The probiotics industry has been growing exponentially due to very high growth of yogurt and animal feed products. The probiotics consumption is predicted to grow from 3,400 tons in 2006, to 10,000 tons in 2010. (Source: Domestic Probiotics Market Analysis and Forecast Report by Beijing Leadership Management Consulting Co. Limited.)
Another source from Euromonitor has shown that, in 2009, China finally overtook Japan as the heaviest consumer of probiotic cultures, reaching over 10,000 tons (Actual consumption number reaches 10,000 tons faster than Beijing Leadership Management Consulting Co. Limited has predicted.) Euromonitor International predicts that by 2014 this will have risen to almost 18,000 tons, accounting for nearly 30% of global consumption. (Source: Euromonitor).
CHBT’s net income growth is very high and stable. Net income growth has averaged 37% annually for the past 4 years, mainly from it supplement products. For the new market segment, bulk additives, CHBT has the largest capacity in China at 300 tons a year which represents a market share of only 2.xx% in 2010. When CHBT runs its 300-ton plant at full capacity in the next 4-5 years, it will have a market share of only 1.xx% of 18,000 tones in 2014. This means there is a lot of room for CHBT to grow very fast.
CHBT doesn’t have to invest much in working capital as we can see that overall CFOA is a little higher than net income (excluding changes in fair value of derivatives.) Moreover, the probiotics industry is not a capital intensive business, so CHBT has invested around 50% of CFOA over the past 4 years in order to grow net income at least 50% annually for the next 4-5 years.
CHBT’s valuation
My forecast is that CHBT’s EPS will be $1.92, $3.33 and $5.23, during 2010-2012, which is 65% annual growth for the next 3 years. At $13.61, the P/E ratio is 7.1 times and the PEG is very low at 0.11. In my opinion, this is a great opportunity to buy a great stock at a very low price.
Conclusions
CTRP P/E 53 future growth 30% PEG 1.76
BIDU P/E 76 future growth 50% PEG 1.51
CHBT P/E 7.1 future growth 65% PEG 0.11
Great stocks usually have very high P/E ratios. In my opinion, they should be priced at least at a 30 P/E and some might be worth more than 50, depending on their fundamentals. So, to be successful in investing in great stocks, you need to buy them before others realize their potential or when there is a temporary problem which brings the price down to a cheap level.
CHBT is one great stock that is unknown to many investors. Additionally, it is having a temporary problem, which I have written about in my previous article, so we can buy it at a very low-price. I will give more details on CHBT in my next article.
Disclosure: Long CHBT
