China Health Labs & Diagnostics Ltd. announces financial results for the year ended December 31, 2012 and conference call to discuss the year end results

TSX-V: CHO
www.chinahealthlabs.com

TORONTO, May 1, 2013 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV:CHO), is pleased to announce the financial results for the year ended December 31, 2012.

In the year ended December 31, 2012, the Company maintained its position as a leading provider of total solutions for medical diagnostics and food safety testing in China, and continued its strong financial position with revenue of $45.8 million and profit of $6.8 million.

Highlights for the year ended December 31, 2012 include:

• Revenue increased slightly to $45.781 million for the year ended December 31, 2012 compared to $45.611 million for the year ended December 31, 2011 and profit decreased by 15% to $6.829 million;
  
  
• Gross margins as a percentage of revenue increased to 55% for the year ended December 31, 2012 from 44% for the year ended December 31, 2011.
  
  
• Earnings per share decreased to $0.10 per basic and diluted share for year ended December 31, 2012 compared to $0.12 for the year ended December 31, 2011.
  
  
• Increased installed base of BK Clinlabs to 928 rural hospitals by installing 111 labs in five new Chinese provinces/ regions in 2012.  At year end, the Company had agreements to install an additional 72 BK Clinlabs to increase the total to 1,000 locations in ten provinces/ regions, compared to 817 locations in four provinces/ regions at the beginning of 2012.
  
  
• Completed a total of $13.798 million (RMB 86.4 million) sales orders to deliver food safety total lab solutions and products during the fourth quarter of 2012, representing a 30% increase in food safety revenues compared to fiscal 2011.
  
  
• Completed sales of two new products launched in 2012 which contributed to overall higher gross margins.

During the fiscal year 2012, the 18^th National Congress of the Communist Party of China was held during November 2012 and involved a change in leadership at all levels. As the Company's total lab solution businesses are primarily sold to the PRC government and related entities, the change in leadership has had an effect on the Company's business as many administrative processes and decisions were delayed. However, the Company was able to maintain its financial performance during the fiscal year 2012 given its foundation of successfully delivering its total lab solutions businesses and also maintaining strong sales in its food safety labs and urban hospitals and labs business sectors.  For further information on seasonality, please see the Company's financial statements and MD&A filed on SEDAR.

"The Company has continued to expand its business to new provinces and regions in China, including penetration into five new provinces in our rural hospitals and clinics sector," said Wilson Yao, CEO of China Health. "Progress is made in marketing our food safety labs and products to new areas outside of Beijing and to new customers, including higher margins recognized on sales of new products launched in 2012. The Company had laid a strong foundation for future growth with our focus on expanding to additional cities and province and delivering new and improved products to our target markets. Further, with the new leadership in China expected to continue the commitment to improving the healthcare and food safety industries, there will be new opportunities for the Company to continue its growth in China"

Revenue for the year ended December 31, 2012 increased to $45.781 million, compared to $45.611 million for the year ended December 31, 2011. For the year ended December 31, 2012, the Company installed 111 BK Clinlabs in five new provinces and regions and delivered 63 Rural Mobile Labs and for the year ended December 31, 2011, the Company installed 607 BK Clinlabs with 587 installed in Jilin Province and 20 installed in Guizhou Province. Although a greater number of BK Clinlabs were installed in the year ended December 31, 2011, the sales price per BK Clinlabs in the year ended December 31, 2012 has increased due to more advanced equipment and products sold as part of the total lab solutions installed. The average sales price for the BK Clinlabs installed and Rural Mobile Labs delivered in the year ended December 31, 2012 was approximately $17,000 (RMB 110,000) per lab compared to the average sales price in the year ended December 31, 2011 of approximately $11,000 (RMB 70,000) per lab.  Further, during the 2012 fiscal year, the Company has installed 52 BK Clinlabs under a new business model whereby the Company will install the BK Clinlabs in return for a five-year contract to provide testing reagents and maintenance services. The BK Clinlabs under this model has an average sales price of approximately $9,300 (RMB 58,000) per lab; however, under this model, the customers are required to make minimum purchases of reagents and consumable over the five year term of the contract, which is expected to generate revenue of a minimum of $3.114 million (RMB 19.5 million). Under the new business model, the Company will generate steady growth in future sales as the averages sales per lab under this model is approximately $60,000 (RMB 375,000) over the five year term. For the year ended December 31, 2012, the decrease of 10% in revenue from POCT solutions and products sales and 41% in revenue from the rural hospitals and clinics sector were offset by an increase in revenue of 30% from sales to the food safety business sector and of 6% from sales to large urban hospitals.

