investor presentation march, 2011. safe harbor statement 2 safe harbor statement under the private...
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Investor PresentationInvestor Presentation
March, 2011
Safe Harbor StatementSafe Harbor Statement
2
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements set forth in
this presentation that are not historical facts may be forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those in the forward-looking statements.
Such factors include, but are not limited to, the Company’s ability to market existing and new products, ability
to access capital for expansion, and changes from anticipated levels of sales, future national or regional
economic and competitive conditions, changes in relationships with customers, dependence on our flagship
product’s profits and other factors detailed from time to time in the Company's filings with the United States
Securities and Exchange Commission and other regulatory authorities. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise. This presentation was developed by the Company, is intended solely for
informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy the
Company’s stock. This presentation is based upon information available to the public, as well as other
information from sources which management believes to be reliable, but is not guaranteed by CHBT as being
accurate nor does it purport to be complete. Opinions expressed herein are those of management as of the
date of publication and are subject to change without notice.
3
Investment HighlightsInvestment Highlights
Strong R&D with highly efficient professional service team
Safe, stable and highly effective product solutions
Over 10 years probiotics production history & proven record of profitability and growth
Rising demand for probiotics products driven by increasing consumption of dairy products, health food and rapid growth in the animal feed, cosmetics and pharma market
Established large-scale production capacity and quality control to penetrate an expanding bulk additives market
Strong revenue and profit growth with high margins
– Revenue growth 39% CAGR FY06-FY10
– FY10 revenue $81M and adjusted net income $28M
– Guidance for 50% top line growth in FY2011
– Proven blended gross margin above 65%
– Consistent positive free cash-flow in recent 3 years
The leading producer of probiotics in China
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What are Probiotics? What are Probiotics?
Historical Context Pasteur announced certain bacteria are necessary for
human health
Metchnikoff received 1908 Nobel Prize for work linking the immune system and intestinal bacteria
“Good” bacteria helps not only to stimulate digestive health, but may stimulate a healthy immune system. – Gary Huffnagle, Ph.D., University of Michigan Health System.
Benefits of Probiotics Improves health of G.I. tract
Stimulates immune system
Helps break down nutrients properly
Reduces creation of toxins
Reduces symptoms of lactose intolerance
Decreases prevalence of allergies in susceptible individuals
Reduces some risks associated with certain cancers
Nutritional Products
Pharma-ceuticals
Animal Feed
Additives
Dairy Products Shining
Probiotics
Food Additives
Source: www.usprobiotics.org
“Live microorganisms which when administered in adequate amounts confer a health benefit on the host.”
– FAO/WHO (2001)
Live microorganisms, through sufficient intake, confer one or more types of unique and verifiable
functional health benefits.
– EFFCA (2002)
5
Global Probiotics Market Global Probiotics Market
New markets are posting faster growth
– Probiotics supplement sales in North America and Eastern Europe are currently reporting a growth rate of 25%
Significant increase in mainstream research on probiotics in recent years
Digestive health is ‘mainstream’
– In 2008, nearly 59.9 million Americans complained of heartburn, and this figure is expected to rise to almost 73 million by 2013, amounting to nearly a quarter of the population
Global animal feed additives mkt expected to have reached US$15.4 B by 2010
– Probiotics have been demonstrated to have an equivalent efficacy to synthetic antimicrobial growth promoters (AGP), which were banned completely in Europe since January 2006
World Market by 2014-$31 Billion
13.5
9
3.5
5.2
Europe
Asia
USA
Others
Source: Marketsandmarkets, nutraingredients-usa.com DataMonitor, FoodNavigator.com, ap-foodtechnology.com Pubmed.org, and Mgmt estimate
0
100
200
300
400
500
600
700
800
900
1950 1960 1970 1980 1990 2000 2010
History of Global Research Publications on Probiotics
6
4%
7%8%
13%15% 15%
23%25%
26%
0%
5%
10%
15%
20%
25%
30%
Ch
ole
ster
ol
free
Lac
tose
fre
e
Fat
fre
e
Fib
er
Om
ega
Glu
tten
fre
e
Org
anic
An
tio
xid
ants
Pro
bio
tics
US Probiotics AwarenessUS Probiotics Awareness
