China Health Labs & Diagnostics Ltd. Announces Financial Results for the Second Quarter Ended June 30, 2012

TSX-V: CHO
OTCQX: CHLBF

TORONTO, Aug. 29, 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 second quarter ended June 30, 2012.

In the six months ended June 30, 2012, 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 fiscal year 2012.  In fiscal year 2011, China Health generated revenue growth of 35% to $45.6 million and profit growth of 53% to over $8 million, compared to fiscal year 2010.  In fiscal year 2012, the Company expects to deliver growth in revenue and profits, compared to fiscal year 2011.  The Company is not providing specific guidance for fiscal year 2012, but expects growth in net profits to be lower than the 53% in fiscal year 2011, due to increased investment in product development and human resources to support expansion into new regions in China.

Highlights from the three and six months ended June 30, 2012 includes:

• Revenue grew by 9% to $16.244 million and profit decreased by 44% to $1.481 million for the six months ended June 30, 2012 compared to the same period last year.
  
  
• Revenue grew by 3% to $8.361 million and profit decreased by 50% to $0.710 million for the three months ended June 30, 2012 compared to the same period last year.
  
  
• Increased installed base of BK Clinlabs to 897 rural hospitals including in four new provinces and region in 2012.
  
  
• Increased sales in the urban hospital and labs sector by 17% to $8.900 million, mostly from increased sales of reagent and consumables, for the six months ended June 30, 2012.
  
  
• Increased sales in the rural hospital and clinics sector by 34% to $3.090 million due to higher sales price on BK Clinlabs installed in the six months ended June 30, 2102 as compared to BK Clinlabs installed in same period last year.

The Company's first and second 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 profit, due to the seasonality of the Company's customers' purchasing and budgeting processes. For example, revenue and profit for the six months ended June 30, 2011 accounted for approximately 33% of total revenue and profit, respectively for the fiscal year 2011, while the fourth quarter accounted for approximately 43% of total revenue and 48% of profit for the year ended December 31, 2011. The Company expects that the majority of fiscal year 2012 revenue and profit will be generated in the third and fourth quarters, similar to the seasonality in the prior year. For further information on seasonality, please see the Company's financial statements and MD&A filed on SEDAR.

"The Company has made much progress in expanding its total lab solutions business to new provinces and regions. In the current year, the Company has installed and contracted its BK Clinlabs to five new provinces and regions, an increase to nine provinces and regions to date. The growth of our rural hospital and clinics sector and also in reagent and consumable sales to urban hospitals and labs resulted in higher sales in the current six-month period as compared to sales in the same period last year. Typically, the first two quarters is always our slowest for revenue; however, 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 to date, we are confident that we can achieve our operating goals and generate another year of growth in revenue and profit in 2012."

Revenue for the three and six months ended June 30, 2012 increased by 3% to $8.361 million and by 9% to $16.244 million, respectively, compared to the same periods last year. 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 is generally from large sales orders that are not placed evenly throughout the year.  The Company expects revenue from POCT solutions and products to increase for the full year of 2012, compared to fiscal year 2011.  In fiscal year 2011, revenue from large urban hospitals decreased by 6%, compared to overall growth of revenue of 35% in fiscal year 2011.  In fiscal year 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 three and six months ended June 30, 2012 increased by 27% to $4.185 million and by 16% to $8.332 million, respectively, compared to the same periods last year, due to overall increase in revenue during the current three and six months ended June 30, 2012. Gross margin as a percentage of revenue for the three and six months ended June 30, 2012 were 50% and 51%, respectively, compared to 41% and 48%, respectively for the same periods last year.

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 current six month period as compared to last year. On average, the gross margin as a percentage of revenues for BK Clinlabs installed, including the Rural Mobile Labs in the six months ended June 30, 2012 was approximately 20% higher as compared to BK Clinlabs installed in the same period last year. The gross margin as a percentage of revenue on POCT was also approximately 17% higher on sales of solutions and products in the current six months period as compared to the same period last year. The higher margin in BK Clinlabs and POCT solutions and products was netted against lower margins on sales in the large urban hospital and labs sectors. The Company expects the gross margin for fiscal year 2012 to be consistent with the gross margin for fiscal year 2011 of 44%, but expects gross margin to vary on a quarterly basis due to changes in sales mix.

Administrative expenses for the three and six months ended June 30, 2012 increased by 22% to $1.836 million and by 16% to $3.776 million, respectively, compared to the same periods last year. 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 increased to 22% for the three months ended June 30, 2012, compared to 19% for the same period last year and to 23% for the six months ended June 30, 2012, compared to 22% for the same period last year.

