China Health Labs & Diagnostics Ltd. announces financial results for the first quarter ended March 31, 2012

TSX-V: CHO
OTCQX: CHLBF

www.chinahealthlabs.com

TORONTO, May 31, 2012 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV:CHO; OTCQX:CHLBF), is pleased to announce the financial results for the first quarter ended March 31, 2012.

In the first quarter, the Company maintained its position as a leading provider of total solutions for medical diagnostics and food safety testing in China, and made progress in delivering another year of growth in 2012.  In 2011, China Health generated revenue growth of 35% to $45.6 million and profit growth of 53% to over $8 million, compared to 2010.  In 2012, the Company expects to deliver growth in revenue and profits, compared to 2011.  The Company is not providing specific guidance for 2012, but expects growth in net profits to be lower than the 53% in 2011, due to increased investment in product development and human resources to support expansion into new regions of China.

Highlights from first quarter ended March 31, 2012 include: 

• Revenue grew by 17% to $7.883 million and profit decreased by 37% to $0.772 million for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011.
  
  
• Earnings per share decreased to $0.01 per basic and diluted share for the quarter ended March 31, 2012 compared to $0.02 for the quarter ended March 31, 2011.
  
  
• Increased installed base of BK Clinlabs to 858 rural hospitals, including the installation of 41 BK Clinlabs in rural hospitals, with 40 installed in Chongqing and 1 in Xinjiang Uygur Autonomous Region.
  
  
• Increased sales in the urban hospital and labs sector by 25% to $4.327 million, mostly from increased sales of reagent and consumables.
  
  
• Launched five new products in March 2012 for its total lab solutions businesses, leveraging the Company's proprietary technologies, which are expected to generate new revenue and strong gross margins.  Delivered 63 rural mobile labs, one of the new products, which integrate the Company's point of care technology ("POCT") and lab managements system to deliver diagnostics to remote rural communities.  (See press releases dated March 15, 2012 and March 27, 2012).

The Company's first quarter revenue and profit are generally the lowest as a percentage of annual revenue, while the third and fourth quarters tend to comprise the largest percentage of revenue and profits, due to the seasonality of the Company's customers' purchasing and budgeting processes.  For example in 2011, the first quarter accounted for approximately 15% of annual revenue and profit, while the fourth quarter accounted for approximately 43% of annual revenue and 48% of annual profit.  The Company expects a similar seasonality of revenue and profit in 2012.  For further information on seasonality, please see the Company's financial statements and MD&A filed on SEDAR.

Subsequent to the first quarter, the Company entered into agreements that will increase its installed base of BK Clinlabs to 965 rural hospitals (see Press Release dated May 29, 2012.)  In addition, the Company secured new sales orders for its high margin POCT field diagnostic total lab solutions.

"In the first quarter, our sales and product development teams worked with our customers to ensure that we can meet their needs for 2012 with new and existing products and solutions.  While the first quarter is always our slowest for revenue, our team works very hard to make sure that our solutions are worked into the annual budgets of our Chinese government customers," said Wilson Yao, CEO of China Health. "Based on our progress in the first quarter, we are confident that we can achieve our operating goals and generate another year of growth in revenue and profits in 2012."

Revenue for the quarter ended March 31, 2012 increased by 17% to $7.883 million, compared to $6.759 million for the quarter ended March 31, 2011. The growth in revenue was largely due to increased sales in the rural hospital and clinics and large urban hospital and labs sectors, offset by a decrease in revenue for POCT solutions and products for defense and rescue agencies sector.  Revenue from POCT solutions and products are generally large sales orders that are not placed evenly throughout the year.  Based on discussions with customers, the Company expects revenue from POCT solutions and products to increase for the full year of 2012, compared to 2011. In 2011, revenue from large urban hospitals decreased by 6%, compared to overall growth of revenue of 35% in 2011.  In 2012, the Company expects the large urban sector to grow due to expected increased sales in recurring revenue of reagents and consumables.

Gross margin for the quarter ended March 31, 2012 increased by 6% to $4.147 million, compared to $3.894 million for the quarter ended March 31, 2011 due to overall increase in revenue. Gross margin as a percentage of revenue for the quarter ended March 31, 2012 was 53% compared to 58% for the quarter ended March 31, 2011.

The decrease in gross margin as a percentage of revenue was due to changes in sales mix.  The lower gross margin as a percentage of revenue for the quarter ended March 31, 2012 was due to the decrease in revenue for the higher margin POCT solution and products for the quarter ended March 31, 2012 as compared to the same period in 2011.  The Company expects the gross margin for 2012 will be consistent with the gross margin for 2011 of 44%, but expects gross margin to vary on a quarterly basis due to changes in sales mix.

Administrative expenses for the quarter ended March 31, 2012 increased by 11% to $1.940 million, compared to $1.745 million for the quarter ended March 31, 2011. The principal reason for the increase was higher overhead costs including new employees and expanded facilities to support a growing customer base and sales. Administrative expenses as a percentage of revenue decreased to 25% for the quarter ended March 31, 2012, in comparison to 26% for the quarter ended March 31, 2011.

