This is a peculiar company which came to my attention from my friend in HSBC. Biostime started out as a probiotic supplement vendor in 2000. In 2008, they introduced imported infant formula into their product range and sales growth practically exploded. Anyone with a decent network of Chinese friends would understand, food safety is a huge issue in China. This is especially important when it comes to infant food products. Due to the melamine contamination scandal in locally produced infant formulas, the Chinese have absolutely no confidence in local products. Unless restrained by budget, most parents would opt for imported infant formula. In fact, there is a cottage industry blooming just around importing foreign infant formula and reselling them on personal blog sites. Anyone doubting this just have to read this piece of news (http://www.news.com.au/national-news/chinese-threaten-supply-of-baby-formula-in-australia/story-fncynjr2-1226547242828)
Biostime's infant formula and baby cereal products are imported with original packaging form their product suppliers, Laiterie de Montaigu and Kerry Ingredients and Flavors. The association with foreign companies have given chinese consumer confidence on their product quality. A quick search on taobao.com for Biostime reveals that the cheaper Biostime infant formula costs around Rmb228-300 while the higher end ones costs Rmb380-476. Thus, Biostime belongs to the high-tier infant formula market (Rmb200-300) and the supreme tier infant formula market (>Rmb300). For a start, let's have a look at Biostime's income statement.
These are growth rates that would make even Warren Buffett envious. The majority of their revenue came from an explosive growth in infant formula starting from 2008 (which perhaps not so coincidentally, is the year the melamine scandal surfaced). Their original business segment, probiotic supplement, while having decent growth, it now only accounts for 11% of total revenue. The million dollar is ... how long can this growth last? As at the closing price of HKD39.80, Biostime trades at a trailing 26x PE. Not the usual place where a value investor should be doing his digging. But if the growth rates can persist at the 40-50% for even a couple of years, this could well turn out to be a bargain.
This is where the data gets a little flaky. The data above is obtained from the IPO Prospectus quoting Euromonitor. I do not have access to Euromonitor, hence 2010-2012 are actually estimates made in 2009 by Euromonitor. Nonetheless, they should not vary too widely and are useful in highlighting certain observations.
(i) Infant population growth is very slow in China ~1% per annum.
(ii) Growth in the infant formula market is driven by increased spending per infant.
(iii) The infant formula market has outpaced growth of the sales volume of infant formula, meaning consumers have been trading up.
(iv) Supreme Tier infant milk powder grows much faster than the rest. Low Tier infant milk powder grows the slowest. In China, parents are willing to pay up for branding, safety and quality.
(v) Biostime has been growing by gaining market share.
In China, many families are not aware that breast milk is the best choice for infants, especially those with lower education levels. Infant formula companies themselves have been spending alot on advertising to build brand image of infant formulas. One of the important secular trend here is that working mothers are increasingly feeding their children infant formula. This is pretty much driven by the difficulty and bodily stress involved in breast feeding their children. A news article here (http://www.havingababyinchina.com/reference/breastfeeding-a-baby-in-china/) quotes that only 22% of mothers at Shanghai continue breast feeding at four months compared to 75% at Cheng De. Those numbers are rather outdated, but it shows that as 2nd and 3rd tier cities urbanise and more women take up white collar jobs, they tend to give up breast feeding in favor of infant formula.
What do I have to be convinced of to buy this stock?
1) The Chinese will continue to spend more and more on infant formula. An average price for a tin of mid-tier infant formula cost around Rmb150. At an average spending of Rmb1,293 per infant per year on infant formula, this is about 8.5 tins of mid-tier infant formula. Can Chinese parents continue to trade up in terms of infant formula choices? There are very little data on household income in China. A 2010 article by Forbes quotes average household income in 2010 to be US$10,220 or Rmb64,000. According to this number, the average family only spends 2% of their income on infant formula. The 12th Five-Year Plan released by the chinese government targets an 7% annual growth in per capital net income for the period 2011-2015. Raising income should ensure that more families switch to high or supreme-tier infant formulas when they can afford it.
2) Biostime can continue to gain market share. The table below from the prospectus list some of Biostime's competitors in the supreme and high-tier infant formula market. I believe there are more competitors that the study did not include, such as Dumex.
Biostime's main competitors are the foreign giants as Biostime is perceived as a french infant formula with ingredients from France. Thus, the main competitors are Mead Johnson, Dumex and Abbott Nutrition, all huge companies in their own right.
Historically, consumption of domestic brands and international brands have largely paced each other (again pardon me for the outdated data). I believe there is more room for international brands to growth, through cannibalizing market share of domestic players.
