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A Closer Look At China Biotics
Amidst all the scare that small, fast-growing Chinese companies give to many investors, one should not judge the whole from the few. China will surely reward investors who can identify quality companies run by decent management. Earlier this week news that RINO International (Nasdaq:RINO), a Chinese environmental company, had suspended its conference call after concerns from its auditors sent shares into a nose dive. Shares are down nearly 50% in two weeks, and down over 80% in the last year. Investors don't forget that type of pain quickly.
IN PICTURES: 4 Biggest Investor Errors
Rationality Over Emotion
One should always require an extra layer of caution when in investing in China or any other foreign nation subject to the strong hand of government control. With this premise, China Biotics (Nasdaq:CHBT) is worth digging into. The company is a producer of probiotics, the good "bacteria" that are added to certain foods that improve human health. Probiotics are not new; their benefits were noted during the 19th Century by Louis Pasteur, the French chemist.
China Biotics has been around for over a decade and is the largest domestic probiotics supplier in China. The company's products are primarily used in the diary and animal feed segment in China. In the past year, the company completely changed its model from a retailer to distributor. Today, the company has 15 retail locations versus 107 locations a year ago. Time will tell if this shift in strategy will maximize value. In the meantime, the numbers look solid.
Not Flashy
Shares trade for $11, off of a high of $19 earlier this year. That gives the company a market cap of around $240 million and a P/E of under 12-times earnings. If you believe the earnings estimates, then the company has a forward P/E of under 5. The balance sheet appears quite good. Over $140 million in net cash. That's more digestible than names like fertilizer company China Agritech (NYSE:CAGC) and Yongye International (Nasdaq:YONG). Both are legitimate Chinese companies and trade at much higher valuations than CHBT.
Even more encouraging, sales are not being created by large accounts receivables at China Biotics. For the six-month period ended September 30, 2010, sales were up by $17 million over the 2009 comparable period. Receivables were up by $5 million while free cash flow was a positive $6 million. The growth outlook looks solid for CHBT but there is nothing flashy about what the company does or its management. Because probiotics are virtually essential ingredients in dairy and animal feed, customers aren't quick to stop buying from the company.
The Bottom Line
This Chinese company has a lot of unique characteristics. But like any Chinese business, it needs to be analyzed with a healthy does of skepticism to come to a rational conclusion. (For related reading, take a look at Investing In China.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 4 Biggest Investor Errors
Rationality Over Emotion
One should always require an extra layer of caution when in investing in China or any other foreign nation subject to the strong hand of government control. With this premise, China Biotics (Nasdaq:CHBT) is worth digging into. The company is a producer of probiotics, the good "bacteria" that are added to certain foods that improve human health. Probiotics are not new; their benefits were noted during the 19th Century by Louis Pasteur, the French chemist.
China Biotics has been around for over a decade and is the largest domestic probiotics supplier in China. The company's products are primarily used in the diary and animal feed segment in China. In the past year, the company completely changed its model from a retailer to distributor. Today, the company has 15 retail locations versus 107 locations a year ago. Time will tell if this shift in strategy will maximize value. In the meantime, the numbers look solid.
Shares trade for $11, off of a high of $19 earlier this year. That gives the company a market cap of around $240 million and a P/E of under 12-times earnings. If you believe the earnings estimates, then the company has a forward P/E of under 5. The balance sheet appears quite good. Over $140 million in net cash. That's more digestible than names like fertilizer company China Agritech (NYSE:CAGC) and Yongye International (Nasdaq:YONG). Both are legitimate Chinese companies and trade at much higher valuations than CHBT.
Even more encouraging, sales are not being created by large accounts receivables at China Biotics. For the six-month period ended September 30, 2010, sales were up by $17 million over the 2009 comparable period. Receivables were up by $5 million while free cash flow was a positive $6 million. The growth outlook looks solid for CHBT but there is nothing flashy about what the company does or its management. Because probiotics are virtually essential ingredients in dairy and animal feed, customers aren't quick to stop buying from the company.
The Bottom Line
This Chinese company has a lot of unique characteristics. But like any Chinese business, it needs to be analyzed with a healthy does of skepticism to come to a rational conclusion. (For related reading, take a look at Investing In China.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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