American Dairy Reports Fourth Quarter and Full Year 2006 Financial Results

- Revenue and Net Income Exceed Company's Expectations - 


BEIJING, April 2  /PRNewswire-FirstCall/ -- American Dairy, Inc. (NYSE Arca: ADY), one of the leading producers and distributors of milk powder and soybean products in China, today announced fourth quarter and full year 2006 financial results.  The Company plans to file its 2006 Form 10K today.

  Key Highlights from 2006 include:
  -- Revenue up 81% year over year to $122.8 million, above previously
     announced expectations
  -- Net income per diluted share increased by 54% to $1.14, above
     previously announced expectations and despite the increase in the
     average diluted share count from 16.1 million to 18.1 million
  -- Continued strategic penetration of the market via increased advertising
     expenditure, to bolster the strength of the Feihe brand
  -- Total sales volume grew 68% to 29.1 million kilograms from 17.3 million
     kilograms in 2005



Leng You Bin, Chief Executive Officer and President of American Dairy stated, "Our financial results for 2006 exceeded our expectations and we generated revenue growth of 81% off of sales volume growth of 68%.  Despite significant investment in the Feihe brand and expenses related to the build out of new facilities in 2006, we still increased our net income by 71% for the year.  Congratulations and thank you to all of our employees who made 2006 a spectacular year for American Dairy."

Leng You Bin continued, "There are two key points to consider when evaluating our fiscal year performance.  First, more and more consumers are seeking out quality and consistency and buying Feihe products.  This drove our revenue to almost $123.0 million in 2006 and we are very proud of that achievement.  Second, we are actively using our capital to create future growth.  Throughout the year, and especially in the fourth quarter, we strategically invested in our brand and our infrastructure.  While we have yet to see the revenue and margin benefits from these material investments, our financials reflect the cost of planning for future success as we build one of China's leading consumer companies, and create significant shareholder value for many years to come."

For the year ended December 31, 2006, revenue increased 81% to $122.8 million from $68.0 million in 2005.  Depreciation expense accounted for in cost of goods sold roughly doubled in 2006 to $1.5 million and reflects the depreciation related to new production facilities. During this same period, gross profit improved 79% to $52.6 million from $29.3 million in 2005. Income from operations increased 78% to $17.7 million from $9.9 million in 2005, and includes the impact of higher expenses such as advertising, distribution and general and administrative expense.  Net income improved 71% to $19.9 million from $11.6 million in 2005.  Diluted EPS income available to common shareholders was $20.6 million, or $1.14 per diluted share.  Please refer to Table 1 for an explanation of the net income per diluted share calculation.

  Key Highlights from the Fourth Quarter of 2006 include:
  -- Revenue up 49% year over year to $38.2 million, reflecting the
     strongest quarter in Company history
  -- Gross profit up 66% year over year to $15.5 million, gross margin of
     40% reflects reclassification of certain promotional expenses as
     detailed in Table 2
  -- Operating income increased 57% to $3.3 million from $2.1 million in
     4Q05
  -- Net income increased 9% to $4.4 million, or $0.22 per diluted share,
     from $4.0 million, or $0.25 per diluted share in 4Q05
  -- Fourth quarter net margin of 11% directly reflects strategic
     investments in advertising and branding.  Company spent $2.8 million,
     or 7% of revenue, on advertising and marketing in 4Q06, up
     substantially from $500,000, or 2% of revenue, spent in 4Q05.
  -- Legal and accounting costs related to financing totaled $224,000, or
     $0.01 per diluted share, in 4Q06



"Our strategic investment in advertising and marketing is an essential part of our plan to build American Dairy into one of China's leading consumer companies.  While this strategy meant lower net margins in the fourth quarter, we believe this is the right strategy that will enhance our brand awareness and continue to increase revenues over the longer term. China is a vast and fragmented consumer marketplace that we are actively penetrating with the right promotional and marketing expenditure. For example, we invested $2.8 million in the fourth quarter to enhance our brand for long-term growth, compared to only $500,000 in the fourth quarter of the prior year. Despite the significantly higher year over year branding investment, we still increased our net income by 9% and we are very pleased with these results," commented Leng You Bin.

Revenue for the fourth quarter was $38.2 million, up 49% from $25.6 million in the fourth quarter of 2005. The increased popularity of the Feihe brand in China continued to drive revenue growth in the fourth quarter.  Sales quantities increased 47% to 8.7 million kilograms in the fourth quarter of 2006, up from 5.9 million kilograms in the prior year period, driven by increased sales quantities of major products.  Specifically, sales volume for the Company's Ca+Zn product increased 160% to 2.8 million kilograms, milk power with nucleotides increased 152% to 1.1 million  kilograms, CPP series increased 33% to 1.3 million kilograms, and the soybean series increased 381% to 662,000 kilograms, as compared to the fourth quarter of 2005.

