China-Biotics: Was its Star Product Successful?

Disclosure: Matt Berry. I have a short position in China-Biotics, Inc (CHBT). All investors
are responsible for their own due diligence. All are responsible for their own investment
decisions.

According to China-Biotics,1 its star product is Shining Essence. I recently found some articles written
by Chinese marketing consultants who paint a very different picture. Here is an excerpt from one article
which was professionally translated:

With right positioning, marketing can be successful. Wrong positioning will certainly lead to product failure.

Shining Essence has been promoted in Shanghai in recent years, but is still under a gloomy cloud now. It
still cannot overcome the challenges brought by I & Onlly2 and “salt water bottle”3. A big part of the reason is
that Shining Essence fails to find the right and effective positioning. It advocates “greening the internal
environment of the body”, which is just a pirated copy of what I & Onlly recommends - “removing the
garbage inside the body”. There is no difference between the two. How can a latecomer not fail by just
taking the positioning adopted by a leading brand?4

~ Bó cèhuà, ”Platinum Planning,” Chén Qíruì5

Both this article and the next take it for granted that Shining Essence was well behind the competition.
That is, unlike our debate here in the West over whether or not the product was successful, the issue on
the other side of the ocean was a foregone conclusion and any debate was restricted to why the sales were
so bad. These articles are instructional texts, probably aimed at promoting the consulting services
themselves. They have been widely republished on the web through the years. They may have been
written around 2003, at least that was the earliest year I found on some of the web pages. In them,
Shining Essence is used as an example of how not to market your product. Here are more excerpts from
the marketing consultants, Xīyì Tuánduì,6 as found in an article titled, “Shining Essence: Your heart is too
soft!”

“Shining Essence is an advanced, visionary product. After years of struggle in Shanghai, what is the reason
7
for its inability to distinguish itself?”

….

Shining Essence’s slogan is “clean the inner environment.” Compared to the previous two, this one provides
no new breakthroughs.8
….

1 & Only and Gaobote Saline Water are not spending less on advertising than Shining Essence. 1 & Only
has staunchly established product channels and marketing methods, which are difficult to disrupt. And when
it comes to product perceptions, Shining Essence does not enjoy a status of being seen as “out of the
 9
ordinary,” so if it does not perform well on the market, that is all too understandable.
….

Strangely, Shining Essence has used its excessively cautious, soft, and messy slogan for a long time, and
10
its marketing methods are ineffective.

….

Not long ago, Shining Essence finally changed its slogan to “Let Bacteria Cure Bacteria.” In print
advertisements, it announced itself as “Leading the World in the Next Generation of Probiotics.” Is 1 & Only
not continually running “probiotic” in its ads? This “Next Generation” is most definitely an attack aimed at 1 &
Only.

This shows that Shining Essence has finally gotten “tough.” This probably became necessary as a result of
poor sales.

If the company had used this marketing method when it was first emerging, Shining Essence’s opportunity
for success would have been great. Having waited so long to change their tone, is it now too late?

“Do not revere stars that have burned out.” Shining Essence’s missed opportunities are most definitely
regrettable.11

~ Xīyì Tuánduì “The Lizard Team”

However, as we approach 2006, when China-Biotics reaches out to the US capital markets, Shining
Essence is supposed to be the star player.

“We launched Shining Essence in Shanghai in April 2001, and it is currently our best-selling product,
representing approximately 68% of our total sales for the year ended March 31, 2006.”

~ SEC 10-KSB, March 31, 2006

This refrain is found in annual report after annual report. In fact, Shining Essence alone was almost a
company in and of itself. Look at the revenue claimed for Shining Essence in the SEC filings, 10-ksb and 10-k.

Years ending March 31 2005 2006 2007 2008 2009 2010

Total revenue 14,421,772 21,862,385 30,609,941 42,321,111 54,197,082 81,363,973
% Shining Essence 0.7046 0.6827 0.6157 0.4861 0.399 0.29
Revenue for Shining
Essence 10,161,581 14,925,450 18,846,541 20,572,292 21,624,636 23,595,552

Sales for Shining Essence, according to China-Biotics, are not doing badly. On the contrary, they are
growing. It is just that the other products are growing at an even faster rate. For example, …

“Our growth in net income primarily resulted from growth in our sales volume of our products. Shining
Essence continued to be our best selling product.”

