Winner Medical second quarter net sales increase 27% to $33.2 million

Winner Medical Group Inc. (Nasdaq: WWIN; "Winner Medical" or the "Company"), a leading manufacturer of medical dressings, medical disposables and non-woven fabric made from 100% natural PurCotton® products in China, today reported consolidated financial results for the second quarter ended March 31, 2011.

Second Quarter Fiscal 2011 Highlights

• Revenue increased by 27% over Q2 FY 2010 to $33.2 million
• Adjusted net income increased 31% YOY to $3.8 million
• Adjusted basic EPS increased 23% YOY to $0.16
• Domestic China sales increased 61% YOY to 8.5 million
• Sales to North and South America increased 47% YOY to 7.5 million
• Reiterates FY 2011 revenue guidance of $138-150 million, representing 20%-30% YOY Growth

Fiscal Second Quarter and Half Year 2011 Results (in millions of USD, except per share data)

Mr. Jianquan Li, Chairman and Chief Executive Officer of Winner Medical, commented: "During the second quarter of fiscal year 2011, sales of our medical products and PurCotton® products in China rapidly increased, signifying robust demand and gains in market share by Winner Medical as we continue to have success penetrating new sales and distribution channels in China and as more Chinese consumers become aware of and accept our products. In addition, the strong sales increase in North and South America reflects local manufacturers continuing to outsource production to China. The Company expects these favorable trends will continue for the near future and support growth in Winner's sales and earnings."

Mr. Li continued, "Despite rising cotton prices, appreciation of the renminbi, high inflation and higher labor costs in China, the Company still managed to grow gross profit dollars while keeping gross margins flat. We will continue to adjust our business portfolio to carry higher gross margin products and reduce costs where appropriate to offset renminbi appreciation, inflation and rising commodity and labor costs."

Second Quarter Fiscal 2011 Unaudited Financial Results

Winner Medical reported net sales of $33.2 million, an increase of 27% compared to the same period last year due to higher pricing and strong reorders of medical and PurCotton products. Sales increased 61% year-over-year in China to $8.5 million, with sales increases in medical products and PurCotton products. Export sales to North and South America remained robust, increasing 47% year-over-year to $7.5 million, driven by increased orders from American and Brazilian clients who recognized Winner Medical's high quality products and timely delivery capabilities. Sales to Japan grew 29% as a result of increased selling prices and volumes. Orders in Europe remained stable year-over-year at $10.6 million, as customers in Britain and Sweden increased purchases while rejected orders from those customers about whom the Company had liquidity concerns as a result of the debt crisis.

Cost of sales increased 28% to $23.9 million in the second quarter of fiscal 2011, from $18.7 million in the second quarter of fiscal 2010. Cost of sales as a percentage of net revenues were 71.9%, unchanged from the same period last year. To minimize the impact of rising cotton prices, the Company increased its selling prices progressively, implemented lean production methods and purchased cotton futures contracts to hedge against the volatility of cotton prices.

Gross profit increased 27 % to $9.4 million compared to the second quarter of fiscal 2010. Gross margin was flat at 28.2%. The Company continues to adjust its business portfolio by developing and marketing advanced medical products as well as PurCotton® jumbo rolls and retail products, which carry higher gross margins.

Selling, general and administrative expenses increased by 40% to $5.8 million in the second quarter of fiscal 2011, from $4.1 million in the same quarter of fiscal 2010. Adjusted selling, general and administrative expenses (non-GAAP), which exclude share-based compensation expenses, were $5.6 million versus $3.9 million for the same period of 2010. The increase was primarily due to higher salary and leasing expenses for the PurCotton retail business.

The income tax provision for the second quarter of fiscal 2011 was $0.3 million, compared to $0.6 million for the same period in 2010, representing an effective tax rate of 13.4% for this reporting period, versus 19.1% in the same period last year. This decrease was primarily due to the deferred tax asset recognized by the Company for total losses generated by Shanghai Winner Medical Apparatus Co., Ltd.

