China Health Industries (OTC BB:CHHE)

 

		For the Three Months Ended								For the Nine Months Ended
		March 31, 2012				March 31, 2011				March 31, 2012				March 31, 2011
REVENUE			11,250,503				16,681,724				56,164,111				41,662,210
COST OF GOODS SOLD			6,406,449				8,918,379				33,777,650				21,611,710
GROSS PROFIT			4,844,054				7,763,345				22,386,461				20,050,500
OPERATING EXPENSES
Selling, general & administrative expenses			566,849				1,069,847				3,442,839				3,558,266
Depreciation and amortization expenses			51,414				20,958				81,975				60,754
Research & development			120,152				602,860				360,200				1,374,403
Total operating expenses			738,415				1,693,665				3,885,014				4,993,423
INCOME FROM OPERATIONS			4,105,639				6,069,680				18,501,447				15,057,077
OTHER INCOME (EXPENSES)
Interest income			82,860				62,905				232,776				141,542
Interest expense			(6,907	)			(1,195	)			(20,602	)			(3,531	)
Total other income			75,953				61,710				212,174				138,011
INCOME BEFORE INCOME TAXES			4,181,592				6,131,390				18,713,621				15,195,088
Provision for income taxes			550,167				1,730,671				4,588,768				4,394,107
NET INCOME		$	3,631,425			$	4,400,719			$	14,124,853			$	10,800,981
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss)			(6,373	)			1,728,002				1,158,748				1,929,003
Total comprehensive income		$	3,625,052			$	6,128,721			$	15,283,601			$	12,729,984
Earning per share:
Basic & diluted earning per share		$	0.06			$	0.07			$	0.23			$	0.17
Weighted average shares outstanding:
Basic & diluted weighted average shares outstanding			62,239,737				62,239,737				62,239,737				62,239,737

Total revenues decreased by $5,431,221, or 33%, to $11,250,503 for the three months ended March 31, 2012 compared to $16,681,724 for the same period in 2011. The decrease in revenues was attributable to the decrease in product sales. According to the current PRC Health Food and Supplement Policy promulgated in 2010 (“Policy”), certification issued by provincial Food and Drug Administration cannot be renewed after expiration. Only certification issued by State Food and Drug Administration can be renewed and only products with State certification are allowed on the market. Among the seven products Humankind previously sold on the market, only Waterlilies Soft Capsule (Sailuozhi) was certified by State Food and Drug Administration. The other six products were certified by provincial Food and Drug Administration and the certifications will expire in May 2012. In order to reduce operational risks, the Company ceased the production of four health products with provincial certification in the quarter ended March 31, 2012. Currently, we only sell Waterlilies Soft Capsule (Sailuozhi), Colon Cleanser Capsule and Virility Max Capsule. In accordance with the Policy, despite expiration of State certification, the product is still allowed on the market so long as the product is within its usage expiration date.

2012 Outlook:

We anticipate our total revenues in 2012 versus 2011 to decrease by 7.64% to 10.83% or approximately $4.8 million to $6.8 million. Our gross profit margin in 2012 is expected to be approximately 40% due to an increase in raw material costs resulting from inflation. We estimate our overall 2012 net profit margin to be approximately 24%. However, there is no assurance that these predictions will be reached.

Previous 2012 outlook:

We anticipate our total revenues in 2012 versus 2011 to increase by 20% or approximately $12.5 million with growth in all categories of our product sales. Our gross profit margin in 2012 is expected to be approximately 47% due to increase in raw material costs resulting from inflation. We estimate our overall 2012 net profit margin to be approximately 26%

According to the current PRC Health Food and Supplement Policy promulgated in 2010 (“Policy”), certification issued by provincial Food and Drug Administration cannot be renewed after expiration. Only certification issued by State Food and Drug Administration can be renewed and only products with State certification are allowed on the market. Among the seven products Humankind previously sold on the market, only Waterlilies Soft Capsule (Sailuozhi) was certified by State Food and Drug Administration. The other six products were certified by provincial Food and Drug Administration and the certifications will expire in May 2012. In order to reduce operational risks, the Company ceased the production of four health products with provincial certification in the quarter ended March 31, 2012. Currently, we only sell Waterlilies Soft Capsule (Sailuozhi), Colon Cleanser Capsule and Virility Max Capsule. In accordance with the Policy, despite expiration of State certification, the product is still allowed on the market so long as the product is within its usage expiration date.

