Feihe (American Dairy)
After careful study and due diligence, we made our first significant investment in China in early 2006. This company, a manufacturer and marketer of infant milk formula, has a sub-$200MM market cap and sells its branded consumer product to the growing population of China. In fact, China’s birth rate is 17MM people per year, similar to the existing population of Australia, which is a powerful demographic trend that works heavily in this company’s favor. The business has built a strong brand with pricing power primarily through the talent and ingenuity of an exceptional management team. We expect the business to grow revenues and profits by over 70% in 2006. We paid a very conservative 15% of fair value for the business while investing roughly 7% of our assets. The company enjoys a no-nonsense management team (the CEO owns over 55% of the company) that understands growing shareholder value. Our discussions and visit with management were both enlightening and reassuring as to what we can expect from this company and this exciting part of the world. The investment was made through a private placement with the company via a 3-year convertible note with a 6-year warrant attached.