Gross margin for the year ended December 31, 2012 increased by 25% to $24.979 million compared to $20.044 million for the year ended December 31, 2011. Gross margins were improved in the fiscal year 2012 due to higher margin sales, specifically in the BK Clinlabs and POCT solution and product offerings. Gross margin as a percentage of revenue for the year ended December 31, 2012 was 55%, compared to 44% for the year ended December 31, 2011.  The increase in gross margin as a percentage of revenue was due to higher margins for BK Clinlabs and POCT solutions and products sold in the fiscal year 2012 as compared to the fiscal year 2011 as well as higher margin diagnostic lab equipment sold to large urban hospitals. The gross margin as a percentage of revenue was higher by an average of 17% for each of the total lab solutions business sectors and a slight decrease of 2% for the urban hospitals and labs sector during the fiscal year 2012 as compared to the fiscal year 2011.

Administrative expenses for the year ended December 31, 2012 increased by 39% to $10.148 million, compared to $7.319 million for the year ended December 31, 2011. The main reason for the increase was higher overhead costs including expanded facilities to support a growing customer base and sales as well as an increase in the allowance for doubtful accounts for certain amounts outstanding over one year. The additional allowance provided for in the fiscal year 2012 was $1.716 million for amounts in the over one year category. During fiscal year 2012, the Company had larger accounts receivable balances outstanding in the over one year category from its customers, which includes the PRC government and related entities. The reason for the slower collection of large balances from the PRC government and related entities in fiscal year 2012 is largely due to the 18^th National Congress held in November 2012, which involves the change in leadership. Given the significance of this meeting and the various levels of government affected, the Company recorded an allowance of larger balances on certain amounts outstanding over one year. The Company will continue to perform on-going evaluations of its accounts receivable accounts and follow up with its customers on overdue payments. Subsequent recoveries of amounts written off will be credited against the allowance account. The Administrative expenses as a percentage of revenue increased to 22% for the fiscal year 2012, compared to 16% for the fiscal year 2011. While administrative expenses have increased significantly in the fiscal year 2012 as compared to the fiscal year 2011, the Company believes the expenses are necessary in order to gain a competitive advantage by growing its operations and customer base and by expanding to new provinces and regions, which involve hiring and training new employees, setting up operations in new areas where the Company will have its total lab solutions installed and/or delivered, and incurring general costs to support the Company's expansion.

Research and development ("R&D") expenditure for the year ended December 31, 2012 increased by 148% to $1.606 million, compared to $0.647 million for the year ended December 31, 2011. Research and development expenses as a percentage of revenue was approximately 4% for the year ended December 31, 2012, compared to 1% for the year ended December 31, 2011. Research and development expenses are higher for the fiscal year 2012 as compared to the fiscal year 2011 as the Company invests its resources in developing new products and also in improving current products to meet an ever evolving healthcare market in China. Research and development expense are expected to continue to increase as the Company seeks to incorporate new technology into its POCT solutions, which will take several years to develop and go to market.

Selling expenses for the year ended December 31, 2012 increased by 83% to $3.964 million, compared to $2.171 million for the year ended December 31, 2011. Selling expenses as a percentage of revenue was 9% for the year ended December 31, 2012, compared to 5% for the year ended December 31, 2011. Selling expenses is higher in 2012 as compared to 2011 due to expanding the rural lab solution business to additional Chinese provinces and the food safety business to additional Chinese cities.

