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

TSX-V: CHO
OTCQX: CHLBF

www.chinahealthlabs.com

TORONTO, Nov. 30, 2012 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV:CHO; OTCQX:CHLBF), is pleased to announce its financial results for the third quarter ended September 30, 2012.

China Health will be hosting an investor conference call on Tuesday, December 4, 2012.  This conference call was originally scheduled for an earlier date but was rescheduled to allow the Company's management and auditors to complete their review of the appropriate accounting treatment and IFRS interpretations relating to a sales arrangement that the Company entered into during the third quarter and involved five pieces of diagnostic equipment.  This review has been completed and the notes to the financial statements and the related MD&A for the third quarter contain the relevant disclosure.

In the three and nine months ended September 30, 2012, the Company has maintained its position as a leading provider of total solutions for medical diagnostics and food safety testing in China, and made progress in installing its total lab solutions and delivering its proprietary products to new provinces and regions in China and expects steady growth in the near future.

Highlights from the three and nine months ended September 30, 2012 includes:

  • Gross margins increased by 32% to $5.630 million and by 22% to $13.962 million for the three and nine months ended September 30, 2012, respectively, compared to the same period last year.

  • Profit increased by 48% to $2.357 million and revenue decreased by 11% to $9.623 million for the three months ended September 30, 2012 compared to the same period last year.

  • Profit decreased by 15% to $3.837 million and revenue increased by 1% to $25.867 million for the nine months ended September 30, 2012 compared to the same period last year.

  • Increased installed base of BK Clinlabs to 911 rural hospitals in five new provinces/regions in 2012 and agreements to install an additional 89 BK Clinlabs to increase the total to 1,000 locations in 10 provinces, compared to 817 locations in four locations at the beginning of 2012.

  • Increased sales in the urban hospital and labs sector by 25% to $16.076 million, mostly from increased sales of reagents and consumables, for the nine months ended September 30, 2012.

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.

"The Company continued to show strong financial results and growth of its total lab solutions business into new provinces and regions in China. Since the beginning of 2012, the Company has installed or contracted its BK Clinlabs in six new provinces and regions, which shows significant progress of our marketing team as we were only in four provinces prior to 2012," said Wilson Yao, CEO of China Health. "The time and resource spent to date showed significant results as the Company continues to grow and gain higher margin on its sales. This shows the value it creates to its existing customers and also the Company's ability to develop new technology and products to suit the evolving changes in the healthcare industry in China. 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 nine months ended September 30, 2012 decreased by 11% to $9.623 million and increased by 1% to $25.867 million, respectively, compared to the same periods last year. For the nine months ended September 30, 2012, the Company installed 94 BK Clinlabs in five new provinces and regions and delivered 63 Rural Mobile Labs. In the comparable period last year, the Company installed 587 BK Clinlabs in Jilin Province. Although a greater number of BK Clinlabs were installed in prior comparable period, the sales price per BK Clinlabs 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 nine months ended September 30, 2012 was approximately $0.021 million (RMB 137,000) per lab compared to the average sales price in the nine months ended September 30, 2011 of approximately $0.011 million (RMB 70,000) per lab.  Further, in the current 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 $0.009 million (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 $3.052 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 $0.058 million (RMB 375,000) over the five year term.

For the nine months ended September 30, 2012, the decrease in revenue for the POCT solutions and products was offset by an increase in revenue of 25% for the large urban hospital and labs 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 in fiscal 2012, compared to 2011.  In fiscal 2011, revenue from large urban hospitals decreased by 6%, compared to the overall growth in revenue of 35% in fiscal 2011.  In fiscal 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 nine months ended September 30, 2012 increased by 32% to $5.630 million and increased by 22% to $13.962 million, respectively, compared to the same periods last year. For the nine months ended September 30, 2012, gross margins were improved due to higher margin sales, specifically in the BK Clinlabs and POCT solution and product offerings, in the current period. Gross margin as a percentage of revenue for the three and nine months ended September 30, 2012 were 59% and 54%, compared to 40% and 45%, 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 nine month period as compared to last year as well as higher margin diagnostic lab equipment sold to large urban hospitals. On average, the gross margin as a percentage of revenues for BK Clinlabs installed, including the Rural Mobile Labs in the nine months ended September 30, 2012 was approximately 23% higher as compared to BK Clinlabs completed in the same period last year. The gross margin as a percentage of revenue on POCT was also approximately 26% higher on sales of solutions and products in the current nine month period as compared to the same period last year. During the three months ended September 30, 2012, the Company entered into a contract where it placed diagnostic lab equipments in a large hospital in Shandong in return for a monthly lease payment over a term of 10 years. The value of the contract for the 10 year lease is a minimum of approximately $5.1 million (RMB 32.4 million), with gross margin of approximately over 75%.

