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Executives

Winnie Yan - Investor Relations

Dr. Zhong Chen - Chief Technology Officer

Sam Tsang - Chief Financial Officer

Xiaodong Wu - Chairman of the Board, Chief Executive Officer

Analysts

Ben Lee - Morgan Stanley

Jinsong Du - Credit Suisse

Hoki Luk - Citigroup

Lewis Fan - Brean Murray Carret

China Medical Technologies, Inc. (CMED) F2Q08 Earnings Call December 18, 2008 8:00 AM ET

Operator

Good morning and welcome to China Medical Technologies second fiscal quarter earnings conference call for the quarter ended September 30, 2008, as well as the sale of HIFU business to a major shareholder, Chengxuan International. (Operator Instructions) I would now like to turn the presentation over to your host for the call, Ms. Winnie Yan. lease proceed, Ms. Yan.

Winnie Yan

Hello, everyone. I am pleased to welcome you to China Medical's second fiscal quarter earnings conference call, as well as the conference call for the sale of China Medical's HIFU business. China Medical already announced its second fiscal quarter financial results and the sale of the HIFU business. A copy of the two press releases is also available on the company’s website at www.chinameditech.com.

Today your speakers will be Xiaodong Wu, CEO; Sam Tsang, CFO; Dr. Zhong Chen, CTO; and Charles [Zhu], VP. After they finish with their remarks, they will be available to answer your questions.

Before we continue, please bear with me as I take you through the company’s Safe Harbor policy. The discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in the company’s public filings with the U.S. Securities and Exchange Commission. China Medical does not undertake any obligation to update any forward-looking statements except as required by applicable law.

As a reminder, this conference call is being recorded. A replay of this conference call will be available via webcast on China Medical’s website. Now allow me to turn the call over to Dr. Chen.

Dr. Zhong Chen

Thank you. Ladies and gentlemen, welcome to our conference call. We have announced the sale of our HIFU business to Chengxuan International, one of our major shareholders and [inaudible] to Xiaodong Wu, our Chairman and CEO, and [a consideration] of $53.5 million in cash. Chengxuan will make a payment to the company upon the closing of the sale and two other payments during the year after the closing. We expect to close this sale before the end of this month and to record a gain from the sale. This transaction was unanimously approved by our board of directors, including four independent directors, before entering into the agreement with Chengxuan. Mr. Wu did not [involve] in making this decision of China Medical.

The [HIFU business] differs from the direction of our focus in the development of advanced IVD business. The HIFU business, which sells high-priced HIFU equipment, is seasonal and volatile, which while our advanced IVD business generated recurring revenues and high gross margin, given the conditions in the global financial markets, more stringent regulatory requirements on therapeutic equipment from the [inaudible] and job administration in China and the larger capital investments required to obtain U.S. and E.U. regulatory approvals for HIFU equipment, our board of directors and management team believe that the sale of the HIFU business is in our best interests. We will engage the independent value to determine a range of fair values for the HIFU business. The selling price to Chengxuan was within the fair value range. We will receive cash from the sale and plan to invest it in developing existing advanced IVD business to continue to generate recurring and growing revenues.

Mr. Wu advised us that the HIFU business will be managed by the existing mature and experienced HIFU management team and his [inaudible] commitment to us will not be affected by this transaction.

After the sale, we will become a pure advanced IVD player in China, with a particular focus on our fast-growing molecular diagnostic business.

Regarding the performance of the second fiscal quarter ended September 30, 2008, we achieved encouraging growth in both ECLIA and FISH business. For the ECLIA business, it continued to generate recurring revenue from the sale of our reagent kits. We have recently received SFDA approval for our HIV and reagent kit and expect to receive approval for our other reagent kit in the first half of 2009.

For the FISH business, we also received the first SFDA approval for our FISH probe in China. The approved [HER2] new breast cancer FISH probe enabled us to initiate a commercial promotion for the FISH probes. We believe that the commencement of the commercial promotion will increase public awareness of the [inaudible] benefits of FISH probes, which will result in long-term sustainable growth of our recurring revenues from selling our FISH probes. From our experience of obtaining the first SFDA approval for the HER2 new FISH probe, we are confident in gaining SFDA approvals for our other FISH probes and molecular diagnostic products on a timely fashion.