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Probiotics was the fasting-growing category of dietary supplements in the US in 2004-08
9% 10%
14%
18%20%
31%
49%
0%
10%
20%
30%
40%
50%
60%
2002
2003
2004
2005
2006
2007
2008
Proportion of US population familiar with probiotics
Source: AC Nielsen, Survey by Natural Marketing Institute
7
Chinese Market Chinese Market
Chinese affluence drives demand for health food– Demand for health-food expected to hit $9.7 Billion by 2010 (Pacific Bridge Medical)
– In 2009, China overtook Japan as the heaviest consumer of probiotic cultures, exceeding 10,000 tons with potential to reach 18,000 tons in 2014, 30% global market (Euromonitor)
Demand for Bulk Additive Probiotics increasing significantly
– Chinese Bureau of Statistics forecasts tenfold increase in domestic dairy consumption between 2007-2015, more demand for yogurt and baby formula product
– Estimated $58 Billion animal feed market in China
Favorable Government Policies on both food safety and antibiotics safety
– Requires Good Manufacturing Practice (GMP) and a step-by-step Hazard Analysis Critical Control Point (HACCP) quality control system
– Government is encouraging probiotics supplements to combat antibiotics abuse
China has limited probiotics production capacity
– Current demand relies on imports from European manufacturers
– 3 dairy majors – Mengniu (HKSE: 2319), Yili (SHSE: 600887) and Bright (SHSE: 600597), are actively and substantially introducing probiotics in their value-add dairy products
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Segment AnalysisSegment Analysis
0
1000
2000
3000
4000
5000
6000
7000
DairyProducts
Animal Feed NutritionalProducts
Other
CY 2006
CY 2010
Year Dairy Products
Animal Feed
Nutritional Products Other Totals (mt)
2006 2,000 1,000 100 300 3,400
2010 Est. 6,500 2,500 600 1,000 10,600
Chinese Probiotic Usage and Growth (Metric Tons)
Source: Domestic Probiotics Market Analysis and Forecast Report by Beijing Leadership Management Consulting Co. Limited
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China-Biotics OverviewChina-Biotics Overview
Founded in 1999 and headquartered in Shanghai
The largest domestic probiotics supplier
Shining is one of the most recognized brands in Shanghai
Launched commercial production in the new 150 ton manufacturing facility in Feb. 2010 to target bulk market in both diary industry and animal feed industry
Proprietary technology powered by over 40 R&D staff with advanced academic degrees
More than 40 signed bulk additive customers
81.0 27.8 0.0
80.9 49 3.7
32.4 34 14
FY10 Revenue
($Mil) FY10 Net Income*
($Mil) Bank Debt
($Mil)
FY11 9M Revenue
($Mil) Bulk Customer
FY11 Q3 Revenue
($Mil) Retail Distributor
FY10 R&D Spend
($Mil)
Retail Product
*Adjustment to exclude gain/loss related to the change in fair value of convertible notes
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Probiotics R&D Center
Research Areas: Advanced bacteria culturing and protection, genetically engineered drugs, drug delivery solutions
Over 40 members with Masters or Ph.D. degrees
Close R&D partnerships with China’s top research programs in dairy science and technology at the Northeast Agricultural University
Long term cooperation with International Probiotic Association (IPA)
Strong R&D Capabilities Strong R&D Capabilities
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High-Caliber R&D Professionals
Dr. Hui S. Chang, Chief Operating Officer, – Ph.D. in vaccine development focusing on biochemistry and immunology as well as an MBA in finance and vaccine logistics from Johns Hopkins University; 15 years of biopharmaceutical project management experience and research capabilities
Dr. Shuguang Fang, Vice President – Ph.D. in chemical bio-engineering from East China University of Science and Technology and a team member of the No. 863 State Hi-Tech Program and national 9th & 10th 5-year project
Dr. Chunchang Tao, Director of R&D – PhD in Biological & Agricultural Engineering from the University of Idaho and a formerly with Coca-Cola’s Global Innovation & Technology Center in Shanghai
Strong R&D Capabilities Strong R&D Capabilities
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High-Caliber R&D Professionals Dr. Dengru Liu – Ph.D. in fermentation engineering from Jiangnan University and Ph.D. in
bioengineering from Wagningen UR in Netherland; Visiting Researcher at TNO Research and Food Institute; In charge of R&D for probiotics application in agriculture such as starter culture for animal feed and organic fertilizer as well as application in water treatment and soil improvement
Dr. Xia Zhao – Ph.D. in Bioengineering from East Normal University; Post-Doctoral research in biotechnology and pharmaceutical engineering at Sun Moon University in Korea; MBA from Coburg University of Applied Science in Germany. Decades of quality assurance and biotechnology R&D project experience.
