China's Got a Sweet Tooth, Too

12/30/2009 9:36 am EST

Focus: GLOBAL

Ryan Irvine

President, KeyStocks.com

This Chinese producer of corn starch is in the midst of an expansion that should fortify its bottom line and share price, writes Ryan Irvine in KeyStone's Small-Cap Stock Report.

Asia Bio-Chem Group Corp (TSX-V: ABC), through its wholly-owned subsidiary Changtu Bio, manufactures and sells corn starch and re­lated products in the People's Republic of China (PRC). From its 15,000-plus square meter manufacturing facility located in Liaoning province, Asia Bio produces approximately 270,000 tonnes of corn starch and related byproducts per year, includ­ing corn germ, gluten, and fiber for the Chinese domestic market.

Roughly 72% of the company’s 2008 production was corn starch, which is sold to industrial customers in a variety of industries within China. Corn starch is used in the manufacturing of hundreds of food products, including MSG, fructose, maltose, glucose, dextrin, citric acid, and lysine. Corn starch is also used to produce sugar alcohols, such as sorbitol and mannitol, and is used to produce a wide variety of modified starch products for the pharmaceutical and fine chemical industries.

The corn starch manufacturing process produces three byproducts: Corn germ, gluten, and fiber. Corn germ is used by the company’s customers to produce corn oil, which is used for cooking or in producing margarine. The gluten and fiber products manufactured by the company are used by livestock farmers as animal feed.

On September 25, 2008, the company completed the acquisition of 100% interest of Daqing Biochemical Company Ltd., a PRC company located in Helongjiang Province. Daqing Bio’s manufacturing facility currently is under construction. Upon completion, it is expected to triple the company’s annual capacity to produce corn starch and related byproducts.

The challenging market conditions seen in [late 2008] were exacerbated [early in 2009] as the economic slowdown in China, coupled with government purchases of corn, had a negative effect on gross profit. While conditions spilled over into the second quarter of 2009, we were happy to see that market conditions began to improve for the company’s products. That improvement continued in the third quarter, and with the announced completion and commencement of produc­tion at the Daqing facility, Asia Bio-Chem’s shares have strengthened sharply.

Management expects that the continued recovery in its industry will bode well for Asia Bio-Chem as the new Daqing facility comes on stream in the fourth quarter of this year. Fundamentally, on a trailing basis, the stock does not currently look cheap, but the attraction to Asia Bio-Chem has always centered around the launch of the new productive capacity via the company’s Daqing facility.

Our long-term view remains that with the company’s funding falling in place, a resumption of more reasonable margins, the continued rise of the Chinese middle class, the suc­cessful production launch of the Daqing facility, and the near tripling of capacity, Asia Bio-Chem continues to offer solid growth potential. (The stock closed at CAD $1.16 in Toronto Tuesday—Editor.)

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