Current income tax expense for the year ended December 31, 2012 was $2.796 million, compared to $2.038 million for the year ended December 31, 2011. The increase in income taxes is due to an overall increase in taxable income netted against higher reduction of income taxes earned by the Company's PRC subsidiaries which are subject to preferential tax rates. The higher income taxes and effective income tax rates are also due to the timing of when intercompany sales are delivered to customers. Intercompany sales not yet delivered to customers within the reported period results in higher taxes as a percentage of the consolidated profit before taxes as each of the Company's PRC subsidiaries incurs taxes on goods sold to its subsidiaries. The effective income tax rates are lower in the period when intercompany sales are sold to its customers.

Operating profit for the year ended December 31, 2012 decreased by 5% to $9.847 million, compared to $10.356 million for the year ended December 31, 2011. Profit for the year ended December 31, 2012 decreased by 15% to $6.829 million, compared to $8.071 million for the year ended December 31, 2011. Profit includes operating profit, interest expense, interest income and foreign exchange gain/loss. Profit for the year ended December 31, 2012 represents 15% of revenue, compared to 18% for the year ended December 31, 2011. The decrease in operating profit and profit for the year ended December 31, 2012 is due to higher expenses spent in the year to expand its total lab solution businesses and also to the $1.716 million allowance on accounts receivable taken for large outstanding balances in the over one year category, which were mostly from the PRC government and related entities.

Basic and fully diluted EPS was $0.10 for the year ended December 31, 2012, compared to $0.12 for the year ended December 31, 2011. EPS was lower for the fiscal year 2012 as compared to the fiscal year 2011 due to lower profit.

Cash and short-term investments totaled $10.817 million as at December 31, 2012, compared with $5.661 million of cash and short-term investments as of December 31, 2011.  The Company's working capital as of December 31, 2012 was $29.608 million, compared with a $26.538 million working capital as of December 31, 2011.  Working capital increased by $3.070 million, or 12%, mainly due to $6.096 million increase in cash and $2,897 million increase in trades and other receivables, which was offset by $2.738 million increase in loans payable, $2.010 million increase in income taxes payable and $0.524 million increase in amounts due to related party.

The Company is well positioned to expand its business for rural total lab solutions, POCT lab solutions and food safety lab solutions.  However, the Company may need to access additional debt or equity funding if it seeks to accelerate its growth, if it enters into an agreement for a large number of total lab solutions or if it pursues suitable acquisition opportunities. 

Outlook & Growth Strategy

The Company believes that for the fiscal year 2013 it can continue its strong growth in revenue and profits and build on the leading position it has established in China in providing total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency services, and food safety lab solutions, based on the size and growth of the Chinese market for medical diagnostics and food safety, the government support for the market and the Company's proprietary products and services and customer relationships.

In 2013, China Health intends to expand its business by focusing its efforts on expanding its sales network to additional Chinese provinces and cities in the areas where it has proprietary products and limited competition. Going forward, China Health expects revenue growth from its total lab solutions business lines to continue to be stronger than growth from its traditional business with large urban hospitals, and to comprise a higher percentage of revenue.

China Health will be hosting an investor conference call on Friday, May 3^rd, 2013 at 9:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on year ended December 31, 2012 results of the Company. Representatives of China Health on the conference call will be:

				Mr. Shiping (Wilson) Yao, President and Chief Executive Officer
				Ms. Judyanna Chen, Chief Financial Officer
				Mr. Kim Oishi, Member of the Board of Directors
				Mr. Chao Zhang, Vice President, Finance

Following the update, a question and answer session will be held. To participate, the time and call-in instructions are as follows:

DATE:					Friday, May 3^rd, 2013
TIME:					9:00 am, Eastern Time

Participant Dial-In Number(s):
				North America Toll-Free Dial-In Number:					1 [phone]
				For Toronto and International Callers:					1 [phone]

A Taped Replay will be available from 12:00 pm Eastern Time on May 3^rd, 2013 to 11:59 pm Eastern Time on May 17, 2013.