Strong R&D Capabilities Strong R&D Capabilities
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IP, Capability & Publication 12 approved patents and 15 pending in total
5 recent patent applications filed in new market areas such as baby care
1000 types of bacteria strains - China’s largest Enterprise Bacteria Center
China-Biotics currently carries all of the 21 probiotics strains in the list recently approved by the Ministry of Health. These strains are widely used in the Company's bulk additive products
6 registered brands and 10 published paper in major Chinese health journals
Strong R&D Capabilities Strong R&D Capabilities
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Strong R&D Capabilities Strong R&D Capabilities
R&D Center
Core Technology
Development
Probiotics Application
DevelopmentSensory Test
Strain Production Process
Development
Strain Screening & Research
Physics–Chemical & Biological
Analysis
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New Industry-Leading FacilityNew Industry-Leading Facility
The largest probiotics production plant in China
GMP certified, highly automated production line with maximum 60 workers even at full capacity utilization
Proprietary fermentation technology
Phase I = 150 MT annual production capacity
– Commenced commercial production in Feb. 2010
– Currently producing at 5-7 MT per month depending on concentration of probiotics
Phase II = 150 MT annual capacity
– Coming online in 2011
Large scalability to lower production cost per unit and achieve high gross margin
MT = metric tons
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Bulk Business StrategyBulk Business Strategy
Focus on dairy and animal feed industries, with extension to baby care, nutritional and pharmaceutical products
Provide customized solutions and comprehensive support, i.e., co-develop new yogurt formulas
Leverage our proprietary fermentation technology to offer large volume, high-quality bulk powder
Extend business to international markets
Phase II capacity expansion: to increase total annual capacity to 300 MT in Qingpu in 2012
To build a new bulk facility for animal feed-related products within 2 years
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Bulk Business StrategyBulk Business Strategy
Total Quality System (QA/QC)
Operation and Productivity
Business
Customers
Marketing + Application + Sales
Research + Process Development, Engineering Core + Production
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Bulk Additive ProductsBulk Additive Products
Additives for Dairy Product Essential to yogurt-based drinks
CAGR of 31% for yogurt segment growth from ’05 to ’10 in China (estimated by McKinsey Research)
Commonly added to infant formula milk powder
Improves digestion
Animal feeds Mgmt estimates $58 Bil/Yr animal feed market in China
Large global market
Other Products Pharmaceuticals
Nutritional products
Other food additives
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Expanded Bulk Customer BaseExpanded Bulk Customer Base
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Total 41 products with 14 active products in market
Products in Retail BusinessProducts in Retail Business
Sample Products Functions
Shining Probiotics Protein Powder
Improves gastrointestinal function, enhances the immune system
Shining Intestinal and Liver Protection Capsule
Enhances intestinal health and bowel movements; stops diarrhea and protects the liver from alcohol and chemical damages
Shining Essence Balances the micro-ecology of the digestive system; enhances intestinal health; protects and strengthens liver function
Shining Energy Reduces cholesterol level
21
Retail NetworkRetail Network
Continue to develop and introduce new products to the marketplace
15 retail outlets with improved operating efficiency
Strengthen and broaden distribution network by partnering with large wholesalers
Continue to improve brand name and recognition
22
*Adjustment to exclude gain/loss related to the change in fair value of convertible notes
CAGR=39% CAGR=35%
Strong Organic Revenue Growth Proven Earning Growth
FY06 FY07 FY08 FY09 FY10FY11 - 9 Mon.
8.410.9
14.216.9
27.8 28.2
FY06 FY07 FY08 FY09 FY10 FY11 - 9 Mon.
