China Kanghui third quarter net revenue increases 33.9% to RMB63.6 million

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 2010. The Company also provided today the income statement for the second quarter of 2010, which was filed in condensed form with the U.S. Securities and Exchange Commission in the Company's amended Form F-1 on August 11, 2010.

“We are pleased with our third quarter results which demonstrate our continued solid growth in both domestic and international markets. Over the next year, we will continue to execute our growth strategy by expanding internationally and capitalizing on consolidation opportunities in the Chinese market.”

Mr. Libo Yang, the Company's Chief Executive Officer, stated, "Our third quarter financial results reflect continued fundamental strength in our business. With our successful initial public offering earlier this year, we have obtained considerable resources to implement our growth plans going forward, in the fast-growing Chinese market. According to Frost & Sullivan, the market for orthopedic products in China was approximately RMB6.1 billion in 2009 and is expected to reach RMB16.6 billion by 2015. We are working to ensure we effectively capitalize on this opportunity in China, as well as stay focused on our goals to drive international growth and offer innovative and diversified orthopedic product lines."

Third Quarter 2010 Financial Highlights

• Net revenue increased 33.9% to RMB63.6 million ($9.5 million) from RMB47.5 million in the same period of the prior year;
• Gross margin was 71.9%, compared to 71.0% in the same period of the prior year;
• Operating income increased 52.8% to RMB32.4 million ($4.8 million) from RMB21.2 million in the same period of the prior year;
• Net income increased to RMB26.6 million ($4.0 million) from RMB24.4 million in the same period of the prior year. This is equivalent to approximately RMB0.73 ($0.11) per diluted ADS², in the third quarter of 2010, compared to the equivalent of RMB0.09 per diluted ADS in the same period of the prior year.
• Non-GAAP net income, which excludes share based compensation expense, increased 4.4% to RMB28.2 million ($4.2 million), or RMB0.81 ($0.12) per diluted ADS² from RMB27.0 million in the same period of the prior year.
• Net income attributable to ordinary shareholders was RMB 13.6 million ($2.0 million) in the third quarter of 2010, and reflected the impact of accretion of convertible preferred notes which were extinguished in the Company's initial public offering and will not impact the Company's future financial results.

Third Quarter 2010 Financial Performance

Third quarter 2010 net revenue increased 33.9% to RMB63.6 million ($9.5 million) from RMB47.5 million in the third quarter of 2009. Net revenue from trauma products increased 40.6% to RMB39.5 million from RMB28.1 million in the prior year period. Net revenue from spine products increased 24.3% to RMB18.9 million from RMB15.2 million in the prior year period. Net revenue from OEM products increased 23.8% to RMB5.2 million from RMB4.2 million in the prior year period. Domestic sales of proprietary products increased 22.8% year over year to RMB46.8 million from RMB38.1 million, while international sales of proprietary products increased by 121.2% year over year to RMB11.5 million from RMB5.2 million. In addition, net revenue increased sequentially by 9.6% in the third quarter of 2010, from net revenue of RMB58.1 million in the second quarter of 2010.

In the third quarter of 2010, gross profit increased 35.6% to RMB45.7 million ($6.8 million) from RMB33.7 million in the prior year period. Gross margin for the third quarter of 2010 was 71.9%, compared to 71.0% in the third quarter of 2009. In addition, gross profit increased sequentially by 17.7% in the third quarter of 2010, from gross profit of RMB38.8 million in the second quarter of 2010.

Operating income increased 52.8% to RMB32.4 million ($4.8 million) in the third quarter of 2010, from RMB21.2 million in the comparable period of 2009. Operating margin was 50.9% in the third quarter of 2010, compared to 44.6% in the prior year period.

Selling expenses increased 7.8% to RMB5.5 million ($818,000) in the third quarter of 2010 from RMB5.1 million in the prior year period. General and administrative expenses were RMB6.2 million ($919,000) in the third quarter of 2010, roughly flat compared to the prior year period. Research and development expenses increased to RMB1.7 million ($258,000), or 2.7% of net revenue, from RMB1.2 million, or 2.5% of net revenue, in the prior year period.

