Looking Long Into China-Biotics
By Eric Jackson
RealMoney Contributor
8/23/2010 5:12 PM EDT
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Within China, China-Biotics is one of only a few large suppliers of probiotics. As a result, China is forces to be a net importer of probiotics. Large European companies are still key sellers into the Chinese probiotics market. However, players like China-Biotics are growing.
The company's revenue and earnings keep improving. China-Biotics' trailing-12-month revenue figure stands at more than $90 million, and it has a 61% quarterly growth rate. Its net income for the last year is $29 million, up 226% from the previous year.
Investors who know nothing about probiotics are usually struck by China-Biotics' operating margins (over 44%) and its large amount of cash on hand ($160 million). The company's cash represents over half of its market capitalization.
Some investors look at these results and immediately see a huge value opportunity. Others, however, see these numbers as a red flag -- a sign that must be something wrong. It's because of this second camp of investors that there has been such a high short interest in China-Biotics as of July 15 (it was almost 23% of the company's public float).
If 23% sounds like an enormous short position to you, that's because it is. When I have discussed a short position I currently have in Tesla Motors (TSLA - commentary - Trade Now), potential investors have expressed concern about that company's short interest of 13%. (But with a market capitalization of more than $1.7 billion vs. China-Biotics' $321 million, Tesla's greater liquidity makes it easier on short traders when the time comes for them to cover their positions).
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