Recently, we have launched the successful development of a new FISH probe for the detection of epidermal growth factor receptor, [inaudible], in patients with non-small cell lung cancer and we will offer the probe to our hospital customers in January 2009. We are still developing other FISH probes under the FISH molecular diagnostic platform. As you know, we announced the acquisition of the HPV DNA Biosensor Chip and SPR-based Analysis System in October 2008, and we completed the acquisition in December 2008. We have outlined the potential benefits from the acquisition in the related press release.

Now we have [inaudible] a new molecular diagnostic platform which will create a new source of recurring and growing revenue for us, starting from the next fiscal year.

I have finished my remarks and I would like to turn the call over to Sam and he will give you an overview of the second fiscal quarter financial results. Sam, please.

Sam Tsang

Thank you, Dr. Chen and welcome, everyone. Let’s have a recap first -- our 2Q revenues were up 35.2% on a year-over-year basis. Net income was up 52.1% on a year-over-year basis. Our non-GAAP 2Q adjusted net income was up 46.8% on a year-over-year basis.

Diluted EPS for the quarter was RMB4.13 and $0.61. Diluted EPS on a non-GAAP basis for the quarter was RMB5.22, or $0.77. [Let’s now] look at more specific information for the quarter.

2Q revenues were up 35.2% year over year to RMB290.5 million, or $42.8 million. Our revenues are generated from three product lines, ECLIA, FISH, and HIFU.

Revenues from sales of our ECLIA were up 32% year over year to RMB122.2 million, or $18 million. The key driver in our ECLIA operation is the recurring revenue from the sales of the ECLIA reagent kits. We expect to grow in reagent kits to continue and the reagent kit revenue almost account for all our ECLIA revenues.

2Q revenues from the sale of our FISH were up 133.1% to RMB71.8 million, or $10.6 million. The significant growth was primarily due to the strong growth in our sales of FISH probes.

As of September 30, 2008, we have more than 300 large hospitals using our FISH probes.

2Q revenues from the sales of our HIFU increased 5.5% year over year to RMB96.5 million, or $14.2 million. We sold 33 HIFU units this quarter and have a backlog of 35 units.

Gross margin increased to 73.2% this quarter from 61.5% in 2Q07. The increase was because of the change in product mix by selling more higher gross margin and ECLIA reagent kits and FISH probes.

2Q operating expenses increased 61.4% year over year to RMB57.5 million, or $8.5 million. RMB expenses increased 43.8% year over year, mainly because of the development of new reagent kits and FISH probes, as well as non-cash stock compensation expense.

Sales and marketing expenses increased 174.8% year over year, mainly due to the expansion of our direct sales force for FISH, increased product promotional activities, and cost of the giving free ECLIA equipment to customers.

G&A expenses increased 32.3% year over year, primarily due to increased headcount and non-cash stock compensation expense.

Operating expenses as a percentage of revenue were 19.8% for the quarter, compared to 16.6% in 2Q07. 2Q interest income increased 32.3% year over year to RMB10.3 million, or $1.5 million, primarily due to interest earned on the net proceeds from the convertible [notes] of $276 million issued in August 2008.

2Q interest expense of RMB18.4 million or $2.7 million related to the interest expenses for the two convertible notes. The [inaudible] of the notes are 3.5% and 4% per annum respectively.

2Q interest expense of amortization of convertible notes issuance cost increased to RMB3.2 million, or $0.5 million, due to the issuance of the convertible notes in August 2008.

2Q income tax expense was RMB24.9 million or $3.7 million. The effective tax rate for 2Q08 was 17.5%.

We have submitted application for high-tech enterprise qualification and believe we meet the criteria of a high tech enterprise. Currently we are using 18% rate for our income tax computation for 2Q, in accordance with the transitional arrangement of the new income tax law.

2Q net income increased 52.1% year over year to RMB117.7 million, or $17.3 million. 2Q non-GAAP adjusted net income, which excludes stock compensation expense and amortization of acquired intangible assets, was up 46.8% to RMB154.3 million, or $22.7 million.

At September 30, 2008, we had a cash balance of about RMB2.7 billion, or $398.1 million.

Accounts receivable at September 30, 2008 was RMB325.6 million, or $48 million, representing a 7.8% increase from the June ending balance last quarter, while accounts receivable turnover days remained the same at 110 days.

We have recently completed the acquisition of the HPV [treatment] SPR system and [inaudible] a preliminary purchase price allocation for the acquisition. We allocated about $307 million to intangible assets, which will result in estimated annual amortization of about $16 million. We also allocated about $37 million to in-process R&D, which will be charged to the income statement in our 3Q08. The charge is a one-off expense item.