More foreign players are also eyeing this market keenly. Fonterra, the world's largest dairy exporter, has plans to sell its own branded infant milk formula by mid 2013, despite being rocked by the melamine tainting scandal in Chinese dairy company Sanlu, which it held a stake. Swiss giant, Hero Group, have announced their entry into China's infant formula market by selling its products through a Chinese partner.
I suspect there is more momentum to go for both the company's revenue and earnings, as well as the share price. But, with the stock rallying so aggressively in recent months, I am very uncomfortable buying at this stage. If there is a meaningful pull back of 10-15% I will definitely contemplate a position. Otherwise, I think I would look for better risk/return elsewhere.
Biostime's infant formula and baby cereal products are imported with original packaging form their product suppliers, Laiterie de Montaigu and Kerry Ingredients and Flavors. The association with foreign companies have given chinese consumer confidence on their product quality. A quick search on taobao.com for Biostime reveals that the cheaper Biostime infant formula costs around Rmb228-300 while the higher end ones costs Rmb380-476. Thus, Biostime belongs to the high-tier infant formula market (Rmb200-300) and the supreme tier infant formula market (>Rmb300). For a start, let's have a look at Biostime's income statement.
| Income Statement (Rmb' 000s) | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| Probiotic supplements | 172,163 | 253,859 | 265,886 | 303,749 | 331,962 | 379,203 |
| Infant formulas | 0 | 40,812 | 238,108 | 793,565 | 1,684,655 | 2,715,291 |
| Dried baby food | 16,134 | 30,869 | 54,975 | 97,779 | 97,126 | 134,765 |
| Baby care products | 0 | 0 | 0 | 38,467 | 47,845 | 105,989 |
| Nutrition supplements | 0 | 0 | 0 | 0 | 27,446 | 46,653 |
| Total Revenue | 188,297 | 325,540 | 558,969 | 1,233,560 | 2,189,034 | 3,381,901 |
| COGs | (50,425) | (88,666) | (163,016) | (356,387) | (732,907) | (1,152,955) |
| Gross profit | 137,872 | 236,874 | 395,953 | 877,173 | 1,456,127 | 2,228,946 |
| Sales and marketing exenses | (95,026) | (168,844) | (248,299) | (449,453) | (708,604) | (1,077,721) |
| Admin and general expenses | (9,992) | (20,321) | (26,462) | (87,640) | (82,041) | (116,871) |
| Other expenses | (6,006) | (4,025) | (6,100) | (10,370) | (23,326) | (38,609) |
| EBIT | 26,848 | 43,684 | 115,092 | 329,710 | 642,156 | 995,745 |
| Other income, gains and losses | 554 | 922 | 3,061 | 4,353 | 71,751 | 56,934 |
| Financial expenses | 0 | 0 | 0 | 0 | 0 | (2,106) |
| Profit before Tax | 27,402 | 44,606 | 118,153 | 334,063 | 713,907 | 1,050,573 |
| Tax | (9,916) | (9,444) | (9,836) | (68,380) | (186,556) | (307,467) |
| Net Profit | 17,486 | 35,162 | 108,317 | 265,683 | 527,351 | 743,106 |
| No. of shares (diluted) | N.A. | N.A. | N.A. | 457,417 | 610,544 | 610,544 |
| EPS | 0.04 | 0.08 | 0.24 | 0.58 | 0.88 | 1.24 |
| DPS | N.A. | N.A. | N.A. | 0.20 | 0.76 | 1.08 |
| PE | 808.94 | 404.47 | 134.82 | 55.79 | 36.77 | 26.09 |
| Revenue growth rate | N.A. | 72.9% | 71.7% | 120.7% | 77.5% | 54.5% |
| Net Profit growth rate | N.A. | 71.8% | 67.2% | 121.5% | 66.0% | 53.1% |
These are growth rates that would make even Warren Buffett envious. The majority of their revenue came from an explosive growth in infant formula starting from 2008 (which perhaps not so coincidentally, is the year the melamine scandal surfaced). Their original business segment, probiotic supplement, while having decent growth, it now only accounts for 11% of total revenue. The million dollar is ... how long can this growth last? As at the closing price of HKD39.80, Biostime trades at a trailing 26x PE. Not the usual place where a value investor should be doing his digging. But if the growth rates can persist at the 40-50% for even a couple of years, this could well turn out to be a bargain.