Gross profit increased 66% to $15.5 million from $9.3 million in the fourth quarter of 2005.  Gross margin of 40% reflects the significant increase in sales volume offset by the reclassification of certain promotional expenses out of distribution expense and into cost of goods sold, as detailed in Table 2.  These reclassifications had no impact on net income or net earnings per share.

Income from operations increased 57% to $3.3 million from $2.1 million in the fourth quarter of 2005, despite significant increases in distribution and general and administrative expenses.  The Company's distribution expenses increased 58% to $10.7 million, which includes the previously discussed advertising expenditure as well as larger incentive bonuses paid to the Company's network of promotional salespeople during the fourth quarter.  The Company did not experience similar advertising and promotional costs in the prior year period.  General and administration expenses, which increased 65% during the fourth quarter of 2006 compared to the prior year's period, reflect accounting and legal costs associated with increased business and financing activities, mostly at the parent company level.  This includes legal and accounting costs specific to financing in 4Q06 which totaled $224,000, or $0.01 per diluted share.

The Company benefited from $1.6 million of other income in the fourth quarter of 2006, which as expected includes approximately $1.9 million of VAT rebates received from the Heilongjiang Province.  Interest and finance costs were $582,000 during the fourth quarter, partly reflecting the issuance of convertible notes in the fourth quarter 2006.

Net income increased 9% to $4.4 million in the fourth quarter of 2006 from $4.0 million in the fourth quarter of 2005. The Company reported diluted earnings per share of $0.22 in the fourth quarter of 2006.

Balance Sheet

As of December 31, 2006, the Company had $39.5 million of cash, compared to $13.0 million at December 31, 2005 and $23.5 million at September 30, 2006. American Dairy had working capital of approximately $28.8 million at December 31, 2006.  The Company had long term debt of $16.9 million as of December 31, 2006.

  Business Update
  -- Gannan County processing plant: As of today, American Dairy has
     completed the installation of milking and other equipment including
     fillers, product tanks, pasteurizers, and storage.  As planned, the
     Gannan facility will be able to process at least 300 tons of fresh milk
     per day by the end of 2007.  American Dairy expects that the Gannan
     plant will process at least 1,000 tons of fresh milk per day by the end
     of 2009.
  -- Langfang packaging plant:  American Dairy expects that the Langfang
     construction project will create one of China's biggest milk powder
     packaging plants.  The Company expects to begin Langfang packaging
     operations in 2007, and expects an initial packaging capacity of 35,000
     tons of milk powder per year.  The Company is currently testing the
     Langfang production lines.
  -- U.S. corporate presence:  American Dairy announced in December that it
     hired a Vice President of U.S. Operations in order to facilitate
     communications between U.S. based auditors, lawyers and investors.
  -- New company website:  American Dairy has launched its new corporate
     website, including an enhanced investor relations section, at
     http://www.americandairyinc.com/.

  Financial Outlook


"We expect first quarter revenue to increase by at least 39% year over year to at least $36.0 million, and we believe that macroeconomic trends continue to be encouraging for Feihe products. Ultimately the year 2007 is a year to invest in our future growth as we focus on increasing our capacity, enhancing our brand and expanding our distribution reach.  While we continue to strive for long-term shareholder value, we expect to reach a net margin in the first quarter of 2007 of at least 14%." stated Roger Liu, Chief Financial Officer of American Dairy.

American Dairy is currently evaluating its fundraising needs and will do so with an emphasis on what is best for the Company and for shareholders.  Due to this process, management is refraining from giving full year 2007 guidance at this time.

  However, the Company does expect the following during 2007:
  -- Cost of Goods Sold:  The Company anticipates increased utility costs as
     new production facilities come online, which may not be immediately
     offset by revenue generation.  This could affect the Company's near-
     term gross margin in 2007.
  -- Advertising and Marketing Expenses:  The Company is actively investing
     in the long-term growth of the Feihe brand and anticipates continued
     expenditure related to these efforts.  It is likely that advertising
     and marketing expenses will be roughly 10% of total revenue in 2007.
  -- VAT Tax:  The Company expects to continue to receive VAT rebates at
     certain times throughout the year.

  About American Dairy, Inc.