We will finalize the above allocations after we receive the evaluation report from the [inaudible].

We have discussed the rationale for the sale of our HIFU business and expect to close the transaction before the end of this month. We expect to record a gain from this transaction.

Due to the sale of the HIFU business, we have to reclassify the historical revenues, costs, and expenses of the HIFU business to discontinued operations after the closing of the sale.

As such, the revenues of certain classifications of HIFU revenues to discontinued operations for the [inaudible] financial year 2007 were RMB547.4 million, or $18.6 million.

We estimate the annual revenues for financial year 2008 ending March 31, 2009 to be in the range of RMB825 million, or $171.5 million, and RMB838 million, or $123.4 million, representing a year-over-year growth of 50.7% to 53.1%.

However, we are unable to estimate the non-GAAP adjusted net income and non-GAAP adjusted diluted EPS for the financial year 2008 for the time being, until the closing of the sale of the HIFU business. We expect to provide this estimate when we report 3Q08 results in February 2009.

This concludes our remarks. Now we will be happy to take your questions. Operator, please.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Ben Lee with Morgan Stanley.

Ben Lee - Morgan Stanley

Thanks for taking my call. I have a few questions. First, can you tell us how profitable was the HIFU business historically and what’s the outlook for the HIFU business this year and next year, so we can understand the profitability for HIFU going forward?

Sam Tsang

You probably will notice from the past few quarters the HIFU results or the growth from the HIFU has been decelerating. You can see the growth rate of HIFU. It is about 5.5% on a year-over-year basis. And you know the gross margin from the HIFU is about 70%, and so with the decreasing or lower growth rate from the HIFU business, you can see that the contribution to our company, China Medical, is decreasing. And also at the same time, you can see that contribution from our IVD business, ECLIA and FISH are increasing in terms of the revenue contribution as well as the gross margin improvement.

And you can also understand the business nature of the HIFU is the sales of high-priced HIFU equipment. This is basically materially the sales of equipment without consumables. And also you understand that recent conditions in the financial market and the credit market and we see that there is increasing business risk in these kind of sales of expensive equipment business. And so we expect that the outlook for the HIFU, actually the business increasing and also the possibility to experience negative growth in HIFU is very likely in the near future.

Ben Lee - Morgan Stanley

So if I can try to reframe my question a little bit -- in terms of if we look at operating profit for HIFU, is it fair to say your operating profit for HIFU is substantially lower than the corporate operating profit?

Sam Tsang

First, we don’t divide each business to the operating margin level because we share certain of the operating expenses by all the three businesses, HIFU, ECLIA, and FISH. But I can tell you for the major expense items, for example, G&A is equally allocated in general among the three businesses. For the selling expenses, because we are using distributors and so the selling expenses for HIFU is lower compared to FISH, and also ECLIA. But the R&D expenses, the portion of the HIFU business is pretty high because of the U.S. FDA clinical trials, and we expect the investment in the R&D expenses will be substantially higher in the next two to three years. We proceed on the U.S. clinical trial and also the E.U. clinical trial, so we continue investing in the HIFU clinical trial, the R&D expenses will be substantially higher than the current level.

Ben Lee - Morgan Stanley

Okay. I have another question on the selling price of HIFU. Can you talk about how the price was determined? What are the metrics that you are using to -- for us to understand how to look at the value of stock, value of the asset? Any similar divestitures you could reference to? And also, I think in your press release, you said you have engaged an independent party to give you a range of fair values. Can you tell us who is this independent party and what is the range of fair value?

Dr. Zhong Chen

I think I need to get the consent of the independent [inaudible] to disclose the name but it is a very large firm and very reputable and so this is the background of the independent [inaudible]. And also, they are using mainly the [inaudible] approach to estimate the value of the HIFU and provide us with a range of fair value. And this is the weapons we have to determine the value of the HIFU. At the same time, we tried to reference to other similar public companies and there is also similar HIFU player public company and we also compare to the market cap of that company as the weapons in determining the appropriate price we believe we can [inaudible] for sale of this HIFU business.

Ben Lee - Morgan Stanley

And what’s the name of that public company and the market cap that you are using?

Dr. Zhong Chen

I think again, we may not be in an appropriate position to mention the name of the company but you can actually [search] for another HIFU company which is also a public company to get the reference.

Ben Lee - Morgan Stanley

Okay. Thanks.