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 nine months ended September 30, 2012 increased by 55% to $2.559 million and by 29% to $6.335 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 27% for the three months ended September 30, 2012, compared to 15% for the same period last year and to 24% for the nine months ended September 30, 2012, compared to 19% for the same period last year. While administrative expenses have increased significantly in the current fiscal period as compared to the prior fiscal period, 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. Costs are spent to hire and train new employees, set up base in new areas where the Company will have its total lab solutions installed and/or delivered and general costs to support a growing operation.

Share-based compensation for the three and nine months ended September 30, 2012 was $0.037 million and $0.164 million, respectively, compared with $0.190 million and $0.601 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 nine months ended September 30, 2012.

Research and development ("R&D") expenditure for the three and nine months ended September 30, 2012 increased by 427% to $0.585 million and by 160% to $1.174 million, respectively, compared to the same periods last year.  Research and development expenses as a percentage of revenue was approximately 6% and 5% for the three and nine months ended September 30, 2012, respectively, compared to 1% and 2%, respectively for the same periods last year.

Research and development expenses are higher for the fiscal period 2012 as compared to prior fiscal period 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 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. The margins on new products launched are generally higher than the existing products.

Selling expenses for the three and nine months ended September 30, 2012 increased by 31% to $0.827 million and by 87% to $2.396 million, respectively, compared to the same periods last year. Selling expenses as a percentage of revenue was 9% for the three and nine months ended September 30, 2012, compared to 6% and 5%, 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. Selling and marketing expenditures include salaries and benefits, travel, promotion and marketing and advertising costs.

Current income tax expense for the three months ended September 30, 2012 was a recovery of $0.235 million, compared to income tax of $0.142 million for the same period last year. Current income tax for the nine months ended September 30, 2012 was $0.617 million, compared to $0.432 million for the same period last year.

The recovery of $0.235 million for the three months ended September 30, 2012 was mostly due to income tax refunded during the period after completion of the Company's annual tax audit in China and losses recorded at some of the Company's PRC subsidiaries. The increase in income taxes during the nine months ended September 30, 2012 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 Company's PRC subsidiaries are subject to income taxes at a statutory tax rate of 25% in China.  Two of the Company's PRC subsidiaries have been granted preferential tax rates.  One subsidiary is subject to PRC income taxes at 1% of gross sales and another PRC subsidiary is qualified for income tax exemption during the first two years of profitable operations followed by a 50% tax reduction in the next three years for engaging in R&D activities in a particular economic zone.  The subsidiary received income tax exemptions in the years 2008 and 2009 with the years 2010 to 2012 being taxed at the 50% reduced tax rate.

Operating profit for the three and nine months ended September 30, 2012 increased by 5% to $2.023 million and decreased by 9% to $4.489 million, respectively, compared to the same periods last year. Profit for the three and nine months ended September 30, 2012 increased by 48% to $2.357 million and decreased by 9% to $3.837 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 nine months ended September 30, 2012 represents 24% and 15% of revenue, respectively compared to 15% and 16% of revenue, respectively for the same periods last year.

During the nine months ended September 30, 2012, operating profit and profit decreased due to increased operating expenses. 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 $0.04 and $0.06 for the three and nine months ended September 30, 2012, respectively, compared to $0.02 and $0.06 for the three and nine months ended September 30, 2011, respectively. EPS was higher during the three months ended September 30, 2012 as compared to the same period last year due to higher profit and remained the same for the nine months ended September 30, 2012 as compared to prior period.

The average number of basic ordinary shares outstanding for the nine months ended September 30, 2012 was 65,606,686 (fully diluted 65,606,816), compared to 65,261,986 (fully diluted 67,287,479) average shares outstanding for the nine months ended September 30, 2011.

Cash totaled $2.850 million as at September 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 September 30, 2012 was $26.116 million, compared with a $26.538 million working capital as of December 31, 2011.  Working capital decreased by $0.422 million due to the increase in total current liabilities of $1.170 million offset by the increase in total current assets of $0.748 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 Tuesday, December 4, 2012 at 10:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on the third quarter ended September 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:        Tuesday, December 4, 2012
TIME:        10:00 am, Eastern Time

Participant Dial-In Number(s):
      North America Toll-Free Dial-In Number:         1 (888) 231-8191
      For Toronto and International Callers:         1 (647) 427-7450

A Taped Replay will be available from 1:00 pm Eastern Time on December 4, 2012 to 11:59 pm Eastern Time on December 18, 2012.

Taped Replay Toll Free Number: 1.855.859.2056

Taped Replay Local Dial-in Numbers:

(778) 371-8506       (416) 849-0833       (514) 807-9274
(403) 451-9481       (613) 667-0035       (902) 455-3955

Taped Replay Password: 74573565

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 steady growth in the near future; similar seasonality effects as in the past; the achievement of operating goals and another year of growth in revenue and profit in 2012; generating steady growth in future sales under the new business model for BK Clinlabs; 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

For further information:

Judyanna Chen
Chief Financial Officer
China Health Labs & Diagnostics Ltd.
T: (416) 865-3351
Email: jchen@chinahealthlabs.com