| (Rmb M) | 2007 | 2008 | 2009 | E2010 | E2011 | E2012 |
| infant Population ('ooo infants) | 38,085 | 38,567 | 38,857 | 39,246 | 39,638 | 40,034 |
| Infant Formula Market (Rmb m) | 20,316 | 25,497 | 30,346 | 36,805 | 43,945 | 51,783 |
| Retail Sales Vol of milk formula ('000s tonnes) | 248 | 295 | 340 | 394 | 460 | 530 |
| Supreme Tier | 437 | 688 | 1,214 | 1,767 | 2,307 | 2,770 |
| High Tier | 7,527 | 9,765 | 11,501 | 14,060 | 16,941 | 20,014 |
| Mid Tier | 8,086 | 10,454 | 12,624 | 15,311 | 18,325 | 21,594 |
| Low Tier | 4,266 | 4,590 | 5,007 | 5,668 | 6,372 | 7,405 |
| Biostime Market Share | 0.0% | 0.2% | 0.8% | 2.2% | 3.8% | 5.2% |
| Average Annual spending per Infant | 533 | 661 | 781 | 938 | 1,109 | 1,293 |
This is where the data gets a little flaky. The data above is obtained from the IPO Prospectus quoting Euromonitor. I do not have access to Euromonitor, hence 2010-2012 are actually estimates made in 2009 by Euromonitor. Nonetheless, they should not vary too widely and are useful in highlighting certain observations.
(i) Infant population growth is very slow in China ~1% per annum.
(ii) Growth in the infant formula market is driven by increased spending per infant.
(iii) The infant formula market has outpaced growth of the sales volume of infant formula, meaning consumers have been trading up.
(iv) Supreme Tier infant milk powder grows much faster than the rest. Low Tier infant milk powder grows the slowest. In China, parents are willing to pay up for branding, safety and quality.
(v) Biostime has been growing by gaining market share.
In China, many families are not aware that breast milk is the best choice for infants, especially those with lower education levels. Infant formula companies themselves have been spending alot on advertising to build brand image of infant formulas. One of the important secular trend here is that working mothers are increasingly feeding their children infant formula. This is pretty much driven by the difficulty and bodily stress involved in breast feeding their children. A news article here (http://www.havingababyinchina.com/reference/breastfeeding-a-baby-in-china/) quotes that only 22% of mothers at Shanghai continue breast feeding at four months compared to 75% at Cheng De. Those numbers are rather outdated, but it shows that as 2nd and 3rd tier cities urbanise and more women take up white collar jobs, they tend to give up breast feeding in favor of infant formula.
What do I have to be convinced of to buy this stock?
1) The Chinese will continue to spend more and more on infant formula. An average price for a tin of mid-tier infant formula cost around Rmb150. At an average spending of Rmb1,293 per infant per year on infant formula, this is about 8.5 tins of mid-tier infant formula. Can Chinese parents continue to trade up in terms of infant formula choices? There are very little data on household income in China. A 2010 article by Forbes quotes average household income in 2010 to be US$10,220 or Rmb64,000. According to this number, the average family only spends 2% of their income on infant formula. The 12th Five-Year Plan released by the chinese government targets an 7% annual growth in per capital net income for the period 2011-2015. Raising income should ensure that more families switch to high or supreme-tier infant formulas when they can afford it.
2) Biostime can continue to gain market share. The table below from the prospectus list some of Biostime's competitors in the supreme and high-tier infant formula market. I believe there are more competitors that the study did not include, such as Dumex.
| Supreme-tier infant formula Market Share | 2009 | Mid-tier infant formula Market Share | 2009 |
| Beingmate Scientific Industry Trade | 18.6% | Mead Johnson | 17.7% |
| Biostime | 13.1% | Beingmate Scientific Industry Trade | 12.0% |
| Ausnutria Dairy | 12.7% | Abbott Nutrition International | 11.5% |
| Wakodo | 3.0% | Biostime | 1.3% |
| Others | 52.6% | Others | 57.5% |
Biostime's main competitors are the foreign giants as Biostime is perceived as a french infant formula with ingredients from France. Thus, the main competitors are Mead Johnson, Dumex and Abbott Nutrition, all huge companies in their own right.
| US$m | 2005 | 2006 | 2007 | 2008 | 2009 |
| Domestic Brands | 607 | 882 | 1,255 | 1,472 | 1,903 |
| International Brands | 903 | 1,118 | 1,364 | 1,859 | 2,241 |
Historically, consumption of domestic brands and international brands have largely paced each other (again pardon me for the outdated data). I believe there is more room for international brands to growth, through cannibalizing market share of domestic players.
More foreign players are also eyeing this market keenly. Fonterra, the world's largest dairy exporter, has plans to sell its own branded infant milk formula by mid 2013, despite being rocked by the melamine tainting scandal in Chinese dairy company Sanlu, which it held a stake. Swiss giant, Hero Group, have announced their entry into China's infant formula market by selling its products through a Chinese partner.
I suspect there is more momentum to go for both the company's revenue and earnings, as well as the share price. But, with the stock rallying so aggressively in recent months, I am very uncomfortable buying at this stage. If there is a meaningful pull back of 10-15% I will definitely contemplate a position. Otherwise, I think I would look for better risk/return elsewhere.
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