Operator

Our next question will come from the line of Jinsong Du with Credit Suisse.

Jinsong Du - Credit Suisse

Just a question regarding going forward, what will be our business outlook? I know that you have a top line guidance but in terms of margins, margin trend and also working capital requirements and return on capital, in terms of directionally, I understand you may not be able to quantify it but directionally what will be the trend in terms of just a few factors?

Dr. Zhong Chen

You know that the nature of our HIFU business is very seasonal and also the visibility is relatively low for this business because it depends on the receipt of orders from customers. And so after selling the HIFU business, our business becomes more simple [inaudible] IVD business with the majority of the revenue coming from the recurring sales of our ECLIA reagent kits, FISH probe, and in the future, the HPV chips. And so the visibility and also the stability of the revenue base is -- I would say that that’s with our HIFU business.

And so you also know that our IVD business, especially the molecular diagnostic business, for example, the FISH and also the upcoming HPV are in the very early stage of growth and so you can see from the result of the past few quarters the revenue growth from this molecular diagnostic business are pretty high. And so there is a lot of room for expansion and also the symmetry between this molecular diagnostic business. And also for profitability, you can see that for the past two quarters, the gross margin of the overall gross margin of the company improved fairly obviously for the past two quarters and is the result of the IVD business, the ECLIA reagent kits, and also the FISH probes. And also we mentioned in our HPV SPR acquisition, we expect the gross margin from the sales of the HPV chips is about 18%. So we will say that the current IVD business will provide China Medical a more higher level of gross margin level, and more predictable revenue base, which is recurring for us. And also most of our current molecular diagnostic business, which are in the early stages of growth. And also we are continuing to lower our more new products from the existing molecular diagnostic platforms, and so there is more room for the [inaudible] now diagnostic business.

Jinsong Du - Credit Suisse

Right. Just to follow-up on that, understandably historically the account receivable days for HIFU is longer than the IVD business, so do you expect a large reduction in terms of working capital requirements as a result of this divestment?

Dr. Zhong Chen

The accounts receivable from HIFU is longer in general, which is about 150 days for us. And so after selling the HIFU business, the accounts receivable of HIFU will be gone. But I don’t expect there will be much improvement in the current 110 days accounts receivable turnover days because we find that actually the collection from the hospital, especially the current [inaudible] large hospital customers, is normally in the range of about four to five months on average, and is the common practice in the industry because even though we provide 90 days credit to the large hospitals but because they are very big and they have a lot of payments to process, and so normally this hospital, they normally [inaudible] the payments in four to five months.

But the credibility of these large hospitals are very good and there is basically no risk in collecting directly from the customer, and [inaudible] the market [inaudible] for this collection time for the large hospitals.

Jinsong Du - Credit Suisse

Right. Talking about cash, given the [inaudible] issuance, the HPV testing acquisition and now the divestment of HIFU, so if the selling of the HIFU transaction completes by the end of this month, then what will be your estimated cash position at the end of December?

Dr. Zhong Chen

Let’s use the September cash balance. We have about roughly $400 million. And if we take out the $345 million for the HPV SPR acquisition, we have about $55 million, and with this additional $53 million, so from $5 million initial [inaudible], about $110 million using the September 30 numbers. And to December, we will also have a positive operating cash generated from the ECLIA and FISH, as well as partly from the HIFU business and also in the future, we will continue to have very stable operating cash inflow from this business. So we mentioned that we expect to have a pretty healthy and strong cash position, which is pretty good in such a credit environment and also provide us the room to invest in our high-growth molecular diagnostic business.

Jinsong Du - Credit Suisse

Just a question regarding the ongoing strategy, I noticed that during the call, and also in the press release, you keep mentioning molecular diagnostics instead of IVD. So it makes me wonder, going forward does that mean that you are going to increasingly focusing on molecular diagnostics and probably -- basically what will be the future of ECLIA and maybe some other related products as well, because you did acquire a smaller IVD player before as well. Do you expect going forward for the long-term, the majority of your revenue will be from the molecular diagnostics products?

Dr. Zhong Chen

Probably Mr. Wu may want to add some more input after my comments, and after the HIFU sales, the ECLIA revenue is -- it compares a higher proportion of the company’s current existing revenue compared to FISH. But if FISH as well as the HPV chips or SPR platform, we believe there is more room for the growth because they are [inaudible] the molecular diagnostics technology platform and also they are in the early stage of growth in the sales in China. So we believe that we will have more focus in this fast-growing molecular diagnostic business, and probably Mr. Wu can add some more input in this regard.