American Dairy, Inc. conducts operations in The People's Republic of China ("China") through its wholly owned subsidiary, Feihe Dairy. Founded in 1962, Feihe Dairy is one of the leading producers and distributors of milk powder and soybean products in China. Feihe Dairy is located in Kedong County, China, and has been in operation since 2001. American Dairy also has a milk powder processing plant, BaiQuan Feihe Dairy in Kedong County, and also has a milk powder processing plant in the city of Qiqihaer, Heilongjiang Province. http://www.feihe.com/

Certain of the statements made herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements typically involve risks and uncertainties and may include financial projections or information regarding our future plans, objectives or performance.  Actual results could differ materially from the expectations reflected in such forward-looking statements as a result of a variety of factors, including the risks associated with the effect of changing economic conditions in The People's Republic of China, variations in cash flow, reliance on collaborative retail partners and on new product development, variations in new product development, risks associated with rapid technological change, and the potential of introduced or undetected flaws and defects in products, and other risk factors detailed in reports filed with the Securities and Exchange Commission from time to time.

                           AMERICAN DAIRY INC.
             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                               (Unaudited)


                          Three Months Ended        Twelve Months Ended
                             December 31,              December 31,
                           2006         2005          2006         2005

  SALES                 $38,184,536  $25,599,650  $122,799,191  $68,023,903
  COST OF GOODS SOLD     22,728,001   16,295,578    70,221,023   38,715,895

    Gross Profit         15,456,535    9,304,072    52,578,168   29,308,008

  OPERATING AND
   ADMINISTRATIVE
  EXPENSES:
    Distribution
     expenses            10,680,709    6,770,702    29,397,910   16,742,578
    General and
     administrative
     expenses             1,380,507      837,885     5,218,526    2,484,039
    Depreciation             59,184     (428,350)      266,154      161,450

                         12,120,400    7,180,237    34,882,590   19,388,067

    Income from
     operations           3,336,135    2,123,835    17,695,578    9,919,941

  OTHER INCOME
   (EXPENSE):
    Other income
     (expenses)           1,646,106    2,141,346     3,409,544    2,220,751
    Gain on disposal of
     assets                    (147)       9,125          (147)       9,125
    Interest and
     finance costs         (581,551)    (282,578)   (1,196,694)    (522,812)

                          1,064,408    1,867,893     2,212,703    1,707,064

  MINORITY INTEREST         (46,468)       2,424             -        2,424

  INCOME BEFORE INCOME
   TAXES                  4,354,075    3,994,152    19,908,281   11,629,429

  (PROVISION FOR)
   BENEFIT FROM
  INCOME TAXES                    -            -             -            -

  NET INCOME              4,354,075    3,994,152    19,908,281   11,629,429

  Other comprehensive
   income, net of tax:
    Foreign currency
     translation
     adjustment             (82,406)     (56,837)    1,111,395      605,261

  TOTAL COMPREHENSIVE
   INCOME                $4,271,669   $3,937,315   $21,019,676  $12,234,690

  BASIC NET INCOME PER
   COMMON SHARE               $0.28        $0.28         $1.35        $0.83

  WEIGHTED AVERAGE
   BASIC SHARES
   OUTSTANDING           15,369,133   14,075,682    14,755,576   13,931,006

  DILUTED NET INCOME
   PER COMMON SHARE           $0.22        $0.25         $1.14        $0.74

  WEIGHTED AVERAGE
   DILUTED SHARES
   OUTSTANDING           18,669,699   16,817,936    18,056,143   16,057,073

  Income and expenses as reported for the three months ended December 31,
  2006 take into consideration
  certain reclassifications between expense categories to conform to the
  classifications used in the December 31, 2006
  audited financial statements.  These reclassifications had no impact on
  income or income per share.



                           AMERICAN DAIRY, INC.
                       CONSOLIDATED BALANCE SHEETS
                     AS OF DECEMBER 31, 2006 AND 2005

                                   ASSETS
                                                2006               2005
  Current assets:
    Cash                                     $39,473,910       $12,958,435
    Accounts receivable
      Trade-net of allowance for bad
       debts of $322,520 and $309,461,
       respectively                            5,459,760         4,132,931
      Employees                                  433,121           488,413
      Other                                      452,728         1,516,105
    Notes receivable                             230,179                 -
    Inventories                               13,913,766         9,622,347
    Prepaid expenses                             664,530           875,031
    Advances to suppliers                      1,301,935         1,216,172
    Other tax refundable                       1,365,214           500,892

        Total current assets                  63,295,143        31,310,326

  Property and equipment:
    Fixed assets, net of accumulated
     depreciation                             36,981,569        34,685,898
    Construction in progress                   9,433,148         3,373,833

                                              46,414,717        38,059,731
  Other assets:
    Goodwill                                   1,460,695                 -

