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China Kanghui Holdings Reports First Quarter 2011 Financial Results

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^{Published in Health and Fitness on Monday, May 16th 2011 at 2:20 GMT by Market Wire}  

CHANGZHOU, China--([ BUSINESS WIRE ])--China Kanghui Holdings (NYSE: KH) ("Kanghui" or the "Company"), a leading domestic developer, manufacturer and marketer of orthopedic implants in China, today announced financial results for the first quarter of 2011.

", and our partnership with Consensus Orthopedics Inc. will help us further establish Kanghui as a leading international provider of innovative and diversified orthopedic products."

First Quarter 2011 Highlights

• Total net revenue for the first quarter of 2011 increased by 39.3% year-over-year to RMB68.0 millionfrom RMB48.8 million for the first quarter of 2010.
• Gross profit for the first quarter of 2011 increased by 40.8% year-over-year to RMB48.7 million from RMB34.6 million for the first quarter of 2010.
• Operating income for the first quarter of 2011 increased by 43.3% year-over-year to RMB29.8 millionfrom 20.8 million for the first quarter of 2010.
• Net income for the first quarter of 2011 increased by 23.6% year-over-year to RMB22.0 million from RMB17.8 million for the first quarter of 2010.
• Non-GAAP¹ net income for the first quarter of 2011 increased by 14.1% year-over-year to RMB23.4 million from RMB20.5 million for the first quarter of 2010.

Mr.Libo Yang, the Company's Chief Executive Officer, stated, "We are delighted to report strong financial results for the first quarter of 2011. We experienced significant growth across all product segments and all markets, driven by the solid uptake of our spine products and robust international sales. We continued to implement our strategies, which led to our impressive product growth and further expanded our distribution network, and completed an important acquisition that will help us build our leadership position in China and internationally."

Ms.Sarah Wang, Kanghuia™s Chief Financial Officer, said, "Our first quarter performance was primarily driven by strong growth across our business sectors and higher operating leverage through disciplined expense controls. We are off to a good start in 2011. We believe our strategic acquisition of Beijing Wei Rui Li Medical Device Co., Ltd., or "Wei Rui Li", and our partnership with Consensus Orthopedics Inc. will help us further establish Kanghui as a leading international provider of innovative and diversified orthopedic products.a

First Quarter 2011 Financial and Operating Results

Net revenue increased 39.3% to RMB68.0 million ($10.4 million) in the first quarter of 2011 from RMB48.8 million in the first quarter of 2010. Net revenue from trauma products increased 28.8% to RMB42.0 million ($6.4 million) from RMB32.6 million in the corresponding period of the prior year. Net revenue from spine products increased 60.0% to RMB19.2 million ($2.9 million) from RMB12.0 million in the corresponding period of the prior year. Net revenue from OEM products increased 61.9% to RMB6.8 million ($1.0 million) from RMB4.2 million in the corresponding period of the prior year. Domestic sales of proprietary products increased 21.0% year over year to RMB50.1 million ($7.7 million) from RMB41.4 million, while international sales of proprietary products increased 246.9% year over year to RMB11.1 million ($1.7 million) from RMB3.2 million.

In the first quarter of 2011, cost of revenue increased 35.9% to RMB19.3 million ($2.9 million) from RMB14.2 million in the corresponding period of the prior year. Gross profit increased 40.8% to RMB48.7 million ($7.4 million) in the first quarter of 2011 from RMB34.6 million in the corresponding period of the prior year. Gross margin for the first quarter of 2011 was 71.7%, compared to 70.9% in the first quarter of 2010. Selling expenses increased 20.7% to RMB7.0 million ($1.1 million) in the first quarter of 2011 from RMB5.8 million in the corresponding period of the prior year. General and administrative expenses increased 44.4% to RMB10.4 million ($1.6 million) in the first quarter of 2011 from RMB7.2 million in the corresponding period of the prior year. Research and development expenses increased 66.7% to RMB1.5million ($229,000) in the first quarter of 2011 from RMB0.9 million in the corresponding period of the prior year.

Provision for income taxes in the first quarter of 2011 was RMB9.0 million ($1.4 million), representing an effective tax rate of 29.0%, compared to RMB3.2 million, or an effective tax rate of 15.4%, in the corresponding period of the prior year.

Operating income increased 43.3% to RMB29.8 million ($4.6 million) in the first quarter of 2011 from RMB20.8 million in the corresponding period of the prior year. Operating margin increased to 43.8% in the first quarter of 2011 from 42.7% in the corresponding period of the prior year.

Net income was RMB22.0 million ($3.4 million) in the first quarter of 2011, up 23.6% from RMB17.8 million in the first quarter of 2010. On a diluted per ADS² basis, the Company reported net income per diluted ADS of RMB0.87 ($0.13) in the first quarter of 2011, compared to a net loss per diluted ADS of RMB0.77 in the corresponding period of the prior year. Non-GAAP net income, which excludes share based compensation expenses, increased 14.1% to RMB23.4 million ($3.6 million) from RMB20.5 million in the corresponding period of the prior year. The Company reported non-GAAP net income per diluted ADS of RMB0.93 ($0.14) in the first quarter of 2011. This compares to a non-GAAP net loss per diluted ADS of RMB0.49 in the corresponding period of the prior year.

During the first quarter of 2011, the Company had a weighted average diluted share count of approximately 150.9million shares (equivalent to 25.2million ADSs), compared to 57.7million shares (equivalent to 9.6million ADSs), in the first quarter of 2010.

