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ONE Bio Corp: fast growing herbal extracts, natural supplements and organic products business with low valuation

ONE Bio Corp (OTC:ONBI) is a Florida based company with operating subsidiaries in the Fujian province of China. It is growing quickly in its core businesses; overall revenue has soared from $22.1 million in 2009 to $52.3 million in 2010. The company is profitable, with net income growing from $4.8 million in 2009 to $8.7 million in 2010. Financial performance continues to be strong; Q1 2011 sales came in at $12.1 million, up 8.2% over the year ago quarter.

Growth was driven by new product introductions and continued sales increases of existing product lines. The company’s two core units are Chemical and Herbal Extracts (CHE), and Organic Products (OP). A third, non-core, finance solutions (FS) unit handles logistics, fulfillment, and financing for sales outside China.

First quarter 2011 sales at the CHE unit were up about 57% while Organic Products saw a 36% increase compared to the first quarter 2010. Revenue was dragged down by lower sales at the financing unit, which had shifted its focus toward transaction-based fees with higher gross margins. With gross margins climbing to 56% in CHE, a consistent 41% in OP, and a leap from 14% to 48% in FS, overall gross margins reached 47.8%, a significant increase from 36.8% the prior year.

ONE Bio is vertically integrated, with agricultural land, manufacturing, research and development, and distribution capabilities. It is amongst the larger bamboo producers in China, using the plant as a key ingredient in many of its organic products. Bamboo shoots are packaged directly or with other vegetables as a high nutrient food. Leaf extracts are used to make caffeine-free energy drinks, and bamboo skins are turned into organic fertilizer; nothing is wasted in the process. Even with thousands of acres under cultivation, the company plans on acquiring still more land to increase its supply of bamboo.

While the OP unit makes what are considered “finished products,” the CHE unit produces high margin “intermediates”- components of finished goods. Using a proprietary chemical extraction process, high-value chemicals such as CoenzymeQ10, 5-HTP, and Reveratrol are removed from plant leaves. CoenzymeQ10, or CoQ10, is an antioxidant the company derives from waste tobacco leaves. Once again, nothing is wasted; used leaves are further processed into organic fertilizer. Reveratrol, another agent with potent antioxidant properties, has long been the subject of scientific investigation. 5-HTP is thought to increase serotonin levels, aiding sleep, depression, and anxiety disorders. All three are major components of popular nutraceuticals.

The CHE unit moved beyond intermediates with the launch of several new products in 2010. In addition to the traditional green tea extract, the unit added a house branded sweetener called Sero and the company’s first over-the-counter health beverage, Ganoderma tea. It is the success of these products that helped boost the division’s sales and gross margins, making it the most profitable of the company’s three units. Beginning the second half of this year, the CHE unit will begin introducing a line of OTC health and skin care products. 

The success of Ganoderma tea in particular, which derives from mushrooms, has further validated ONE Bio’s vertical integration strategy. It now intends on using more of its own raw materials in future OTC products.

Most of the company’s sales come from within China. It counts the U.S. and Japan as its two largest export markets. Good progress is being made in Japan with organic product sales up 25% from the previous year. Japan now accounts for 14% of organic product sales. ONE Bio recently added new distributors in Japan.

The company is positioning itself to be more aggressive in the U.S. market, recently signing a distribution agreement with P&G Ingredients. Management is in the process of setting up a new warehouse in the U.S. from which it will sell products directly to U.S. clients. Expectations are the U.S. will begin contributing a greater amount to sales beginning in the third quarter.

Aside from growing organically, ONE Bio has set its sights on at least one acquisition of a profitable, well-run company in the next 24 to 36 months. Seeing as the company has been built through acquisitions, this is not a surprise. The success of previous integrations gives confidence that the outcome of future purchases will be positive.

From a timing standpoint, ONE Bio is in the perfect business. An aging population combined with increasing affluence is increasing demand for health related products. Health conscious consumers have made nutraceuticals into what the company estimates to be a $230 billion market worldwide. Another plus for the company, low cost production in China combined with the ability to sell into the Chinese market.

ONE Bio’s move into higher value and higher margin products such as OTC skin care and OTC tea looks to have significant potential. Stretching or developing a new brand must be done with care, but the company has shown an affinity for this through its successful launch of its OTC Ganoderma tea. The margin and sales boost from these products are too enticing to ignore.

ONE Bio is currently valued at about $30 million with a PE of about 3. Perhaps this has to do with the company’s operations in China, which often leads to skepticism by investors. A long sought-after listing on a senior exchange may help in that case. No matter, if the company continues to perform as it has for the next several quarters, this low valuation will be a thing of the past.