China Expert

China-Biotics: An Undervalued Stock with a Growth Catalyst

Some valid points here. To clarify, the company has increased its cash position over the last 12 consecutive quarters to $77.4 million. On the liability side it has a $25M convertible bond that matures 12/2010 and converts at $12 per share and a questionable tax liability of $26.1 million which has increased steadily for a few years. Value and free cash flow investors will like that the business generates consistant 40sh% EBITDA margins and except for plant construction/expansion costs, low maintenance capital expenditures could cause significant free cash flow generation. The fact that China is a net importer of probiotics bodes well for future demand. Once the new plant is running at full capacity in late 2010/early 2011, revenues should approach a $154 million a year run rate with an EBITDA run rate of $55-$65 million. Assuming 19.2 million FD shares and a 15% tax rate (started 1/1/09), EPS would be about $2.47 per share. I assume by that time, the cash position will be much higher and the $25 million of converts will have been converted. Hopefully talk of raising cash for future international expansion/acquisitions is delayed until the stock increases in response to earnngs increases or using organic generated free cash flow is carefully studied at a viable alternative.