Taped Replay Toll Free Number: 1.855.859.2056

Taped Replay Local Dial-in Numbers:

[phone]					[phone]					[phone]
[phone]					[phone]					[phone]

Taped Replay Password: 60054721

About China Health Labs & Diagnostics Ltd.

China Health, operating in China as the Biochem Group, is a leading diagnostic lab solution provider for the public healthcare industry in China. The Company develops and sells Biochem Group branded and third-party medical diagnostic products and services to diagnostic facilities in China. Customers include large urban hospitals, rural hospitals, Chinese military and rescue operations, the Beijing government and third-party distributors.

In 2012, China Health had revenue of approximately $45.8 million, and intends to expand its business by focusing its efforts on expanding its sales network in three areas where it provides proprietary solutions, has limited competition and that are supported by Chinese government policy and budgets: BK Clinlab total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency rescue services, and food safety solutions for large cities in China.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

FORWARD LOOKING INFORMATION

This news release contains forward-looking statements and information that are based on the beliefs of management and reflect China Health's current expectations. When used in this news release, the words "estimate", "project", "belief", "anticipate", "intend", "expect", "plan", "predict", "may" or "should" and the negative of these words or such variations thereon or comparable terminology are intended to identify forward-looking statements and information. The forward-looking statements and information in this news release includes information relating to the Company's future growth prospects, the continued commitment of the Chinese government to improve the healthcare and food safety industries in China and the opportunities for the Company from such improvements; the continued performance of on-going evaluations of accounts receivable outstanding over one year; an increase in R&D expenses as the Company seeks to incorporate new technology into its product development and taking several years to go to market if at all; the need to access additional debt or equity funding if the Company seeks to accelerate its growth, if it enters into an agreement for a large number of total lab solutions or if it pursues suitable acquisition opportunities; the continuation of the Company's strong growth in revenues and profits and the building of its leading position in China in providing total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency services, and food safety lab solutions; expansion of the Company's business by focusing on expanding its sales network to additional Chinese provinces and cities in the areas where it has proprietary products and limited competition; and the revenue growth from the Company's total lab solutions business lines to continue to be stronger than growth from its traditional business with large urban hospitals, and to comprise a higher percentage of revenues. The forward-looking information is based on certain assumptions, which could change materially in the future, including the assumption that the Company's products and services, operations, market, marketing plans and strategies, competitive conditions, future developments and proprietary protections continue as projected. Such statements and information reflect the current view of China Health with respect to risks and uncertainties that may cause actual results to differ materially from those contemplated in those forward-looking statements and information. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risk that the Company's future growth prospects may not be as expected, the Company may not proceed or alter its growth strategy, the Chinese government may not continue its commitment to improving the Chinese healthcare and food safety industries as expected or that any improvements may not open new opportunities for the Company, the Company's R&D expenses may increase higher than expected and  such R&D may not result in product development that will successfully enter the market if at all, the Company may not be able to obtain any required financing to accelerate growth on acceptable terms or at all, gross margins, revenues and profits may not continue to increase or increase less than expected, costs and expenses may increase greater than expected, and the Company may not be able to expand its business as expected through its sales network in any of the areas in which it has proprietary products, limited competition and strong government support. These and other risks are further described under "Risk Factors" in the Company's management's discuss and analysis dated April 30, 2013, which is available on SEDAR and may be accessed at www.sedar.com. When relying on China Health's forward-looking statements and information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. China Health has assumed a certain progression, which may not be realized. It has also assumed that the material factors referred to above will not cause such forward-looking statements and information to differ materially from actual results or events. However, the list of these factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors.

THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS NEWS RELEASE REPRESENTS THE EXPECTATIONS OF CHINA HEALTH AS OF THE DATE OF THIS NEWS RELEASE AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE.  READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE.  WHILE CHINA HEALTH MAY ELECT TO, IT DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME EXCEPT AS REQUIRED IN ACCORDANCE WITH APPLICABLE LAWS.

 

SOURCE: CHINA HEALTH LABS & DIAGNOSTICS

Judyanna Chen
Chief Financial Officer
China Health Labs & Diagnostics Ltd.
T: [phone]
Email: [email protected]