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CHBT --- China Biotics

|Includes: China-Biotics, Inc. (CHBT)
China Biotics basically makes probiotics and distributes them in their "Shining" retail branded stores. If you are unfamiliar with probiotics perform a Yahoo search and/or watch your television for advertisements. Their current production capacity is 12 tons. They are presently conducting trial production of their new 150 ton plant which they plan to bring into operational status by the end of calendar 2009 (investors are waiting on a PR). This will multiply their current production capacity by x12 from 12 tons to 150 tons! The plant is completely paid for. They recently stated that they plan to begin phase 2 of their build out (another 150 ton addition costing $18M) when they are finished with the trial production of phase 1 (i.e. now).
Note the verbiage, "We are currently in trial production at our new 150 metric ton probiotics facility, which we expect to complete by year end. At that point, we will begin the second phase of our capacity expansion." Another x12 capacity expansion from the 12 ton baseline! CHBT management has stated previously that they will not begin construction of phase 2 until "demands for probiotics have exceeded the production capacity of the Phase 1 facility."
To me, this a signal that China-Biotics management feels they will be able to quickly move the probiotics from their phase 1   150 ton capacity expansion.
How are they going to sell their x12 capacity? They are going to sell into the bulk food additive market as well as open more retail outlets (which pay for themselves in a year). Margin here are presently around 70% and they claim that will remain approximately constant for their new bulk customers.
From PR dated 10/28/2009
"The Company added eight new bulk additive customers in September and October, bringing its total number of bulk additive customers to 24. The newly signed customers are mainly engaged in manufacture of dairy, nutritional supplement, and animal feed products."
Yeah, yeah, yeah...enough already. I'm sold, CHBT is a growth stock. What am I going to have to pony up to get in? First some financial background.
China Biotics did $54.2M in revenues for FY 2009, had $21.8 operating income with a net income of approx. $20M (36.9% of revenue). 
Management has stated that..."When fully utilized, the first phase of production is expected to generate up to $110 million in annual revenues, with gross margins near the Company’s traditional 70% mark." 
If we take 36.9% of the $110M top end guidance for phase 1 expansion we arrive at $40.5M net revenue. If they open more retail outlets, like they have guided, this number will rise. REMEMBER CHBT DID $20M NET FOR FY 2009. When they complete phase 2 they could add another $40.5M to the net making for a total net income of $101M by the time all the capacity has been built and sold. 
NOTE: This says nothing of the company's future beyond the relatively small 300 ton capacity expansion. I quote... 
"Rising Demand in China’s Probiotics Market - Overall probiotics demand is forecast to increase threefold to 10,600 metric tons from 3,400 metric tons, according to Beijing Leadership Management Consulting “BLMC”).  The 300 ton capacity expansion in China's wide open probiotic marketplace doesn't seem like all that much anymore does it? 
Present p/e @ 17.4 and a peg for 2010 of .309 per guidance (based on 56.3% earnings growth.).
2010 p/e per guidance = 11.1
--- The company has guided at least 50% revenue growth in 2010 (sandbagging) and, again, historically converts around 36.9% of this to net income.
Endgame p/e = 3.4
--- The present market cap is $346M and the addition to net income after all the expansion is realized and sold will be at least $101M (this does not factor in any additional retail sales or further expansion). 
Current accounts minus total liabilities (post recent dilution) is approximately 31% of market cap.

There are no warrants, options, or convertible bonds open.

By my best estimates, insider ownership sits at 41% while insider plus large investors own 84% of the company (post recent dilution).

In conclusion, I wondered how much their margins would be effected by the change to bulk additives. I compiled the following:

Revenue 2009 = $54.4M
Operating Income 2009 = $21.8M (40% of revenue)
Net Income 2009 = $20.0M (36.7% of revenue)
Bulk additives (as % of revenue) in 2009 = 8.3%

Revenue Q1 2010 = $16.5M
Operating Income Q1 2010 = $6.83M (41.5% of revenue)
Net Income Q1 2010 = $5.8M (35% of revenue)
Bulk additives (as % of revenue) in Q1 2010 = 23.2%

~~~ Excluding a book loss related to the revaluation of convertible notes~~~
Revenue Q2 2010 = $18.2M
Operating Income Q2 2010 = $7.5M (41.1% of revenue)
Net Income Q2 2010 = $5.9M (32.4% of revenue)
Bulk additives (as % of revenue) in Q2 2010 = 32%

The net income margin is coming down and the operating income margin is flat.
Disclosure: Long CHBT