Kanghui third quarter total net revenue increases 26.9% to RMB80.7M

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 third quarter of 2011.

Third Quarter 2011 Highlights

• Total net revenue for the third quarter of 2011 increased by 26.9% year-over-year to RMB80.7 million from RMB63.6 million in the corresponding period of the prior year.
• Gross profit for the third quarter of 2011 increased by 28.0% year-over-year to RMB58.5 million from RMB45.7 million in the corresponding period of the prior year
• Operating income for the third quarter of 2011 increased by 12.3% year-over-year to RMB36.4 million from 32.4 million in the corresponding period of the prior year.
• Net income for the third quarter of 2011 increased by 8.6% year-over-year to RMB28.9 million from RMB26.6 million in the corresponding period of the prior year.
• Non-GAAP net income for the third quarter of 2011 increased by 11.0% year-over-year to RMB31.3 million from RMB28.2 million in the corresponding period of the prior year.

Mr. Libo Yang, Chief Executive Officer of the Company, stated, "We are very pleased that Kanghui once again exceeded expectations and delivered another strong quarterly financial performance in the third quarter of 2011.  We continued to benefit from strong growth in our domestic sales, as we further enhanced our brand recognition and market share in China. We believe our new manufacturing facilities, new product introductions and the smooth integration of our recent acquisitions have laid a strong foundation for our future growth.  In short, the third quarter of 2011 was another successful milestone that supported our growth strategy.

Ms. Sarah Wang, Chief Financial Officer of Kanghui, commented, "Our strong third quarter performance demonstrates the resiliency of Kanghui's balanced and diversified revenue model, pursuant to which the decrease in our international sales were fully covered by our strong growth in domestic and OEM sales.  We continued to benefit from firm pricing in our proprietary products and achieved strong gross profits.  Considering the strong demand for our products and our increasing market share, we feel confident about our future prospects for the remainder of 2011 and beyond."

Third Quarter 2011 Financial and Operating Results

Net revenue increased by 26.9% year-over-year to RMB80.7 million ($12.7 million) in the third quarter of 2011 from RMB63.6 million in the corresponding period of the prior year.  Net revenue from trauma products increased by 22.8% year-over-year to RMB48.5 million ($7.6 million) in the third quarter of 2011 from RMB39.5 million in the corresponding period of the prior year. Net revenue from spine products increased by 34.4% year-over-year to RMB25.4 million ($4.0 million) in the third quarter of 2011 from RMB18.9 million in the corresponding period of the prior year. Net revenue from OEM products increased by 30.8% year-over-year to RMB6.8 million ($1.1 million) in the third quarter of 2011 from RMB5.2 million in the corresponding period of the prior year. Domestic sales of proprietary products increased by 36.5% year-over-year to RMB64.0 million ($10.0 million) in the third quarter of 2011 from RMB46.9 million in the corresponding period of the prior year, while international sales of proprietary products decreased by 13.9% year-over-year to RMB9.9 million ($1.6 million) in the third quarter of 2011 from RMB11.5 million in the corresponding period of the prior year.

In the third quarter of 2011, cost of revenue increased by 23.5% to RMB22.1 million ($3.5 million) from RMB17.9 million in the corresponding period of the prior year. Gross profit increased by 28.0% to RMB58.5 million ($9.2 million) in the third quarter of 2011 from RMB45.7 million in the corresponding period of the prior year. Gross margin for the third quarter of 2011 was 72.5%, compared to 71.9% in the corresponding period of the prior year.  Selling expenses increased by 50.9% to RMB8.3 million ($1.3 million) in the third quarter of 2011 from RMB5.5 million in the corresponding period of the prior year. General and administrative expenses increased by 72.6% to RMB10.7 million ($1.7 million) in the third quarter of 2011 from RMB6.2 million in the corresponding period of the prior year.  Research and development expenses increased by 88.2% to RMB3.2 million ($502, 000) in the third quarter of 2011 from RMB1.7 million in the corresponding period of the prior year.

Provision for income taxes in the third quarter of 2011 was RMB11.1 million ($1.7 million), representing an effective tax rate of 27.9%, compared to an income tax expense of RMB4.3 million in the corresponding period of the prior year.

Operating income increased by 12.3% to RMB36.4 million ($5.7 million) in the third quarter of 2011 from RMB32.4 million in the corresponding period of the prior year. Operating margin decreased to 45.1% in the third quarter of 2011 from 50.9% in the corresponding period of the prior year.

Net income was RMB28.9 million ($4.5 million) in the third quarter of 2011, representing a year-over-year increase of 8.6% from RMB26.6 million in the corresponding period of the prior year. On a diluted per ADS basis, the Company reported net income per diluted ADS of RMB1.12 ($0.18) in the third quarter of 2011, compared to a net income per diluted ADS of RMB0.73 in the corresponding period of the prior year. Non-GAAP net income, which excludes share based compensation expenses, increased by 11.0% to RMB31.3 million ($4.9 million) from RMB28.2 million in the corresponding period of the prior year. The Company reported non-GAAP net income per diluted ADS of RMB1.21 ($0.19) in the third quarter of 2011, compared to a non-GAAP net income per diluted ADS of RMB0.81 in the corresponding period of the prior year.  

During the third quarter of 2011, the Company had a weighted average diluted share count of approximately 155.2 million shares (equivalent to 25.9 million ADSs), compared to 112.3 million shares (equivalent to 18.7 million ADSs) in the corresponding period of the prior year.

Balance Sheet

As of September 30, 2011, the Company had cash and cash equivalents of RMB340.4 million ($53.4 million), compared to RMB262.5 million as of December 31, 2010. As of September 30, 2011, the Company held short-term investments of RMB93.2 million ($14.6 million), compared to RMB266.7 million as of December 31, 2010.

Business Outlook

Mr. Yang added, "Taken into account our strong third quarter performance and the continued demand for all of our product lines, we are once again increasing our revenue and net income guidance for full year 2011."

The Company anticipates revenue for full year 2011 to increase to the range of RMB313 million to RMB318 million, which represents a year-over-year growth of 29% to 31%.  This compares to the Company's previous 2011 revenue guidance of RMB303 million to RMB313 million.  The Company estimates non-GAAP net income for full year 2011 will increase to the range of RMB124 million to RMB128 million, compared to its previous estimate of RMB122 million to RMB127 million.