"China is becoming a land of big milk drinkers; this year, China will consume 25 million tons of milk, putting it ahead of both France and Germany -- that’s a 76% increase from 2000," observes Tony Sagami.

In The Asia Stock Alert, he says, "The best way to profit from this Chinese milk boom, in my opinion, is with China-based American Dairy (NYSE: ADY)."

"The Chinese currently consumes 24 pounds of dairy products per person each year versus a world average of almost 220 pounds annually.

"To put that into perspective, we Americans consume 586 pounds per person per year. Clearly, the potential of the Chinese dairy market is staggering.

"American Dairy was started in 1962 by the Chinese government and was privatized in 1997. The Chinese government, however, is still a major shareholder.

"The company is one of the largest producers and distributors of milk, infant formula, and powdered milk, as well as soybean, rice, and walnut dairy products. 

"All its products are sold under the Feihe Dairy name. Feihe Dairy has 200 milk collection stations and six production facilities with the capacity to produce 1,200 tons a day. That bounty is then distributed over 84,000 retail outlets across China. 

"The biggest force driving up milk is rising incomes, which are lifting millions of people out of poverty and into the middle class. One of the first things that people spend money on when they rise out of subsistence wages is an improved diet, specifically protein and dairy products.

"In addition, the dairy industry receives a tremendous amount of support from the Chinese government. Currently, the dairy industry receives a 100% subsidy for all the taxes that it pays.

"Additionally, the government runs advertisements about the diary industry that encourages consumption.

"American Dairy had a 2.7% market share before last year’s melamine scandal hit; tainted baby formula in China killed dozens of infants and sickened another 300,000.

"However, American Dairy’s three largest competitors were among the 22 companies that sold milk products containing the industrial chemical melamine.

"How did American Dairy escape the tainted milk scandal? Unlike its competitors, American Dairy controls its own production instead of buying milk from other brokers.

"As its competitors were forced to halt production or went out of business, American Dairy saw its market share grow to 7.3% and now expects that number to reach 15% by 2014. The Chinese will long remember that American Dairy was not implicated in the tainted milk crisis.

"American Dairy reported its quarterly results in August and they were great. Revenues increased by 10.4% on a year-over-year basis, while profits surged by 59%.

"That’s not a one quarter anomaly, either. Revenues have increased from a paltry $19.1 million in 2003 to $271 million over the last 12 months.

"During the same time, profits have climbed from 19 cents to a whopping $2.05 per share. That type of growth is usually very expensive, but American Dairy is selling for only nine times forward earnings! That’s a bargain."