Net income attributable to Winner Medical decreased by 16% to $2.2 million, or $0.09 per basic share, compared to net income of $2.7 million, or $0.12 per basic share, for the second quarter of fiscal 2010. This decrease in net income was due to commodity hedging losses. The weighted average diluted shares outstanding were 24.5 million, up 8% year-over-year.

Excluding the non-cash share-based compensation expenses and realized loss on commodity financial instruments, adjusted net income (non-GAAP) was $3.8 million for the second quarter of fiscal 2011, an increase of 31% from $2.9 million in the same period of 2010. The adjusted basic earnings per share (non-GAAP) was $0.16 for the three months ended March 31, 2011 versus $0.13 per share for the comparable period last year, an increase of 23%.

Six Months Fiscal 2011 Unaudited Financial Results

Net sales were $66.9 million, an increase of 20% compared to the same period last year. The increase was mainly attributable to higher average sales prices and increased sales orders from customers in North and South America and from consumers of medical products and PurCotton® products in China.

Cost of sales increased 23% to $48.1 million, compared to $39.1 million in the same period in fiscal 2010. Cost of sales as a percentage of net revenues were 71.9% and 70.0% for the six months ended March 31 in fiscal 2011 and 2010, respectively. This increase was mainly attributable to increased raw material prices.

Gross profit increased 12% to $18.8 million compared to the same period in fiscal 2010. Gross margin decreased to 28.1% as compared to 30.1% in the first half of fiscal 2010. The decrease in gross margin was attributable to the increased cost of cotton, the core raw material for the Company, and lower sales of high margin protective medical products, which benefited from the outbreak of H1N1 in the same period last year.

Selling, general and administrative expenses increased by 25% to $11.9 million during the six months ended March 31, 2011, compared to $9.5 million in the same period of fiscal 2010. Adjusted selling, general and administrative expenses (non- GAAP), which exclude share-based compensation expenses, for this reporting period were $11.3 million, versus $8.9 million for the same period of 2010. The increase was primarily due to higher salary and leasing expenses for PurCotton retail business compared to the same period last year.

The income tax provision for the six months ended March 31, 2011 was $0.7 million, compared to $1.2 million for the same period in 2010, representing an effective tax rate of 11.4% for this reporting period, versus 15.6% in the same period last year. This decrease was primarily due to the deferred tax asset recognized by the Company for total losses generated by Shanghai Winner Medical Apparatus Co., Ltd.

Net income attributable to Winner Medical decreased by 16% to $5.6 million, or $0.23 per basic share, compared to net income of $6.6 million, or $0.29  per basic share, for the six months ended March 31, 2010. This decrease in net income during the reporting quarter was mainly due to the realized loss on commodity hedging. The weighted average diluted shares outstanding were 24.5 million, up 8% year-over-year.

Excluding non-cash share-based compensation expenses and realized loss on commodity financial instruments, adjusted net income (non-GAAP) was $7.6 million for the six months ended March 31, 2011, an increase of 6% from $7.1 million in the same period of 2010. Adjusted basic earnings per share (non-GAAP) was $0.31 for the six months ended March 31, 2011, versus $0.32 per share for the comparable period last year, a decrease of 3%.

Other Financial Highlights

Cash and cash equivalents were $12.0 million as on March 31, 2011 compared to $14.8 million as on September 30, 2010. The Company's working capital as of March 31, 2011 was $47.9 million. Total assets were approximately $134.7 million compared to $119.0 million as of September 30, 2010, while total shareholder's equity was $114.4 million and $105.9 million in the respective periods.

Second Quarter Fiscal 2011 Operational Updates

PurCotton Business Update

PurCotton sales increased 114% during the second quarter of 2011 to $4.1 million as a result of robust jumbo roll supply and growth of domestic retail business, which are sold in self-operated chain stores, online and in bulk sales to large customers in China.

Net sales attributable to the PurCotton® jumbo roll-supply business increased to $3.2 million in the three months ended March 31, 2011 from $1.8 million in the same period last year, an increase of 78.3%. This large increase was due to increased demand from Chinese customers who used it as a component in hygiene products. With the increasing demand from these customers, the PurCotton® jumbo roll-supply has been steadily growing.

