China Tracker - Details for China-Biotics (CHBT)

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 Analyst Coverage
2011-06-01Maxim GroupDowngradeSell$6.00
2011-03-28Maxim GroupDowngradeHoldn/a
2011-03-22Roth CapitalDowngradeSuspendedn/a

We are suspending research coverage on CHBT due to the realignment of resources relating to the reassignment of one of our publishing analysts to our Equity Capital Markets group.

2010-12-10Roth CapitalReiterationSell$8.00

Notes redemption. On December 9, 2010, CHBT announced it has redeemed the $25MM convertible notes two days prior to the scheduled retirement date of December 11, 2010. The 4 percent 3-year senior notes were originally issued to Pope Investments II LLC at a conversion price of $12 on December 11, 2007, mainly to fund the construction of the 150-metric-ton bulk additive manufacturing facility. Total redemption cost includes $25MM for the note principal plus $4.7MM interest. Cash and equivelants totaled $158.8MM as of 09/30/2010.

Impact on earnings. The redemption eliminated potential dilution from the notes conversion. Total share count is now 22.3 million versus our previous estimate of 24.5 million diluted shares, which presents ~$0.08 accretion to our estimated FY11 EPS of $1.58.

Maintain SELL rating. We remain cautious on CHBT's prospects in light of 1) slowing bulk additive growth, 2) margin contraction, and 3) lack of clarity in retail operation. Additionally, Pope's choice of cash (redemption) over CHBT shares (conversion) may reflect similar concerns, in our view.

2010-11-09Roth CapitalReiterationSell$8.00

CHBT reported revenue of $23.6MM/EPS of $0.33, missing consensus of $26.7MM/$0.37. Bulk sales showed no growth q/q, well below our estimate. Despite an upbeat tone from management, we believe the revenue shortfall, along with margin contraction indicates growth headwinds. Furthermore, the overhaul of its retail operation during the quarter presents uncertainty. We maintain our SELL rating and $8.00 price target. Revenue decreased 5% q/q with bulk additive accounting for 41% or $9.9MM (flat sequentially), short of our $12.5MM estimate. Gross margin slipped 380bps to 65% sequentially on higher contribution from lower-margin bulk additive in the mix. Opex increased 2.4% q/q due to higher R&D cost partially offset by savings in selling expense. EPS increased marginally to $0.33 from $0.31 from a year ago, but decreased 6 cents q/q. Cash was largely unchanged at $158.8MM.

Business updates: 88 retail outlets were closed during 2Q with 15 remaining, down from 103 in 1Q and 107 a year ago. Although the shift to distributors may help cost-savings, we believe it could hurt brand-building and consumer-pull efforts given CHBT's limited investment in marketing. Additionally, our recent checks indicate poor sell-through in the channel, raising concerns about the effectiveness of the company's sales network. Bulk additive customers totaled 37 with no gain of new customers during the quarter. The flat sequential sales growth seems disconnected with management's statement of growing traction. Management reiterated its expectation of at least 50% revenue growth for FY11. We remain cautious on the outlook given a slowing growth momentum and declining margins.

Model update. We raise our FY11 EPS to $1.58 (from $1.56) but reduce FY12 EPS to $2.01 (from $2.03), reflecting lower gross margin offset by reduced selling expenses. Maintain SELL rating and $8.00PT based on ~1.0x tangible book value ($8.30/share at 2Q11). We believe an asset-based valuation is appropriate in light of 1) lack of clarity in retail operations; 2) slower bulk growth, and 3) margin deterioration. (Intraday price: $13.05 - 12:51pm ET)

2010-09-24Maxim GroupReiterationBuy$18.00

In our opinion, CHBT is a premium Chinese probiotics company at the dawn of a major expansion in the bulk probiotics market. CHBT’s share price at the current level, in our opinion, is substantially valued due to unwarranted speculations. We are adjusting our forecasts of revenue and earnings due to reduced outlook for retail product sales but remain bullish on the growth of bulk probiotics. As such, we are reducing our 12-month target price to $18 (10X forward EPS), from $24 (14X forward EPS), to accommodate our EPS adjustment and slightly subdued sentiment toward China-based stocks, but we are reiterating our Buy rating for high-risk-tolerant, long-term-oriented investors.

2010-09-21Roth CapitalDowngradeSell$8.00

China-Biotics held its first investor day event on Monday, marking an effort to provide transparency to investors and analysts. The event involved a range of presentations and tours, including the provision of bank statements, tax documents and retail outlet lease agreements. Based on our quick review of the materials (given 40+ participants on site), the tax documents (revealing tax payments for the past several quarters) and bank statements (reflecting cash balances in the company's bank accounts) appeared consistent with the company's SEC filings.

In our view, the company's recent communication regarding its retail operations was not adequate to support definitive conclusions regarding the magnitude of the business. During the presentation, management stated that the bulk additive probiotics will be the major growth engine going forward. Management also indicated that the company has shut down a significant number of retail outlets since June 2010. Meanwhile, our recent retail channel checks suggested slow sales of China-Biotics products. We have revised our estimates to reflect expectations for lower retail sales going forward.

Reducing estimates; lowering PT to $8.00 (from $20.00). We are decreasing our estimates to reflect our tempered outlook and management's planned reduction in the company's retail operations. We are lowering our PT to $8.00, based on 1.0x the company's tangible book value ($7.84/share at 1Q11).

2010-08-10Maxim GroupReiterationBuy$24.00
2010-08-03Roth CapitalReiterationBuy$20.00

We expect 1Q revenue of $25.0MM, representing a 62% y/y increase. This is the quarter when we will start to see a more meaningful contribution from CHBT's new Qingpu bulk facility. We modeled $8.6MM revenue from bulk additives or 34% of total sales, up 140% from a year ago. The Street calls for $25.3MM in revenue. Our EPS estimate is $0.30 versus consensus of $0.33. Our $20 per share price target is based on 14.0x our estimated CY10 EPS of $1.44.

2010-07-08Maxim GroupReiterationBuy$24.00
2010-07-07Roth CapitalReiterationBuy$20.00

CHBT announced today that the company will buy back up to $20.0MM of outstanding common shares from the open market over the next 12 months. The company plans to fund repurchases from its available cash balance. Shares of CHBT currently trade for ~ 9.0x our CY10 EPS estimate of $1.44 or 5.3x (ex. cash). We view the stock is undervalued compared with its peers' average in the low-to-mid teens. This stock buyback program demonstrates management's commitment to long-term growth and enhancing shareholder value.

2010-02-08Maxim GroupReiterationBuy$24.00
2009-11-18Maxim GroupReiterationBuy$24.00
2009-10-16Maxim GroupInitiationBuy$24.00
Healthcare & Drugs
READ: Score Cards Explained
DETAILS: Safety/Risk Model for CHBT
Current Price:  n/a
F10k Day (2006-04-17): -100.00%$7.00
2009 Close: -100.00%$15.47
2010 Close: -100.00%$14.70
2011 Close: -100.00%$0.70
High (2012-09-18): -100.00%$4.49
Low (2012-05-09): -100.00%$0.68
Market Capitalization: n/a
Total Shares: 23.71 mill
Float: n/a
Avg Volume: n/a
Last Quarter: 2010-12-31
Revenue (MRQ): 32.38 mill
Net Income (MRQ): 10.42 mill
Op. Cash Flow (MRQ): 1.61 mill
all financial data provided without warranty