 

		For the Three Months Ended								For the Six Months Ended
		December 31, 2011				December 31, 2010				December 31, 2011				December 31, 2010
REVENUE			23,973,612				13,363,093				46,167,138				24,980,486
COST OF GOODS SOLD			14,401,135				6,708,036				27,371,201				12,693,331
GROSS PROFIT			9,572,477				6,655,057				18,795,937				12,287,155
OPERATING EXPENSES
Selling, general & administrative			2,286,370				1,227,027				4,129,519				2,488,419
Depreciation and amortization			15,862				20,099				30,561				39,796
Research & development			120,024				34,115				240,048				771,543
Total operating expenses			2,422,256				1,281,241				4,400,128				3,299,758
INCOME FROM OPERATIONS			7,150,221				5,373,816				14,395,809				8,987,397
OTHER INCOME
Interest income			76,778				39,282				149,916				78,637
Interest expense			(6,595	)			(1,168	)			(13,695	)			(2,336	)
Total other income			70,183				38,114				136,221				76,301
INCOME BEFORE INCOME TAXES			7,220,404				5,411,930				14,532,030				9,063,698
Provision for income taxes			2,041,873				1,548,022				4,038,601				2,663,436
NET INCOME		$	5,178,531			$	3,863,908			$	10,493,429			$	6,400,262
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss)			631,937				(23,552	)			1,165,121				201,001
Total other comprehensive income		$	5,810,468			$	3,840,356			$	11,658,550			$	6,601,263
Earning per share:
Basic & diluted earning per share		$	0.08			$	0.06			$	0.17			$	0.10
Weighted average shares outstanding:
Basic & diluted weighted average shares outstanding			62,239,737				62,239,737				62,239,737				62,239,737

The increase in revenues was attributable to growth in product sales. This growth in product sales was attributable to increase in sales volume resulting from our efforts to continue to develop our distribution channels by hiring additional sales agents to ensure that our products and their benefits are introduced to those making or influencing the purchasing decisions.

2012 Outlook

We anticipate our total revenues in 2012 versus 2011 to increase by 20% or approximately $12.5 million with growth in all categories of our product sales. Our gross profit margin in 2012 is expected to be approximately 47% due to increase in raw material costs resulting from inflation. We estimate our overall 2012 net profit margin to be approximately 26%

Plan of Operation

We will continue to focus on the expansion of our operation, development of new products and increase new customers. Additionally, we are putting more effort to develop our distribution channels by hiring more sales agents and sales people. We presently have enough liquidity to meet our expansion plans. However, depending on growth, the Company may need additional funding in the future.

We believe our current working capital position; together with our expected future cash flows from operations will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding in the future.

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Audited)
		For the Year Ended
		June 30, 2011				June 30, 2010
REVENUE			62,779,978				43,105,972
COST OF GOODS SOLD			33,335,334				20,160,420
GROSS PROFIT			29,444,644				22,945,552
OPERATING EXPENSES
Selling, general & administrative expenses			6,000,090				5,399,736
Depreciation and amortization expenses			46,578				79,388
Total operating expenses			6,046,668				5,479,124
INCOME FROM OPERATIONS			23,397,976				17,466,428
OTHER INCOME (EXPENSES)
Interest income			227,837				226,536
Interest expense			(27,317	)			(20,580	)
Other income							29,254
Total other income (expenses)			200,520				235,210
INCOME BEFORE INCOME TAXES			23,598,496				17,701,638
Provision for income taxes			5,924,501				4,447,467
NET INCOME		$	17,673,995			$	13,254,171
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain			1,421,363				327,761
Total other comprehensive income		$	19,095,358			$	13,581,932
Earning per share:
Basic & diluted earning per share		$	0.28			$	0.21
Weighted average shares outstanding:
Basic & diluted weighted average shares outstanding			62,239,737				62,239,737

GeoTeam® Note: Fourth Quarter 2011 vs. 2010 EPS was $0.11 vs. $0.05

2012 Outlook We anticipate our total revenues in 2012 versus 2011 to increase by 20% or approximately $12.5 million with growth in all categories of our product sales. Our gross profit margin in 2012 is expected to be approximately 47% due to increased raw material costs resulting from inflation. We estimate our overall 2012 net profit margin to be approximately 26%. However, there is no assurance that these predictions will be reached.

