China Kanghui first quarter total net revenue increases 39.3% to RMB68.0 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 first quarter of 2011.

First Quarter 2011 Highlights

• Total net revenue for the first quarter of 2011 increased by 39.3% year-over-year to RMB68.0 million from RMB48.8 million for the first quarter of 2010.
• Gross profit for the first quarter of 2011 increased by 40.8% year-over-year to RMB48.7 million from RMB34.6 million for the first quarter of 2010.
• Operating income for the first quarter of 2011 increased by 43.3% year-over-year to RMB29.8 million from 20.8 million for the first quarter of 2010.
• Net income for the first quarter of 2011 increased by 23.6% year-over-year to RMB22.0 million from RMB17.8 million for the first quarter of 2010.
• Non-GAAP net income for the first quarter of 2011 increased by 14.1% year-over-year to RMB23.4 million from RMB20.5 million for the first quarter of 2010.

Mr. Libo Yang, the Company's Chief Executive Officer, stated, "We are delighted to report strong financial results for the first quarter of 2011. We experienced significant growth across all product segments and all markets, driven by the solid uptake of our spine products and robust international sales. We continued to implement our strategies, which led to our impressive product growth and further expanded our distribution network, and completed an important acquisition that will help us build our leadership position in China and internationally."

Ms. Sarah Wang, Kanghui's Chief Financial Officer, said, "Our first quarter performance was primarily driven by strong growth across our business sectors and higher operating leverage through disciplined expense controls. We are off to a good start in 2011. We believe our strategic acquisition of Beijing Wei Rui Li Medical Device Co., Ltd., or "Wei Rui Li", and our partnership with Consensus Orthopedics Inc. will help us further establish Kanghui as a leading international provider of innovative and diversified orthopedic products."

First Quarter 2011 Financial and Operating Results

Net revenue increased 39.3% to RMB68.0 million ($10.4 million) in the first quarter of 2011 from RMB48.8 million in the first quarter of 2010. Net revenue from trauma products increased 28.8% to RMB42.0 million ($6.4 million) from RMB32.6 million in the corresponding period of the prior year. Net revenue from spine products increased 60.0% to RMB19.2 million ($2.9 million) from RMB12.0 million in the corresponding period of the prior year. Net revenue from OEM products increased 61.9% to RMB6.8 million ($1.0 million) from RMB4.2 million in the corresponding period of the prior year. Domestic sales of proprietary products increased 21.0% year over year to RMB50.1 million ($7.7 million) from RMB41.4 million, while international sales of proprietary products increased 246.9% year over year to RMB11.1 million ($1.7 million) from RMB3.2 million.

In the first quarter of 2011, cost of revenue increased 35.9% to RMB19.3 million ($2.9 million) from RMB14.2 million in the corresponding period of the prior year. Gross profit increased 40.8% to RMB48.7 million ($7.4 million) in the first quarter of 2011 from RMB34.6 million in the corresponding period of the prior year. Gross margin for the first quarter of 2011 was 71.7%, compared to 70.9% in the first quarter of 2010. Selling expenses increased 20.7% to RMB7.0 million ($1.1 million) in the first quarter of 2011 from RMB5.8 million in the corresponding period of the prior year. General and administrative expenses increased 44.4% to RMB10.4 million ($1.6 million) in the first quarter of 2011 from RMB7.2 million in the corresponding period of the prior year. Research and development expenses increased 66.7% to RMB1.5 million ($229,000) in the first quarter of 2011 from RMB0.9 million in the corresponding period of the prior year.

Provision for income taxes in the first quarter of 2011 was RMB9.0 million ($1.4 million), representing an effective tax rate of 29.0%, compared to RMB3.2 million, or an effective tax rate of 15.4%, in the corresponding period of the prior year.

Operating income increased 43.3% to RMB29.8 million ($4.6 million) in the first quarter of 2011 from RMB20.8 million in the corresponding period of the prior year. Operating margin increased to 43.8% in the first quarter of 2011 from 42.7% in the corresponding period of the prior year.

Net income was RMB22.0 million ($3.4 million) in the first quarter of 2011, up 23.6% from RMB17.8 million in the first quarter of 2010. On a diluted per ADS basis, the Company reported net income per diluted ADS of RMB0.87 ($0.13) in the first quarter of 2011, compared to a net loss per diluted ADS of RMB0.77 in the corresponding period of the prior year. Non-GAAP net income, which excludes share based compensation expenses, increased 14.1% to RMB23.4 million ($3.6 million) from RMB20.5 million in the corresponding period of the prior year. The Company reported non-GAAP net income per diluted ADS of RMB0.93 ($0.14) in the first quarter of 2011. This compares to a non-GAAP net loss per diluted ADS of RMB0.49 in the corresponding period of the prior year.

During the first quarter of 2011, the Company had a weighted average diluted share count of approximately 150.9 million shares (equivalent to 25.2 million ADSs), compared to 57.7 million shares (equivalent to 9.6 million ADSs), in the first quarter of 2010.

Balance Sheet

As of March 31, 2011, the Company had cash and cash equivalents of RMB177.6 million ($27.1 million), compared to RMB262.5 million as of December 31, 2010. As of March 31, 2011, the Company held short-term investments of RMB261.0 million ($39.9 million), compared to RMB266.7 million as of December 31, 2010.

Business Outlook

Mr. Yang added, "We remain focused on further penetrating both our existing domestic and international markets while expanding into new growth opportunities. As demonstrated by our strong first quarter performance across our business sectors, we are confident in our ability to realize our business plans for the remainder of 2011. We are delighted with the progress achieved, as we position Kanghui as a leader in product quality in the fast-growing and underserved joint reconstruction market in China."

The Company expects year-over-year revenue growth of 20% to 25% in 2011, bringing revenue for the full year 2011 in the range of RMB292 million to RMB303 million. The Company also expects its full year 2011 non-GAAP net income, without taking into account relevant operating expenses in connection with the exclusive partnership with Consensus Orthopedic and the acquisition of the majority stake in Wei Rui Li, to be in the range of RMB128 million to RMB133 million. The impact of the exclusive partnership with Consensus Orthopedic and the acquisition of the majority stake in Wei Rui Li on the Company's operating expenses is expected to be approximately RMB7 million. After taking into account the operating expenses relating to these transactions, the Company believes that non-GAAP net income for the full year 2011 will be between RMB121 million and RMB126 million.