China Botanic first quarter net sales increase 32.1% to $22.6 million

China Botanic Pharmaceutical Inc. (AMEX: CBP) (formerly Renhuang Pharmaceutical, Inc.) ("China Botanic" or the "Company"), a developer, manufacturer and distributor of botanical products, bio-pharmaceuticals and traditional Chinese medicines ("TCM") in China, today announced financial results for the three months ended January 31, 2011, and reaffirmed guidance for its full fiscal year ending October 31, 2011.

First Quarter 2011 Highlights and Recent Events

• Net sales increased 32.1% year-over-year to $22.6 million
• Gross profit increased 45.8% to $13.8 million from $9.5 million in the first quarter of fiscal year 2010
• Gross margin increased to 61.1% from 55.3% a year ago
• Net income rose 48.3% to $10.9 million or $0.29 per diluted share
• New products, including Qing Re Jie Du Oral Liquid, Compound Schisandra Tablets, Ginseng and Deer Antler Extract and Badger Fat accounted for 15.0% of gross sales in the first quarter of fiscal 2011
• The Company passed the annual assessment for the High-Technology Enterprise certificate and will continue to enjoy a preferential tax rate in fiscal 2011.  This rate of 15%, commencing on January 1, 2011, is notably lower than the statutory income tax rate of 25 percent, but higher than the zero percent rate the company enjoyed in fiscal 2010

"We are pleased to report strong financial performance for the first quarter and begin fiscal 2011 on a positive note. We achieved substantial revenue and net income growth. This was driven by strong market demand which allowed us to increase in our average selling prices, thus enhancing our overall gross margin," said Mr. Shaoming Li, Chairman and Chief Executive Officer of China Botanic.  "In the first quarter of 2011, we focused on our marketing efforts to further strengthen demand for our products and increase market acceptance. Our core ginseng series remains very competitively priced.  In addition, our new products have been well accepted in the market and continue to increase their overall revenue contribution."

First Quarter Fiscal 2011 Results

During the three months ended January 31, 2010, net sales increased 32.1% to $22.6 million, from $17.1 million during the same period in 2010.  The rise was mainly attributable to increased demand for the Company's products and growing market acceptance of the Company's product portfolio as a result of its increased marketing efforts. In addition, increases in average selling prices of the Company's products contributed to the first quarter's strong sales growth.

Gross profit increased 45.8% to $13.8 million compared to $9.5 million in the first quarter of fiscal 2010. Gross margin increased to 61.1% as compared to 55.3% in the same period of 2010. The growth in gross profit was mainly driven by price increases across all of the Company's products. The increase in gross margin was a result of a modest increase in raw material prices which was more than offset by significant increases in selling prices.

Operating expenses for the first quarter of fiscal 2011 were $2.2 million, as compared to $2.1 million in the same period last year. Sales and distribution expenses rose to $1.3 million from $1.1 million a year ago. The spending increase reflected the Company's efforts to expand its distribution network, market share, and awareness of its premium quality products. General and administrative expenses decreased $0.2 million or 19.2%. Research and development expenses were $0.18 million, up from $0.15 million in the year ago period, reflecting the Company's continued commitment to build a strong pipeline of new products.

Operating income in the first quarter was $11.6 million, compared to $7.4 million in the first quarter of 2010. Operating margin increased year-over-year to 51.5% from 43.0%. The Company incurred income tax expenses $0.7 million in the first quarter of fiscal 2011, compared to no taxes paid for the first quarter 2010, due to the 15% tax rate imposed effective January 1, 2011. For the first quarter ended January 31, 2011, net income increased 48.3% to $10.9 million, or $0.29 per diluted share, from $7.4 million, or $0.20 per diluted share for the same period a year ago.

Financial Condition

The Company invested significantly during the first quarter of fiscal 2011 to increase its future production capacity and R&D resources and enable future growth in output.  Approximately $7.6 million was invested in the exclusive rights to ginseng production from 6,667 hectares of ginseng-producing land for the next 30 years and 67 hectares for ginseng agricultural research.  Approximately $7.6 million was invested in the land use rights, property and plant for the Company's Ah City facility and approximately $1.9 million in payments were made for Ah City Phase Two projects for Siberian Ginseng product development and industrialization.  

As of January 31, 2011, following these investments, the Company had cash and cash equivalents of approximately $12.4 million and total current assets of approximately $46.4 million. As of January 31, 2011, China Botanic had working capital of approximately $41.9 million as compared to $47.1 million for the fiscal year ended January 31, 2010.  The Company had no long-term debt on its balance sheet as of January 31, 2011. Shareholders' equity stood at $81.4 million, compared with $69.8 million as of January 31, 2010. Net cash flow from operating activities for the quarter ended January 31 2011 was $1.3 million compared to $9.6 million for the quarter ended January 31, 2010, primarily reflecting an increase in trade receivables related to sales growth and an increase in inventories as the Company accumulated raw materials during the main harvest season for its Ginseng product series in anticipation of increased production and sales in fiscal 2011.

Business Outlook

"We expect to continue to deliver strong revenue and net income growth for the rest of fiscal year 2011, largely driven by increased market demand for botanical and traditional Chinese medicines and the maintenance of higher price levels for our products. We plan to introduce new products during the year based on our ongoing market research and testing. We believe we have a stable customer base and our average selling prices are still lower than those of most competitors.  Due to our low cost manufacturing advantage, we still have some room to manage a healthy level of gross margin despite any increase in raw material prices. Our intense marketing efforts have resulted in strong market acceptance of our new and existing products and facilitated sales volume growth in a number of cases despite price increases," said Mr. Li. "We are confident that we will achieve our goals for fiscal 2011 and reaffirm our previously disclosed fiscal 2011 guidance for revenue in the range of $70.6 million to $71.7 million, and after-tax net income of $22.9 million to $23.2 million.  These figures represent a 28% to 30% increase from fiscal 2010 revenue of $55.2 million and net income of $17.9 million. Our guidance does not take into account the impact of any potential acquisitions."