2011 Outlook

We anticipate our total revenues in 2011 versus 2010 to increase by 40% or approximately $17.2 million with growth in all categories of our product sales. Our gross profit margin in 2011 is expected to be approximately 53% due to increased raw material costs resulting from inflation. We estimate our overall 2011 net profit margin to be approximately 28%. However, there is no assurance that these predictions will be reached.

• total revenues in 2011 versus 2010 to increase by 40% or approximately $17.2 million with growth in all categories of our product sales
  
• gross profit margin in 2011 is expected to be approximately 53% due to increased raw material costs resulting from inflation
  
• overall 2011 net profit margin to be approximately 28%.

For the Three Months Ended
		September 30, 2010				September 30, 2009
REVENUE		$	11,617,393			$	10,246,606
COST OF GOODS SOLD			5,985,295				4,486,366
Gross Profit			5,632,098				5,760,240
OPERATING EXPENSES
Selling, general & administrative expenses			1,261,392				516,325
Depreciation and amortization expenses			19,697				20,331
Research & development			737,428				-
Total operating expenses			2,018,517				536,656
Operating profit			3,613,581				5,223,584
OTHER INCOME (EXPENSES)
Interest expenses			(1,168	)			(15,899	)
Interest income			39,355				-
Other income							5
Total other income (expense)			38,187				(15,894	)
INCOME (LOSS) BEFORE INCOME TAXES			3,651,768				5,207,690
Income taxes			1,115,414				1,318,033
Net income (loss)		$	2,536,354			$	3,889,657
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss)		$	224,553			$	184,455
Comprehensive income		$	2,760,907			$	4,074,112
Basic and diluted net loss per share			0.04				0.06
Weight average shares outstanding
Basic			62,239,737				62,234,737
Diluted			62,239,737				62,234,737

Management considers current working capital and borrowing capabilities adequate to cover our current operating and capital requirements for the full fiscal year 2011.

For the year ended June 30, 2010 as compared to June 30, 2009

• Total revenues increased by 293% to $43.1 million for the year ended June 30, 2010 compared to the same period in 2009. The $32,138,144 increase in revenue is attributable to strong performances from our sales distribution channels.

"This growth in sales is attributable to volume and our efforts to continue to develop our distribution channels by hiring additional sales agents to assure that our products and their associated benefits are seen by those making or influencing the purchasing decisions."

• Net income increased 375.0% to $13.3 million from $2.8 million.
  
• EPS increased to$0.21 compared to $0.05.

GeoTeam® Note: 2010 Fourth quarter EPS was flat at $0.05.

2011 Outlook:

We anticipate our:

• Revenues will increase 40.0% to $60.3 million with growth in all categories of our product sales.
  
• Gross profit margin  to be approximately 53% due to raw material cost inflation.
  
• Net profit margins to be approximately 28%. This would translate into net income of $16.9 million and EPS of $0.27 using the 2010 share count of 62.2 million.

Added to the GeoSpecial list on December 28, 2009 @ 0.55.

Catalyst: Stock was selling at a cheap valuation, given bullish guidance.
Peak performance: Reached a high of $2.00 on January 7, 2010.
Current Price: $0.81

Current road block: No IR; very illiquid; Stock has over 60 million outstanding shares which is above our preferred 50 million maximum threshold; Did not reiterate guidance in its Third quarter 10Q; Company still has not responded to our questions.

Remains on the GeoSpecial list.  Previous guidance is still bullish; trailing P/E is 4.04 despite well above average EPS growth rates.

GeoTeam note:

On July 6, 2010 we removed all ChinaHybrids from the GeoBargain/Special lists, pending review.

We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices.  Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

GeoTeam® Note:

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors' portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question. 

***Very Important GeoTeam® note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

We anticipate our total revenues in 2010 versus 2009 to increase by 300% or approximately $30 million with growth in all categories of our product sales. Our gross profit margin in 2010 is expected to be approximately 55.45% due to raw material cost inflation. Operating expenses will increase due to higher percentage of R&D investment as well as expanding our own distribution channels. We estimate our overall 2009 net profit margins to be approximately 22.64%. However, there is no assurance that these predictions will be reached.  Fiscal Year ends in June.