Share-based compensation for the quarter ended March 31, 2012 was $0.081 million, compared with $0.188 million for the quarter ended March 31, 2011. The share-based compensation expense is a result of stock options that vested during the period for stock options granted to employees in April 2011 and to management in September 2011.

Research and development ("R&D") expenditures for the quarter ended March 31, 2012 decreased by 21% to $0.259 million, compared to $0.328 million for the quarter ended March 31, 2011.  Research and development expense as a percentage of revenue were approximately 3% for the quarter ended March 31, 2012, compared to 5% for the quarter ended March 31, 2011. Research and development is focused on developing a full range of POCT solutions and improving the LMS system. The Company is accelerating product development to maintain its competitive advantages in the areas where it has developed unique proprietary solutions. Since the Company often collaborates with its customers to develop solutions, it is able to keep costs under control while developing products tailor made to customer needs.

Selling expenses for the quarter ended March 31, 2012 increased by 62% to $0.746 million, compared to $0.462 million for the quarter ended March 31, 2011. Selling expense as a percentage of revenue was 9% for the quarter ended March 31, 2012, compared to 7% for the quarter ended March 31, 2011. Selling expenses are expected to increase in subsequent periods due to plans to expand the rural lab solution business to additional Chinese provinces and the food safety business to additional Chinese cities.

Government subsidy income for the quarter ended March 31, 2012 was $0.004 million, compared with $0.080 million for the quarter ended March 31, 2011. From time to time, the Company will receive government subsidies for one of the PRC subsidiaries' that qualifies as a high-tech Company and is involved in developing the Company's lab management software, and also for another PRC subsidiary that is located in a certain district and is eligible for government grant based on outstanding performance.

Current income tax expense for the quarter ended March 31, 2012 was $0.371 million, compared with $0.322 million for the quarter ended March 31, 2011.

The increase in income taxes is mainly due to an overall increase in taxable income being earned by the Company's PRC subsidiaries subject to the 25% tax rate, in comparison to the taxable income earned by the Company's PRC subsidiaries which are subject to preferential tax rates.

Operating profit for the quarter ended March 31, 2012 decreased by 16% to $1.206 million, compared to $1.439 million for the quarter ended March 31, 2011. Profit for the quarter ended March 31, 2012 decreased by 37% to $0.772 million, compared to $1.224 million for the quarter ended March 31, 2011.  Profit includes operating profit, interest expense, interest income and foreign exchange loss. Profit in the quarter ended March 31, 2012 represents 10% of revenue, compared to 18% of revenue for the quarter ended March 31, 2011.

The decrease in operating profit and profit is due to the lower sales of POCT total lab solutions in the current quarter as compared to the same quarter last year, which generates higher margins than the Company's other products. Also, as the Company grows and continues its effort to expand its total lab solution businesses to other provinces and cities, expenses are expected to increase as a percentage of revenue.

Basic and fully diluted EPS was $0.01 for the quarter ended March 31, 2012 and $0.02 for the quarter ended March 31, 2011. The decrease in EPS is due to the decrease in profit for the quarter ended March 31, 2012 as compared to the same period last year.

The average number of basic ordinary shares outstanding for the quarter ended March 31, 2012 was 65,606,686 (fully diluted 65,607,087), compared to 64,780,452 (fully diluted 67,183,226) average shares outstanding for the quarter ended March 31, 2011.

Cash and short-term investments totaled $6.358 million as at March 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 March 31, 2012 was $26.509 million, compared with a $26.538 million working capital as of December 31, 2011.  Working capital decreased by $0.029 million due to the decrease in total current assets of $1.994 million offset by the decrease in total current liabilities of $1.965 million.

The Company is well positioned to expand its business for rural lab total 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 2012 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 2012, 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 Thursday, May 31, 2012 at 10:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on the first quarter ended March 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:			Thursday, May 31, 2012
TIME:			10:00 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 1:00 pm Eastern Time on May 31, 2012 to 11:59 pm Eastern Time on June 14, 2012.

Taped Replay Toll Free Number: 1 [phone]

Taped Replay Local Dial-in Numbers:

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

Taped Replay Password: 83319568

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 2011, China Health had revenue of approximately $45.6 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 new products generating new revenue and increasing gross margins; an increase in the stalled base of BK Clinlabs; the achievement of operating goals and another year of growth in revenue and profit in 2012; an increase in revenue from POCT solutions and products and from recurring revenue of reagents and consumables from the large urban sector; the gross margin for 2012 to be consistent with the gross margin for 2011, but to vary on a quarterly basis; an increase in selling expenses due to plans to expand the rural lab solution business to additional Chinese provinces and the food safety business to additional Chinese cities; an increase in expenses as a percentage of revenue as the Company expands its total lab solution businesses, 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 revenue 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 revenue.  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 may not proceed or alter its growth strategy, the Company may not be able to obtain any required financing to accelerate growth on acceptable terms or at all, gross margins, revenue 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 year ended December 31, 2011 management's discuss and analysis dated April 16, 2012, 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.

 

 

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

Babak Pedram
Investor Relations
TMX Equicom Group
T: [phone] ext. 264
Email: [email protected]