We have enjoyed strong growth in demands for many products such as Shining Golden Shield and Shining
Energy which outpaced that of Shining Essence. In addition, new product sales now account for 13.6% of
our sales revenue during the year ended March 31, 2008 (1.9% in the year ended March 31, 2007). As a
result, the percentage of sales revenue attributable to Shining Essence has been diluted to only 48% of our
total sales revenue in the year ended March 31, 2008 (61% in the year ended March 31, 2007).

~ March 31, 2008 10-ksb

Perhaps there is an explanation. Perhaps the company had problems, but only before 2005, and then
greatly increased sales just in time for its listing on the US markets. If we stick with the company’s story,
and only their story, we can believe in its success from 2005 to the present. However, if we look to China
for our information, it doesn’t look very good.

In the table below we can see the Total Operating Revenue for the factory, Shanghai Shining. 12 The data
had been filed with the local branch of the government office, State Administration for Industry and
13
Commerce (SAIC).

Years ending December 31 2006 2007 2008 2009

Total Operating Revenue RMB 880,187 3,113,405 3,694,922 3,440,951
Total Operating Cost RMB 4,028,918 11,653,696 12,251,106 12,170,952
USD per Unit, Dec. 31 0.128081973 0.136900036 0.14654161 0.146455769

Total Operating Revenue USD 112,736 426,225 541,460 503,947

Total Operating Cost USD 516,032 1,595,391 1,795,297 1,782,506
(403,296) (1,169,166) (1,253,837) (1,278,559)

First, we can see that sales did improve dramatically from 2006 to 2007. However, this was in equal
proportion to increased operating costs. Losses increased.
I close my eyes and imagine a boat with its bow already under water and the acceleration only results in it
taking on more water.

Now, one of the objections to using the SAIC documents (Chinese government filings) is that each
statement refers to a single subsidiary, whereas the SEC documents give us consolidated figures. So if we
say that the revenue claimed in America is out of proportion to the revenue claimed in China we need to
be sure that we are talking about consolidated Chinese figures. In this case however, Shanghai Shining is
the only operating subsidiary in China during this time. And it gets worse. We can restrict the debate to
Shining Essence alone. It is produced by this one subsidiary ‒ the factory, Shanghai Shining ‒ and as we
have shown, its numbers are clearly distinguished in the SEC documents.

In the chart below we see a comparison between revenue claimed for the single product, Shining Essence
‒ that’s one product all by itself ‒ and pitted against it, we have the revenue for the entire factory that
produced it: Shanghai Shining. 14

If this doesn’t make sense, don’t worry ‒ it doesn’t. This is as impossible as it is for a slice to be bigger
than the very pie it was cut out of. The big difference between the two sets of numbers, and it’s a
revealing difference, is that the larger numbers specific to Shining Essence were recorded in the USA
filings and the much smaller numbers for the entire factory were recorded in the Chinese filings.

Imagine that we reversed the situation, and we had a reverse merger take place in China. We’ll call it,
“America-Car.” We could tell China that the Ford Edsel alone was so wildly successful that it out-sold all
products manufactured in its own factory, including its own sales. First, we would be selling an already
failed marketing venture, and second, we would add the extravagance of a failed logic. (Who would put
together the equation: 1 > 1 + something ...? ) Would we succeed in our little story? … Perhaps, if they
accept only the first half of the story as told in China ‒ and if they do not trust the information found in
America. But who would invest that way? Who would be Bullish on America and at the same time not
trust the information available in America? Who would really do that?

The irony should not be lost on us. We sometimes suffer from bizarre and subtle forms of xenophobia. A
twisted cultural prejudice prevents many pro-China investors from accepting relevant information from
China. They accept the SEC but mistrust the SAIC. A US-based blogger writes a Pro-China-Biotics’
article and they love it; a Chinese nationally syndicated journalist debunks China-Biotics’ claims and the
article is either ignored or considered irrelevant. It is as if the pro-China investor fears that a Chinese
messenger might insert a fact into his ear to pick-pocket his American dream.

**********************

Chinese source material on China-Biotics:

Chinese investigative reporter, Jinyuan Lu, January 21, 2011, reporting for First Financial (Yicai) ‒ in a
nationally published article. English Translation (With link to original Chinese).

