Monday, August 01, 2005
American Dairy, Inc (ADY)
They use contract small dairy farmers (1-10 cows each) with cattle grazing rights to 514K acres in Kedong County. No need for capital investments. The industry is historically fragmented.
They raised US$2.5 million this year with convertable notes sold to one institutional investor. Money for acquisitions... not good.
It's a little tough finding their latest 10-K.
American Dairy has been informed that the Kedong County government intends to invest in additional milk cow breeding operations to increase the presently available number of mature milk cows from 13,000 to 30,000 during 2005, and such an increase in the number of milk cows is anticipated to increase daily milk production from approximately 130 tons to approximately 400 tons of fresh milk.No large customers. They got ISO Nine-Something for quality (9002). Products go to 25 provinces, none more than 10% of sales, except Beijing with 25%.
Milk drinking is a fairly new thing in China, a western food. They talk about their strong brand identity. Their milk products are priced higher than competitors, which is good.
In April 2004, they started up a "walnut powder" operation, they own 60% of it.
Revenues increase from $26million in 2003 to $37million in 2004 ("expanding market areas and adding new value added products"). Net income tripled to $6million. Gross margins went up from 41% to 52%. 70% increase in in distribution. 21% decrease in G&A (reduction in consulting fees "at the parent company level"). $600K decrease in tax.
The popularity of "Feihi" brand increased after advertising. They claim demand was boosted by improved ingredients for some products. Quantity increased by 28%.
They guy also owns 65% of the company, drew a salary of $6,884 in 2003 and none in 2004.Leng You-Bin has been the Chairman, Chief Executive Officer, President,nted the "liver protection milk powder" (GanBao Milk Powder).
and General Manager of American Dairy since May 7, 2003. He is responsible for
the overall strategic planning, management and business development of Feihe
Dairy. Mr. Leng has been in the dairy industry for more than 13 years. He
obtained his Bachelor of Science degree in Food Engineering from Northeast
Agriculture University, China. From 1989 to 1997, Mr. Leng acted as technician,
deputy director and director of ZhaoGuang Dairy Plants, the predecessor of Feihe
Dairy. From 1997 to 2000, Mr. Leng was the General Manager of Feihe Dairy. He
became the Chairman and General Manager in 2000. He has researched and pate
There was some dairy milk industry scandal in 2003 which resulted in strict control over dairy producers (quality and ingredients) drove a lot of competitors out of the market. Quality became more important.
They earned $0.47 in 2004 ($0.19 in 2003). The stock sells for about $6.75. So YaSheng sells for a P/E of 8 while this sells for over 14.
I don't trust this company.
UPDATE Aug 21, 2005: The stock now sells for over $8. After going through several Chinese reverse mergers, I should go back to this one and see if I still don't trust it. I looked briefly at the latest quarterly result and revenues and profits are great, but cash flow looks suspicious: increases in AR, inventory, etc. etc.,