China is becoming a country of milk drinkers. This year the Chinese will consume more milk then both France and Germany.  China has increased its milk consumption by over 75% since 2000. American Dairy (NYSE: ADY) based in China is well positioned to profit from China's increasing milk consumption.

The Chinese currently consume about 24 pounds of dairy products per person each year versus a world average of almost 220 pounds annually. And Americans consume 586 pounds per person per year. The potential of the Chinese dairy market is staggering. Consumption would have to increase 9 fold just to reach the world average dairy consumption that leaves plenty of growth for American Dairy and increasing profits.

American Dairy was started in 1962 by the Chinese government and was privatized in 1997. The Chinese government 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 of American Dairy's 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 largest force driving up milk consumption is raising incomes, which are lifting millions of people out of poverty and into the middle class. People rising out of poverty spend money on an improved diet, specifically protein and dairy products.

The entire dairy industry receives a tremendous amount of support from the Chinese government. The dairy industry in China receives a 100% subsidy for all the taxes that it pays. The Chinese government also encourages diary consumption via advertisements.

American Dairy has increased its market share from 2.7% last year to 7.3% due to the melamine scandal hit; tainted baby formula in China killed dozens of infants and sickened another 300,000. Unlike its competitors, American Dairy controls its own production instead of buying milk from other brokers. Therefore the crisis was a spring board which ADY used to capture market share. American Dairy expects to reach a 15% of market share by 2014. The Chinese people will 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%. Revenues have increased from a minimal $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 strong $2.05 per share; P/E is currently slightly above 13. That type of growth is usually very expensive, but American Dairy is selling for only nine times forward earnings. American Dairy has a strong long term growth picture. Double digit revenue growth should persist for years to come. ADY currently trades at $29 I would look to enter into ADY in the lower $20's. And if ADY is taken down to $10 again like in March of 2009 because of a market correction I would load up on ADY.

Note: I do not own ADY