Source: 10K (For the quarterly period ended December 31, 2009)

China Health was formed on July 20, 2007  for the purpose of seeking and consummating a merger or acquisition with a business entity.

On August 20, 2007, the sole shareholder of China Health entered into a Share Purchase Agreement with the owners of Humankind.

On December 31, 2008, China Health closed a reverse merger with Universal Fog, Inc, a U.S. public traded shell company.

Harbin Humankind Biology Technology Co., is in the business of the manufacture and sale of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies. Harbin Huimeijia Medicine Company was incorporated on October 14, 2008. Huimeijia completed its GMP certification on July 23, 2009 and will be producing and selling our medical drugs.

Financial Summary:

Fiscal Yr. Ends June	Full Year 2009	Full Year 2008	Period Change
GAAP Revenue	$10.98 million	$763.60 thousand	1337.93%
GAAP EPS	$0.05	$0.00	n/a
Tax Rate	34.36%	n/a	n/a
Fully Diluted Shares	62,234,737	61,203,088	1.69%

Source: See SEC Filing (For the period ended June 2009) 

Fiscal Qtr. Ends September	1st Quarter 2010	1st Quarter 2009	Period Change
GAAP Revenue	$10.25 million	$286.21 thousand	3481.29%
GAAP EPS	$0.06	$0.00	n/a
Tax Rate	25.31%	n/a	n/a
Fully Diluted Shares	62,234,737	62,234,732	0.00%

We anticipate our total revenues in 2010 versus 2009 to increase by 101% or approximately $11.04 million with growth in all categories of our product sales. Our gross profit margin in 2010 is expected to be approximately 55.45% due to raw material cost inflation. Operating expenses will increase due to higher percentage of R&D investment as well as expanding our own distribution channels. We estimate our overall 2009 net profit margins to be approximately 22.64%.However, there is no assurance that these predictions will be reached.

Source: See SEC Filing (For the quarterly period ended September 30, 2009)

 

2010 Outlook:

"We anticipate our total revenues in 2010 versus 2009 to increase by 101% or approximately $11.04 million with growth in all categories of our product sales. Our gross profit margin in 2010 is expected to be approximately 55.45% due to raw material cost inflation. Operating expenses will increase due to higher percentage of R&D investment as well as expanding our own distribution channels. We estimate our overall 2009 net profit margins to be approximately 22.64%.However, there is no assurance that these predictions will be reached."

Source: See SEC Filing (For the quarterly period ended September 30, 2009)

The GeoTeam® is taking a bold move and coding China Health Industries (Pinksheets:CHHE), which trades on the Pink Sheets, as a GeoSpecial.  After some initial due diligence and reviewing filed financials it is possible that some investors may view CHHE as an interesting risk/reward opportunity.

Positive points:

• Fiscal 2009 revenues increased 1337.93% to $10.98 million.
• First quarter fiscal 2010 revenues increased 3481.29% to $10.25 million.
• First quarter 2010 sales have essentially matched all of 2009's figure.
• Achieved 2009 EPS profitability of $0.05.
• First quarter 2010 EPS has already matched all of 2009's figure.
• Positive 2010 outlook:

"We anticipate our total revenues in 2010 versus 2009 to increase by 101% or approximately $11.04 million with growth in all categories of our product sales. Our gross profit margin in 2010 is expected to be approximately 55.45% due to raw material cost inflation. Operating expenses will increase due to higher percentage of R&D investment as well as expanding our own distribution channels. We estimate our overall 2009 net profit margins to be approximately 22.64%.However, there is no assurance that these predictions will be reached."

Source: See SEC Filing (For the quarterly period ended September 30, 2009)

We should note that we are somewhat perplexed on one issue: The 2010 guidance, which implies 2010 full year revenues of approx. $22 million, seems a little peculiar given that CHHE has already booked  $10.25 million in revenues for its 2010 first quarter.  The GeoTeam® will delve into this matter.

Other points to ponder:

• Shares outstanding of 62 million are above our preferred minimum.
• We found no verbiage on 2010 capital requirements
• Stock trades on the pinksheets, although the company is filing SEC documents, a practice uncommon with pinks.