                                               1,460,695                 -

  Total assets                              $111,170,555       $69,370,057

       LIABILITIES AND STOCKHOLDERS' EQUITY
                                                2006              2005
  Current liabilities:
  Accounts payable and accrued
   expenses                                  $13,263,315       $11,855,430
  Current portion of long term debt            5,103,197           102,466
  Advances from related parties                  119,911           932,942
  Advances from employees                        735,294           947,596
  Deferred income                              2,145,325        12,073,781
  Short-term notes and loans payable          13,122,868         7,323,801

  Total current liabilities                   34,489,910        33,236,016

  Long term debt, net of current
   portion shown above, net of
   discount
  of $1,715,871 at December 31, 2006          16,936,654         5,543,517

  Minority interest                                    -           493,500

  Stockholders' equity:
  Common stock, $.001 par value;
   50,000,000 shares authorized;
   15,831,820 and 14,132,824
  shares issued and outstanding at
   December 31, 2006 and 2005,
   respectively                                   15,832            14,133
  Additional paid-in capital                  17,834,429         9,208,837
  Retained earnings                           40,177,074        20,268,793
  Accumulated other comprehensive
   income                                      1,716,656           605,261

  Total stockholders' equity                  59,743,991        30,097,024

  Total liabilities and stockholders'
   equity                                   $111,170,555       $69,370,057




  Table 1: Reconciliation of Numerator and Denominator in earnings per share
  calculation
                                   Income            Shares       Per Share
                               (Numerator)      (Denominator)      Amount
  For the year ended December
   31, 2006

  Basic EPS income available
   to Common shareholders         $19,908,281         14,755,576      $1.35

  Effect of dilutive
   securities:
  Convertible notes                  723,707           1,833,285      $0.11
  Warrants issued                                      1,467,282      $0.10

  Diluted EPS income
   available to Common
   shareholders                   $20,631,988         18,056,143      $1.14

  For the year ended December
   31, 2005

  Basic EPS income available
   to Common shareholders         $11,629,000         13,931,006      $0.83

  Effect of dilutive
   securities:

  Warrants issued                           -          1,643,533      $0.08

  Convertible notes                   304,000            482,534      $0.01

  Diluted EPS income
   available to Common
   shareholders                   $11,933,000         16,057,073      $0.74


  For the year ended December
   31, 2004

  Basic EPS income available
   to Common shareholders          $6,258,000         12,077,085      $0.52

  Effect of dilutive
   securities:

  Warrants issued                                      1,378,615      $0.05

  Diluted EPS income
   available to Common
   shareholders                    $6,258,000         13,455,700      $0.47




  Table 2: Summarized unaudited quarterly financial data for 2006 and 2005

  The table below for fiscal year 2006 includes certain reclassifications of
  expenses previously reported as distribution expenses to cost of goods
  sold to conform to the classifications used in the December 31, 2006
  audited financial statements.  These reclassifications had no impact on
  net income or net earnings per share.



                                       March 31,    June 30,   September 30,
                                         2006         2006         2006
   Total revenues                     $25,893,000  $26,110,028  $32,611,627
   Gross profit                       $11,908,000   $9,997,007  $15,236,726
   Gross Margin:                              46%          38%          47%

   Net income                          $4,764,000   $5,261,967   $5,528,239
  Net earnings per common share:
        Basic                               $0.34        $0.36        $0.37
        Diluted                             $0.29        $0.31        $0.32

                                            December 31,         Fiscal Year
                                                2006                2006
   Total revenues                            $38,184,536       $122,799,191
   Gross profit                              $15,456,435        $52,578,168
   Gross Margin:                                     40%                43%

   Net income                                 $4,354,075        $19,908,281
  Net earnings per common share:
        Basic                                      $0.28              $1.35
        Diluted                                    $0.22              $1.14



                                       March 31,    June 30,   September 30,
                                          2005         2005         2005
   Total revenues                     $13,560,731  $14,589,807  $14,273,618
   Gross profit                        $6,263,478   $6,996,110   $6,744,356
   Gross Margin:                              46%          48%          47%

   Net income                          $2,632,757   $2,823,250   $2,178,699
  Net earnings per common share:
        Basic                               $0.19        $0.21        $0.16
        Diluted                             $0.17        $0.18        $0.14


                                             December 31,       Fiscal Year
                                                2005                2005
   Total revenues                            $25,599,747        $68,023,903
   Gross profit                               $9,304,064        $29,308,008
   Gross Margin:                                     36%                43%

   Net income                                 $3,994,723        $11,629,429
  Net earnings per common share:
        Basic                                      $0.27              $0.83
        Diluted                                    $0.25              $0.74


DATASOURCE: American Dairy, Inc.



CONTACT:  Ashley Ammon MacFarlane of Integrated Corporate Relations,

Inc., [phone] (Investor Relations), for American Dairy, Inc. 



Web site:  http://www.americandairyinc.com/

http://www.feihe.com/ 

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