21.930.6
42.354.2
81.4 80.9
0
10
20
30
40
50
60
70
FY06 FY07 FY08 FY09 FY10
69.6%
69.8%
70.0%
70.2%
70.4%
70.6%
70.8%
71.0%
71.2%
Gross Profit (millions $) & Gross Margin
Strong FinancialsStrong Financials
(Millions USD) (Millions USD)
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Financial Statements Financial Statements
* non-cash gain or loss related to the change in fair value of convertible notes is not included
(Million $) Q3 FY11 Q2 FY11 Q1 FY11 FY10 FY09 FY08
Net sales 32.4 23.6 24.9 81.4 54.2 42.3
Gross profit % 65% 65% 69% 70% 70% 71%
Operating income 12.8 9.9 11.9 35.2 20.2 18.3
Adj. net income* 10.4 8.1 9.7 27.8 16.9 14.2
Working Capital 133.3 122.2 120.7 105.2 55.0 53.1
Net sales increased by 39% yoy to a quarterly record of $32.4 Mil
Sales of bulk additive products increased 133% yoy to $14.7 Mil
Produced over 20 MT of bulk probiotic products
Had 49 bulk customers
R&D expense increased to $1.9 million, 5.8% of revenue compared with $0.9 million and 3.8% the previous year
FY11 Q3 Highlights
24
Financial StatementsFinancial Statements
(Thousands $) Q3 FY11 Q2 FY11 Q1 FY11 FY10 FY09 FY08
Cash and cash equivalents
132,290 158,844 159,754 155,579 70,824 64,310
Current assets 175,984 190,818 189,721 181,953 87,370 79,979
Total assets 243,021 253,798 244,427 232,935 120,804 93,792
Current ratio 4.1 2.8 2.7 2.4 2.7 3.0
Current liabilities 42,716 68,593 69,002 76,756 32,336 26,896
Total liabilities 42,716 68,593 69,002 76,756 55,408 49,396
Stockholder’s equity 200,305 185,205 175,426 156,179 65,396 44,395
Cash balance of $132.3 Mil
Convertible Promissory Notes were redeemed for $29.7 Mil - $25 Mil principal and $4.68 Mil accrued and unpaid interest; considerably decreased shares outstanding and created immediate accretion of earnings per share to investors
Stockholder’s equity increased to an all time high of $200.3 Mil
FY11 Q3 Highlights
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Key ManagementKey Management
Mr. Jinan Song, Founder, Chairman and CEO– Founder and CEO since 1999
– Bachelor’s degree in Polymers; Masters degree in politics and economics
Mr. Travis Cai, Chief Financial Officer– Over 10 years of management experience in financial institutions and US-listed companies
– MS from Stern School of Business at New York University and BS from Tsinghua University
Ms. Eva Yan, Chief Administration Officer– Management team member since 1999 with participation in formulating corporate
development plans, implementing internal control procedures and business negotiations
– Master’s degree in Economic Law from Capital University of Economics and Business
Dr. Hui S. Chang, Chief Operating Officer– 15 years of biopharmaceutical project management experience and research capabilities
– Ph.D. in vaccine development focusing on biochemistry and immunology as well as an MBA in finance and vaccine logistics from Johns Hopkins University
26
Investment HighlightsInvestment Highlights
Strong R&D with highly efficient professional service team
Safe, stable and highly effective product solutions
Over 10 years probiotics production history & proven record of profitability and growth
Rising demand for probiotics products driven by increasing consumption of dairy products, health food and rapid growth in the animal feed, cosmetics and pharma market
Established large-scale production capacity and quality control to penetrate an expanding bulk additives market
Strong revenue and profit growth with high margins
– Revenue growth 39% CAGR FY06-FY10
– FY10 revenue $81M and adjusted net income $28M
– Guidance for 50% top line growth in FY2011
– Proven blended gross margin above 65%
– Consistent positive free cash-flow in recent 3 years
The leading producer of probiotics in China
27
Three Months Ended Dec 31,
2010 2009
Adjusted Net income $10,416,229 $7,811,082
Adjustments
Non-cash gains (losses) from change in fair value of convertible notes
2,847,000 2,668,000
Amount per consolidated statement of operations 13,263,229 10,479,082
Fiscal Year Ended March 31,
2010 2009
Adjusted Net income $27,784,961 $16,874,889
Adjustments
Non-cash gains (losses) from change in fair value of convertible notes
(12,137,000) 3,092,000
Amount per consolidated statement of operations 15,647,961 19,966,889
Appendix: Reconciliation of Non-GAAP Financial DataAppendix: Reconciliation of Non-GAAP Financial Data
Thank YouThank YouMarch 2011
China-Biotics Inc. Travis Cai, Chief Financial [email protected]@chn-biotics.com
Grayling Shiwei Yin/Dixon Chen (646) [email protected]@grayling.com