Balance Sheet

As of March 31, 2011, the Company had cash and cash equivalents of RMB177.6 million ($27.1 million), compared to RMB262.5 million as of December 31, 2010. As of March 31, 2011, the Company held short-term investments of RMB261.0 million ($39.9 million), compared to RMB266.7 million as of December 31, 2010.

Business Outlook

Mr.Yang added, "We remain focused on further penetrating both our existing domestic and international markets while expanding into new growth opportunities. As demonstrated by our strong first quarter performance across our business sectors, we are confident in our ability to realize our business plans for the remainder of 2011. We are delighted with the progress achieved, as we position Kanghui as a leader in product quality in the fast-growing and underserved joint reconstruction market in China."

The Company expects year-over-year revenue growth of 20% to 25% in 2011, bringing revenue for the full year 2011 in the range of RMB292 million to RMB303 million. The Company also expects its full year 2011 non-GAAP net income, without taking into account relevant operating expenses in connection with the exclusive partnership with Consensus Orthopedic and the acquisition of the majority stake in Wei Rui Li, to be in the range of RMB128 million to RMB133 million. The impact of the exclusive partnership with Consensus Orthopedic and the acquisition of the majority stake in Wei Rui Li on the Companya™s operating expenses is expected to be approximately RMB7 million. After taking into account the operating expenses relating to these transactions, the Company believes that non-GAAP net income for the full year 2011 will be between RMB121 million and RMB126 million.

Non-Cash Share-Based Compensation Expense Discussion

The Company recognized non-cash share-based compensation expenses of approximately RMB1.4 million ($215,000) in the first quarter of 2011.

The Company classified these non-cash share-based compensation expenses in its costs of revenue, selling expenses, general and administrative expenses as well as in research and development expenses. The break out of these expenses per line item is provided in the financial tables attached to this press release.

The Company has provided a non-GAAP presentation of results which excludes the non-cash share based compensation expenses. Please refer to the non-GAAP presentation provided in the appendix for a year over year comparison of non-cash share-based compensation expenses. The Company believes that non-GAAP presentation is a helpful tool for the Company to plan and forecast future periods and both management and investors benefit from referring to such non-GAAP presentation in assessing the performance of the Company.

Conference Call

Kanghui will hold a conference call at 8:00 a.m. ET on May 16, 2011 to discuss results of the first quarter of 2011 and answer questions from investors. A webcast of the call will be available at [ www.kanghui.com ]. Listeners may access the call by dialing:

A replay of the webcast will be accessible through May 30, 2011 on [ www.kanghui.com ] or by dialing:

About China Kanghui Holdings

Founded in 1997, Kanghui is a leading domestic developer, manufacturer and marketer of orthopedic implants in China. The Company offers a wide array of proprietary orthopedic implant products in trauma and spine. It has an extensive network of distributors for its products in China. In addition, Kanghui's products are distributed in 27 countries. Kanghui has strong research and development capabilities, focused on developing new proprietary products, including new product lines, extensions of existing product lines and enhancements of existing products. For more information, please visit [ www.kanghui.com ].

Use of Non-GAAP Financial Measures

The Company has included non-GAAP financial measures in this press release. Non-GAAP financial measures are defined as GAAP gross profit, operating income, net income, net margin, basic earnings per share and per ADS, and diluted earnings per share and per ADS, excluding non-cash share based compensation expense. The Company believes that management and investors benefit from referring to the non-GAAP financial measures in assessing the performance of the Company and when planning and forecasting future periods. These non-GAAP operating measures are useful for understanding and assessing underlying business performance and operating trends. The use of non-GAAP financial measures has limitations and readers should not consider non-GAAP financial measures in isolation from or as alternatives to consolidated financial metrics prepared in accordance with U.S. GAAP. Readers are encouraged to refer to the reconciliation of non-GAAP measures to GAAP measures included herein.

Safe-Harbor Statement

This press release contains statements of a forward-looking nature, including, among other things, the Company's unaudited operating results for 2010 and anticipated operating results for 2011, the anticipated benefits of the Company's Consensus Orthopedics partnership and its acquisition of a majority stake in Wei Rui Li and the ability for the Company realize its business plans for the remainder of 2011. These forward-looking statements are not historical facts but instead represent only the Companya™s belief regarding expected results and events, many of which, by their nature, are inherently uncertain and outside of the Companya™s control. The actual results and other circumstances of the Company may differ, possibly materially, from the anticipated results and events indicated in these forward-looking statements. Announced results for the first quarter 2011 are preliminary, unaudited and subject to audit adjustment. Adjustments to the financial statements may be identified when audit work is performed for the year end audit, which could result in significant differences from this preliminary unaudited financial information. These statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. These forward-looking statements may include, but are not limited to, statements containing words such as "may," "could," "would," "plan," "anticipate," "believe," "estimate," "predict," "potential," "expects," "intends" and "future" or similar expressions. These forward-looking statements speak only as of the date of this press release and are subject to change at any time.These forward-looking statements are based upon management's current expectations and are subject to a number of risks, uncertainties and contingencies, many of which are beyond the Company's control that may cause actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. The Company's actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including our beliefs regarding our strengths and strategies; our ability to expand our international business; our ability to develop and successfully market new products in China and internationally; our current expansion strategy, including our ability to expand our manufacturing and research and development facilities and capabilities and our future prospects, business development, results of operations and financial condition. For additional information on these and other important factors that could adversely affect our business, financial condition, results of operations, and prospects, please see "Risk Factors" that begins on page 13 of Form 424(b) that we filed with the Securities and Exchange Commission on August 11, 2010, and in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission, which can be found on the Companya™s website at [ www.kanghui.com ] or at [ www.sec.gov ].