Zheng Zhaohui, Chinese Forensic Accountant on China-Biotics: English Translation (With link to
original Chinese).

China-Biotics in SAIC documents:

 China-Biotics’ 2009 Revenue is 70 Million Dollars Off (Slide Show)

 China-Biotics’ 2009 Revenue is 70 Million Dollars Off (Video)

Unpaid Debt found on another company’s annual reports:

 Did China-Biotics Pay Its Debts? (Article)

Internet Sleuthing in China:

 The Critical Failure in China-Biotics’ Story (Slide Show)

Endnotes:

1
China-Biotics, Inc. (“China-Biotics”)

2
昂立一号 Competing product ‒ 323,000 results in Google Images; 双金爱生, “Shining
Essence”had about 900.
3
盐水瓶 was translated as “Salt Water Bottles” by one translator and “Gaobote Saline Water”
by another.

4
成功的定位能够带来营销得成功，失败的定位必然导致产品失败。

最近几年一直在上海推广的双金爱生，直到现在仍然惨淡经营，始终
无法突破昂立一号和盐水瓶对它的阻击。原因很大程度上是因为双金爱生一直没有找到准确有效
的定位。双金爱生的“绿化体内环境”只不过是昂立一号“清楚体内
垃圾”的盗版，没有任何差异。作为后来者简单重复领导品牌的定位，岂有不败之理？

5
铂策划、陈奇锐 (Platinum Planning, Bó cèhuà, Chén Qíruì)

Widely distributed: see here.

Here’s one selected from the above hits: http://www.boraid.com/darticle3/list.asp?id=212550

Chén Qíruì’s column, http://www.globrand.com/column/chenqirui/

Oldest date found on web page was April 2003. http://www.hi138.com/?i197748

6
Title: "双金爱生：你总是心太软" ‒ an article put out by a “ marketing planning company,” 蜥蜴团队, Xīyì
Tuánduì “The Lizard Team,” http://www.ce-team.com/about.shtml

Widely distributed: here.

Examples:

http://www.mie168.com/manage/2005-01/93265.htm
http://www.365u.com.cn/WenZhang/Detail/Article_81910.html

Oldest date found on web page: May 2003. The page was no longer available. However, the title and
author are still found on Google search results, with the date. Here.
7
双金爱生就是一个有抱负的跟进产品，在上海苦苦挣扎多年，一直没有出人头地，原因何在？

8
双金爱生的广告词是“绿化体内环境”，与前两者比，毫无新意，软绵绵无突破。
9
昂立一号和盐水瓶的广告，也不比双金爱生的投入少。在产品通路、市场营销手段上，昂立一号
树大根深，难以撼动；在产品概念上，双金爱生又没有“不同凡响”，市场做不好，实在太正常了
。

10
奇怪的是， 双金爱生这些四平八稳、 软绵绵、 凌乱的口号叫了很长时间，
而市场推广手段也绵软无力。

11
前不久双金爱生终于改变口号， 号称“以菌治菌”，
在报纸硬广告上宣传“国际全新一代微生态制剂”。
昂立一号不是一直打着“微生态制剂”的招牌吗？这个所谓的“全新一代”，矛头当然是指向昂立一
号。

这表明双金爱生终于“强硬”起来了。这大概是一直销售惨淡，逼出来的。

如果上市初期就用这个概念和手段，双金爱生成功的机会很大，迟到现在才改变口径，是不是太
晚了？

“过气的明星不要捧”，双金爱生错失时机，实在可惜。

12
Shanghai Shining Biotechology, Co. Ltd. (“Shanghai Shining”)
13
2007, 2008 (Note that 2006 data was taken from the 2007 statement’s “Prior Year” column.)

English
Chinese

2008, 2009

English and Chinese (Income Statement only)

Chinese
14
The years for Shining Essence end March 31, and the years for the entire factory end December 31. Comparing
Shining Essence revenue ending March 2007 to the sales of the Entire Factory ending December 2006, and so on,
would have been a closer synchronization. The difference would also have been more pronounced. However, either
result suffices to make the point -- and since CHBT has been a controversial topic, I give CHBT the least damaging
of the two available comparisons. Any debate would be a further distraction from the main point.