Provision for income taxes in the third quarter of 2010 increased to RMB4.3 million ($649,000), an effective tax rate of 14.0%, from RMB3.8 million, an effective tax rate of 13.5%, in the third quarter of 2009. Both of Kanghui's subsidiaries, Changzhou Kanghui and Beijing Libeier, are expected to qualify for special tax rates in 2010.

Net income was RMB26.6 million ($4.0 million), equivalent to RMB 0.73 ($0.11) per diluted ADS, in the third quarter of 2010, compared to RMB24.4 million, equivalent to RMB 0.09 per diluted ADS, in the prior year period. Non-GAAP net income, which excludes share based compensation expenses, increased 4.4% to RMB28.2 million ($4.2 million) from RMB27.0 million in the prior year period. Year over year net income comparisons are impacted by an RMB6.6 million government grant in the third quarter of the prior year, as well as a foreign exchange loss of RMB 2.9 million ($433,000) in the third quarter of 2010. In addition, compared to net income of RMB27.7 million in the second quarter of 2010, net income in the third quarter of 2010 decreased by RMB1.1 million, or 4.0%, primarily due to the reversed income tax expenses for uncertain tax positions and related interest of RMB6.2 million recorded in the second quarter of 2010, as well as the RMB2.9 million foreign exchange loss recorded in the third quarter of 2010.

During the quarter, the Company had a weighted average diluted share count of approximately 112.3 million shares, or 18.7 million ADSs, compared to 63.3 million shares, equivalent to 10.6 million ADSs, in the third quarter of 2009.

Nine Months Ended September 30, 2010 Financial Performance

For the nine month period ended September 30, 2010, net revenue increased 31.2% to RMB170.5 million ($25.5 million) from RMB130.0 million for the prior year period. Gross profit increased 31.7% to RMB119.1 million ($17.8 million) from RMB90.4 million in the prior year period. Operating income increased 37.2% to RMB77.4 million ($11.6 million) for the first nine months of 2010 from RMB56.4 million in the first nine months of 2009.

Net income was RMB72.2 million ($10.8 million) in the first nine months of 2010, compared to RMB58.2 million in the first nine months of 2009. On a per ADS basis, this is equivalent to RMB0.49 ($0.07) and RMB(0.44), respectively. Non-GAAP net income, which excludes share based compensation expenses, was RMB79.5 million ($11.9 million), compared to RMB65.9 million in the prior year period. The weighted average number of diluted shares outstanding was approximately 82.8 million, equivalent to 13.8 million ADSs, for the first nine months of 2010, compared to a weighted average of 57.7 million diluted shares outstanding, equivalent to 9.6 million ADSs, in the first nine months of 2009.

Balance Sheet

As of September 30, 2010, the Company had cash and cash equivalents of RMB403.4 million ($60.3 million), compared to RMB122.6 million as of December 31, 2009. Average accounts receivable days outstanding were 84 days in the nine month period ended September 30, 2010 compared to 83 days in the year 2009. Average inventory days were 422 days in the nine month period ended September 30, 2010 compared to 425 days in the year 2009. The Company calculated the above working capital days using the average of beginning and ending balance of the reporting period.

Ms. Sarah Wang, Chief Financial Officer of the Company, said, "We are pleased with our third quarter results which demonstrate our continued solid growth in both domestic and international markets. Over the next year, we will continue to execute our growth strategy by expanding internationally and capitalizing on consolidation opportunities in the Chinese market."

Non-Cash Share-Based Compensation Expense Discussion

The Company recognized non-cash share-based compensation expenses of approximately RMB1.6 million ($234,000) in the third quarter of 2010, and non-cash share-based compensation expenses of approximately RMB7.3 million ($1.1 million) in the first nine months of 2010.

The Company incurred 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.

Initial Public Offering

On August 10, 2010, the Company completed its initial public offering of American Depositary Shares ("ADSs"), listed on the New York Stock Exchange. Net proceeds from the sale of the ADSs by the Company were approximately $60.4 million. The Company intends to use the net proceeds from this offering for the development of its product pipeline, expansion of its manufacturing capacities, enhancement of its sales and marketing capabilities as well as general corporate purposes.