Share-based compensation for the three and six months ended June 30, 2012 was $0.046 million and $0.127 million, respectively, compared with $0.223 million and $0.411 million, respectively, for the same periods last year. 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 an officer in September 2011. The fair value of options granted on April 14, 2011 was estimated on date of grant at $0.669 million and of options granted on September 1, 2011 was estimated on date of grant at $0.048 million using the Black-Scholes option-pricing model. The fair values of options are expensed over the vesting period ending on April 14, 2014 and September 1, 2014, respectively.  There were no stock options granted during the six months ended June 30, 2012.

Research and development ("R&D") expenditure for the three and six months ended June 30, 2012 increased by 2652% to $0.330 million and by 73% to $0.589 million, respectively, compared to the same periods last year.  Research and development expenses as a percentage of revenue was approximately 4% for the three and six months ended June 30, 2012, compared to 0% and 2%, respectively for the same periods last year. Research and development is focused on developing new diagnostics products and solutions based on market conditions and demand, including 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. In March 2012, the Company launched four new products: Type C POCT Diagnostic Field Lab, Rural Emergency Rescue Medical Total Solution, BK Early Diagnosis System for Cardio-Cerebral Vascular Disease and BK Food Safety Rapid Test System.  These new products were developed to meet specific medical diagnostic and food testing needs of customers and based on the Company's knowledge of Chinese government policy and budget priorities.

Selling expenses for the three and six months ended June 30, 2012 increased by 338% to $0.822 million and by 142% to $1.568 million, respectively, compared to the same periods last year. Selling expenses as a percentage of revenue was 10% for the three and six months ended June 30, 2012, compared to 2% and 4%, respectively for the same periods last year. Selling expenses are expected to be higher in 2012 as compared to 2011 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 three months ended June 30, 2012 increased to $0.064 million from $nil in the same period last year and for the six months ended June 30, 2012 decreased by 15% to $0.068 million compared to the same period last year. From time to time, the Company will receive government subsidies for one of the PRC subsidiaries that qualify 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 three months ended June 30, 2012 was $0.480 million, compared to an income tax recovery of $0.032 million for the same period last year. Current income tax for the six months ended June 30, 2012 was $0.851 million, compared to $0.290 for the same period last year. 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. The higher income taxes and effective income tax rates are due to the timing of when intercompany sales are delivered to customers. For intercompany sales not yet delivered to customers within the reported period will result in higher taxes as a percentage of the consolidated profit before taxes as each of the Company's PRC subsidiaries would incur taxes on goods sold to its subsidiaries. The effective income tax rates would be lower in the period when intercompany sales are sold to its customers.

Operating profit for the three and six months ended June 30, 2012 decreased by 21% to $1.261 million and by 19% to $2.467 million, respectively, compared to the same periods last year. Profit for the three and six months ended June 30, 2012 decreased by 50% to $0.710 million and by 44% to $1.481 million, respectively, compared to the same periods last year.  Profit includes operating profit, interest expense, interest income and foreign exchange gain/ loss. Profit for the three and six months ended June 30, 2012 represents 8% and 9% of revenue, respectively compared to 17% and 18% of revenue, respectively for the same periods last year. The decrease in operating profit and profit is due to increased expenses and current income taxes. 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 and $0.02 for the three and six months ended June 30, 2012, respectively, compared to $0.02 and $0.04 for the three and six months ended June 30, 2011, respectively. The decrease in EPS is due to the decrease in profit for the three and six months ended June 30, 2012 as compared to the same periods last year.

The average number of basic ordinary shares outstanding for the six months ended June 30, 2012 was 65,606,686 (fully diluted 65,606,887), compared to 65,097,415 (fully diluted 67,218,861) average shares outstanding for the six months ended June 30, 2011.

Cash and short-term investments totaled $5.432 million as at June 30, 2012, compared with $5.661 million of cash and short-term investments as of December 31, 2011.  The Company's working capital as of June 30, 2012 was $27.004 million, compared with a $26.538 million working capital as of December 31, 2011.  Working capital increased by $0.466 million due to the increase in total current assets of $0.548 million offset by the increase in total current liabilities of $0.082 million.

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 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 Wednesday, August 29, 2012 at 10:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on the second quarter ended June 30, 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:		Wednesday, August 29, 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 August 29, 2012 to 11:59 pm Eastern Time on September 12, 2012.

Taped Replay Toll Free Number: 1.855.859.2056

Taped Replay Local Dial-in Numbers:

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

Taped Replay Password: 23951000

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 delivering growth in revenue and profits in 2012; growth in net profits to be lower than in 2011 due to increased investment in product development and human resources to support expansion into new regions of China; similar seasonality effects as in the past; 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 will achieve its operating goals, that the Company will deliver products as contracted and able to collect and recognize revenue, that actual revenue, expenses, gross margins and profits with certain business lines or the business as a whole will substantially meet budget or management's expectations, that the Company will continue with its growth strategy including the expansion of businesses, that additional debt or equity funding required to accelerate growth, and 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 discussion 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.

 

SOURCE: CHINA HEALTH LABS & DIAGNOSTICS

Please contact:

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]