China-Biotics (PINK:CHBT)

	Recent 52-week high
	30% Earnings Per Share (EPS) growth rate
	10% revenue growth year over year
	Strong balance sheet
	15% minimum return on equity (ROE)
	8% minimum pre-tax margins
	Under 50 million shares outstanding
	High insider ownership
	Limited institutional ownership
	P/E at least 1/2 of EPS growth rate

Added to the GeoBargain list on July 14, 2009 @ $9.70

Catalyst: Had a strong EPS outlook; Was exceeding analyst estimates; High anticipation of the benefits of a new facility to increase production capacity.

Peak performance: Reached a high of $19.74 on March 25, 2010

Current Price: $11.96

Current road block: Short investors have attempted to discredit CHBT by illustrating inconsistencies in SEC filings compared to filings located in China; The next two quarters may pose challenges for short-term investors who hold CHBT shares as analyst estimates for the next two quarters call for non-GAAP EPS growth of less than 30%, due to dilution:

• June Fiscal 2011 First Quarter Estimate: $0.31 vs. $0.27 for the comparable period.
• September Fiscal 2011 Second Quarter Estimate: $0.35 vs. $0.31 for the comparable period.

The good news for long-term investors is that EPS growth estimates for the back half of fiscal 2011 remain over 30%:

• December Fiscal 2011 Third Quarter Estimate: $0.44 vs. $0.24 for the comparable period.
• March Fiscal 2011 Fourth Quarter Estimate: $0.49 vs. $0.36 for the comparable period

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

CHBT is a story we want to be involved in. However, given that one of our philosophies has been to generally avoid companies that face controversies with regards to "ethics", we will sit on the sidelines until we gain additional clarity. We will monitor the company's enforcement of its decision to commence a share buy back program enacted to instill investor confidence. Please note, that a buy back program does not obligate a firm to purchase stock, which is why we typically view insider buying as a stronger measure of confidence during controversial times.

Liquidity seems intact:

"We had cash of $155.6 million and working capital of $145.3 million as of March 31, 2010, and cash of $70.8 million and working capital of $55.0 million as of March 31, 2009. Cash generated from operations was $28.2 million for the fiscal year ended March 31, 2010, and $23.1 million for the fiscal year ended March 31, 2009."

"Our business is not capital or labor intensive. Taking into account our current cash position and our anticipated cash flows from operations, we expect we will be able to meet all our funding needs in the next twelve months, including payments required to settle our contractual obligations and for our construction of our new plant.

Let’s hope CHBT does not blindside us with an offering as so many other management teams have. This seems unlikely given its recent initiation of its stock buy back program.

Our intent over the short-term is to build a check list to assess the perceived risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially

-Is the company's auditor ranked in the top 100?
-Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm.  Short sellers have been using this information as a tool to validate their opinions. 
-Are the company's internal controls satisfactory?
-Are their any outstanding legal issues?
-Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?