Net sales attributable to the PurCotton retail business, which consists of 33 retail stores and online business, increased approximately $0.8 million, to $0.9 million in this reporting period, compared to $0.1 million the same period last year when the Company had only seven PurCotton retail stores and no online business as of the last day of that reporting period.

As of May 11, 2011, the Company owns and operates 34 PurCotton chain stores in first-tier cities across China, including 9 in Beijing, 4 in Shanghai and 21 in Guangdong province, where the Company's headquarters is located. Six stores were closed due to unsatisfactory performance.In order to build strong awareness of its high-quality and international brand, management believes that Hong Kong will be a good city to launch and promote its PurCotton retail business. The first store in Hong Kong will be opened in mid-May.

Conducting self-operated stores required higher operating expenses and a longer period of investment turnover when compared with other distribution channels. The Company will focus on efficient operating and developing each existing store, rather than accelerating the pace of store opening. However, self-operated stores are vital for marketing new products and for brand building and will remain an important and significant sales channel for the PurCotton retail business. As of May 11, 2011, approximately 16,000 customer memberships were recorded for the self-operated stores in China.

In addition, the Company  recently started launching its products into mid-and-high end supermarkets in Shenzhen, particularly the top selling products, such as PurCotton® sanitary napkin and 100% natural cotton tissue. The Company expects that its core products will be launched into more supermarkets and in more cities throughout China in the near future.

In July 2010, the Company opened its first online PurCotton store at http://purcotton.mall.taobao.com, featuring its entire array of products on Taobao.com, the largest online trading platform in China. In September 2010, the Company also built its own B2C trading website, www.purcotton.com, which is co-branded through its retail stores. Total online customer membership has increased to approximately 29,000 as of May 11, 2011. The Company will continue to leverage and expand its online platform to drive incremental sales of PurCotton retail products.

Cotton Futures Trading Risk-transferred Agreements

Cotton is the Company's primary raw material used in its manufacturing process. As a result of rising demand caused by global economic recovery and supply shortages due to bad weather, cotton prices have been rapidly increasing and fluctuating in the last half year. Under this rising cost environment, the Company cannot secure stable price quotes from cotton suppliers, resulting in inconsistency in the prices quoted to the Company's customers. Therefore, the Company, through its wholly-owned subsidiary Winner Industries (Shenzhen) Co., Ltd. ("Winner Shenzhen") has decided to enter into cotton future transactions in order to manage the impact of volatility in cotton prices on production.

During the second quarter of 2011, Winner Shenzhen's transactions in cotton futures resulted in a net loss of approximately $1,577,000, which was charged to Realized Loss on Commodity Financial Instruments in the condensed consolidated statements of income for the period. The loss was a result of significant increases and fluctuation in cotton prices since January, 2011. During this period, based on management's expectation that cotton prices would experience a downward correction, Winner Shenzhen acquired a short position to hedge against price corrections. However, contrary to management's expectation, the price increase continued. In order to minimize further losses, management closed its short position, generating a loss for the period.

In order to shift risk away from the Company during the initial period of cotton futures trading and better protect the interests of the Company's shareholders, the chief executive officer of the Company, Mr. Jianquan Li, signed agreements with Winner Shenzhen effective January 1, 2011 that are scheduled to expire on September 30, 2011. Under these agreements, Mr. Jianquan Li agrees that, on September 30, 2011, he will assume all net losses, if any, incurred by Winner Shenzhen from cotton futures trading from January 1, 2011 to September 30, 2011 to the extent of $2,838,000. If, however, there is a net gain from trading activities, it will be retained by Winner Shenzhen.

Since Winner Shenzhen began trading in cotton futures in October 2010, management has made on-going assessments of its trading performance. As a result of the experience gained over this period, the Company has established more stringent trading procedures and policies, as well as risk-reducing strategies for entering into cotton futures transactions, in regular consultation with the board of directors. Details regarding the loss from trading in cotton futures and the agreements signed by Mr. Jianquan Li are discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Development" section of the quarterly report on Form 10-Q for the reporting period ended March 31, 2011, as filed with the SEC on May 11, 2011.