Sunday, December 11, 2005

A play on Chinese dairy consumption -- American Dairy (ADY)

Before I begin, note that ADY is very thinly traded (sometimes in the hundreds of shares/day) and has a small market cap.

ADY($6.69/PCX) is one of the largest processors of milk in China under the Feihe brand. The co. is expanding rapidly with 2002 sales of $12.2 million and earinings of $0.3 million and projected 2005 revs of $65-$70 million and earnings of $11-12 million.

This co. is on my watch list mainly due to the current depressed levels of per capita daily consumption of dairy in China and the prospects of improvement in this metric as Chinese disposable income continues to advance. Currently, China consumes 11kg of dairy per capita vs. a world avg. of 100kg (US at 266kg).

Risks (in addition to those listed at the top of the post):
--majority of production concentrated in NE province in China (800 mi. drive to Beijing)
--ADY enters into contracts with small farmers for milk (might be limited supply, pricing risks)
--large multinationals moving into China. This has already happened with varying degrees of success. Likely that more JV's set up in the future.

For some reading material on ADY, see this most recent pr,
this company presentation,
this analyst initiation,
and the most recent SEC filings.

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