophilus and bifidobacterium bifidum, occur at retail through supermarkets, hypermarkets and drugstores. For the quarter ending Sept. 30, 2007 the company reported net revenues of US$8.2 million, an increase of nearly 50% from the same quarter last year. Pretax margins were 36%, with net margins over 24%.Based on strong demand for its products, the company to expand both production and distribution efforts. The manufacturing expansion announced today represents the first phase of a planned US$30 million expansion of capacity. The increased production will allow the company to make bulk sales to food producters including yogurt, milk powder, and animal feed producers. On the retail front the company intends to open over 300 stores over the next two years in Shanghai, Bejing, Jiangsu, Zhejiang, Shenyang, Harbin and Heilongiang at a projected of US$11 million. With US$35.2 million in cash as of the latest quarter the company intends to fund its expansion internally.

Disclosure: none