China Kanghui Holdings Reports Second Quarter 2011 Financial Results

CHANGZHOU, China, Aug. 15, 2011 /PRNewswire-Asia/ -- 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 second quarter of 2011.

Second Quarter 2011 Highlights

• Total net revenue for the second quarter of 2011 increased by 40.8% year-over-year to RMB81.8 million from RMB58.1 million for the second quarter of 2010.
• Gross profit for the second quarter of 2011 increased by 49.5% year-over-year to RMB58.0 million from RMB38.8 million for the second quarter of 2010.
• Operating income for the second quarter of 2011 increased by 25.6% year-over-year to RMB30.4 million from 24.2 million for the second quarter of 2010.
• Net income for the second quarter of 2011 increased by 0.7% year-over-year to RMB27.9 million from RMB27.7 million for the second quarter of 2010.
• Non-GAAP (1) net income for the second quarter of 2011 decreased by 4.5% year-over-year to RMB29.4 million from RMB30.8 million for the second quarter of 2010.

Mr. Libo Yang, the Company's Chief Executive Officer, stated, "We are very delighted China Kanghui Holdings again exceeded expectations and delivered another strong quarterly financial performance in the second quarter of 2011. We experienced strong growth across all product segments and markets, and in our important China domestic market, we continue to grow our brand and market share. I'm also very pleased with the integration process of our acquisition and strategic partnership, and I'm confident that Wei Rui Li and Consensus will contribute to our leadership position in joint reconstruction in China as they are expected to allow us to launch a full line of reconstruction products over the next three years."

Ms. Sarah Wang, Kanghui's Chief Financial Officer, said, "Our second quarter performance was primarily driven by strong domestic and OEM sales, as well as by a noticeable gross margin expansion. Benefiting from our strong gross profits and continued strong demand for our products, we took the opportunity to aggressively reinvest into our business and our people. We exceeded expectations in the first half of 2011, and we feel confident about our business and growth opportunities for the remainder of the year."

SecondQuarter 2011 Financial and Operating Results

Net revenue increased by 40.8% to RMB81.8 million ($12.6 million) in the second quarter of 2011 from RMB58.1 million in the second quarter of 2010. Net revenue from trauma products increased by 23.7% to RMB47.5 million ($7.3million) from RMB38.4million in the corresponding period of the prior year. Net revenue from spine products increased by 74.2% to RMB26.3 million ($4.1 million) from RMB15.1 million in the corresponding period of the prior year. Net revenue from OEM products increased by 73.9% to RMB8.0 million ($1.2 million) from RMB4.6 million in the corresponding period of the prior year. Domestic sales of proprietary products increased by 47.3% year over year to RMB57.6 million ($8.9 million) from RMB39.1 million, while international sales of proprietary products increased by 12.6% year over year to RMB16.1 million ($2.5 million) from RMB14.3million.

In the second quarter of 2011, cost of revenue increased by 23.4% to RMB23.7 million ($3.7 million) from RMB19.2 million in the corresponding period of the prior year. Gross profit increased by49.5% to RMB58.0 million ($9.0 million) in the second quarter of 2011 from RMB38.8 million in the corresponding period of the prior year. Gross margin for the second quarter of 2011 was 71.0%, compared to 66.9% in the second quarter of 2010. Selling expenses increased by 107.0% to RMB11.8 million ($1.8 million) in the second quarter of 2011 from RMB5.7 million in the corresponding period of the prior year. General and administrative expenses increased by 83.1% to RMB14.1 million ($2.2 million) in the second quarter of 2011 from RMB7.7 million in the corresponding period of the prior year. Research and development expenses increased by 50.0% to RMB1.8 million($278,000) in the second quarter of 2011 from RMB1.2 million in the corresponding period of the prior year.

Provision for income taxes in the second quarter of 2011 was RMB3.8 million ($0.6 million), representing an effective tax rate of 12.0%, compared to a tax benefit of RMB3.0 million in the corresponding period of the prior year.

Operating income increased by 25.6% to RMB30.4 million ($4.7 million) in the second quarter of 2011 from RMB24.2 million in the corresponding period of the prior year. Operating margin decreased to 37.2% in the second quarter of 2011 from 41.7% in the corresponding period of the prior year.

Net income was RMB27.9 million ($4.3 million) in the second quarter of 2011, up 0.7% from RMB27.7 million in the second quarter of 2010. On a diluted per ADS (2) basis, the Company reported net income per diluted ADS of RMB1.09($0.17) in the second quarter of 2011, compared to a net income per diluted ADS of RMB0.03 in the corresponding period of the prior year. Non-GAAP net income, which excludes share based compensation expenses, decreased by 4.5% to RMB29.4 million ($4.5 million) from RMB30.8 million in the corresponding period of the prior year. The Company reported non-GAAP net income per diluted ADS of RMB1.11($0.17) in the second quarter of 2011. This compares to a non-GAAP net income per diluted ADS of RMB0.19 in the corresponding period of the prior year.

During the second quarter of 2011, the Company had a weighted average diluted share count of approximately 153.7million shares (equivalent to 25.6 million ADSs), compared to 67.0 million shares (equivalent to 11.2 million ADSs) in the second quarter of 2010.

Balance Sheet

As of June 30, 2011, the Company had cash and cash equivalents of RMB227.1 million ($35.1 million), compared to RMB262.5 million as of December 31, 2010. As of June 30, 2011, the Company held short-term investments of RMB198.9 million ($30.8 million), compared to RMB266.7 million as of December 31, 2010.

Business Outlook

Mr. Yang added, "While we remain focused on positioning Kanghui as a leader in the fast-growing spine and trauma segments, we are strategically moving to underserved joint reconstruction market in China. Reflecting on our strong second quarter performance and continued demand for all of our product lines, both domestically and internationally, we are increasing our revenue and net income guidance for full year 2011."

The Company anticipates revenue for full year 2011 will increase to the range of RMB303 million to RMB313 million, which represents year-over-year growth of 25% to 29%. This compares to the Company's previous 2011 revenue guidance of RMB292 million to RMB303 million. The Company estimates non-GAAP net income for full year 2011 will increase to the range of RMB122 million to RMB127 million, compared to its previous estimate of RMB121 million to RMB126 million.

Non-Cash Share-Based Compensation Expense Discussion

The Company recognized non-cash share-based compensation expenses of approximately RMB1.5 million($237,000) in the second 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.