3 Highlights from China Biotics' Conference Call

China Biotics (CHBT) held its Q3 earnings conference call Wednesday to discuss its financial results for the quarter ended 12/31. The company did fairly well, showing across the board improvements for its pro-biotic natural food additive business: [[ more ]]

- Sales increased 36.2% y-o-y and 45.8% q-o-q
- Gross profit increased to 73.3% from 71.4% a year ago
- Net income expanded 12.3% y-o-y and 105.3% q-o-q

In addition, the company provided information that gave us a window into what it is up to and, more importantly, the business environment for Chinese companies in general. Here are some highlights:

1) CHBT has amassed over $59 million in cash (almost 30% of its current market cap), and its operations is currently cash flow positive. During the call, management explained how the amount is to be used. First, it is setting aside $18 million for Phase 1 expansion of its production facilities. Then it is using some of the remainder for acquisitions. That is quite a lot to play with. My view is that since part of CHBT's strategy is to up downstream synergy by enhancing retail presence of its products, it must be looking closely at buying up a retail chain, most obviously in the health food segment.

2) Related to that, the company is aggressively expanding its own "Shining" retail outlets. Currently these are mostly situated in the Greater Shanghai area, but CHBT has started to look further afield. Revenues from retail jumped 100% to 8% of total revenues from a year ago, and the company hopes to be opening its 300th store by the end of 2009 (it currently has 27 such outlets). I'm excited about CHBT's retail prospects, given its concentration in the Eastern seaboard. With the rapidly increasing spending power of the urban Chinese, news just released showed that Shanghai enjoyed its biggest retail boom in 8 years over this Chinese New Year season.

3) Finally, the company is cautious about its Q4 ending 3/31, and this has to do with the recent bad weather. Usually this is CHBT's best quarter, but during the call, management expressed doubt if that would be indeed the case this time round. The company cited issues with transportation of its products, and this provides a real world confirmation to what I've reported earlier. It looks like the additional consumption that usually occurs during the Spring Festival would not be enough to mitigate the logistical challenges, and this would have implications for many C.O.P. companies. In other words, Q1 for most companies (for those with calender year end) would likely turn out to be quite weak.

In any case, China Biotics' investors took the earnings and news well, and its shares traded up slightly Wednesday. There is a final interesting note. CHBT is currently seeking listing on NASDAQ and apparently the only requirement it doesn't meet is that it is short of "fifty to sixty" round lot shareholders. Given that the requirement is 300 (for admission to the NASDAQ Small Market), that means CHBT only has about 250 round lot shareholders, which is amazingly few for such a relatively big company.