Xiaodong Wu (Translation)

China Medical in the future will be more focusing on the advanced molecular diagnostic technologies instead of focusing on the traditional or more mature IVD technologies. The benefits of some molecular diagnostic segment is that as people gain more and more knowledge about the gene technology and more and more applications and technologies are being discovered to be used for the clinical diagnosis using the molecular diagnostic technologies, so by focusing on this platform, we can generate sustainable growth and with the high margin as we outlined in the past.

And in China, there are limited companies that is sizable and also has very good molecular diagnostic technologies. So if we can identify and develop the good molecular diagnostic technologies it will position the company in a very good market position.

For the ECLIA markets, it still remains as a very attractive market for the company. However, it’s also attracting other new players, such as the existing [inaudible] or radio-immunoassay companies to enter into this market to compete with us in the future. So I believe the company’s management team made the right decision to focus on developing more advanced molecular diagnostic markets to keep our competitive advantages.

We have obtained a very high market share in the ECLIA market and as we are entering the large tier-one hospitals using the molecular technologies like FISH, we believe it will generate synergies for ECLIA as well and ECLIA will remain as a very profitable and attractive business unit for us as well.

We expect in the next two to three years our molecular diagnostic technology business can generate more than 70% of the revenue for the company.

Jinsong Du - Credit Suisse

Is that 70% based on the current business or based on what Mr. Wu has said, should we expect anymore acquisitions within the molecular diagnostics field?

Xiaodong Wu (Translation)

What I have mentioned is only talking about our existing technologies and business.

Jinsong Du - Credit Suisse

Right, but is it possible for China Medical to do additional acquisitions in that field in the foreseeable future?

Xiaodong Wu (Translation)

Currently we don’t see any big acquisition targets for the molecular diagnostic platform. However, we think it’s possible to identify some of the smaller acquisition candidates that can provide the good PCR based or DNA chip based technologies for the company in the future.

Currently the company has a very good cash position and also as I mentioned, we don’t see very large acquisition targets, so we don’t see any need for any further financing [requirements].

Jinsong Du - Credit Suisse

All right. Thank you.

Operator

(Operator Instructions) Our next question will come from the line of Hoki Luk with Citigroup.

Hoki Luk - Citigroup

Thanks. I have a question regarding FISH -- based on the slowing economy in China, can you talk about whether you have seen slow-down on the FISH franchise and if you have not, whether you would expect to see the growth rates to decline slightly? And what kind of impact do you expect the slow-down to have on FISH and also your upcoming launch on HPV?

Xiaodong Wu (Translation)

As we know, the Chinese economy is slowing down. However, so far we haven’t seen the impact on the healthcare markets. As you know, the Chinese Government is planning to spend [4,000 billion] to stimulate the economy and part of that fund will go into the healthcare industry. It’s going to be mainly used in improving the healthcare insurance coverage and we think the healthcare industry will benefit from this. So currently I don’t see the slowdown and we don’t expect the slow-down for our FISH and new HPV business because the FISH is still in a very early stage of high growth stage, and by adding new customers and improving the utilization rate for the existing customers, it will generate a very high growth rate for us. So we are confident that in the near future, the FISH business will be sustained at this high growth rate. And also it’s the same case for our new HPV DNA chip. It’s a new technology to be launched to the hospital, so it won’t be affected by the slow-down, if there is any in this industry.

Hoki Luk - Citigroup

Okay, and then for the HPV payment, you are going to do that in two installments -- can you just give us a sense of how much you will pay for each installment?

Dr. Zhong Chen

Actually, we make a payment when we closed the HPV acquisition and we have another three payments to make during the year, so it is up to [inaudible]. And for the closing of the HPV acquisition, we pay about half of the price.

Hoki Luk - Citigroup

Okay, and then it will be equally paid out for the next three payments?

Dr. Zhong Chen

It is not equal. The balance will be paid in three different installments over the one-year period.

Hoki Luk - Citigroup

Okay. All right, thank you.

Operator

Our next question will come from the line of Lewis Fan with Brean Murray Carret. Please proceed.

Lewis Fan - Brean Murray Carret

Thanks for taking my call. My first question is again related to the sale of HIFU. I wonder if the management could give us any guidance on the sale of HIFU will have impact on R&D and SG&A expenses going forward -- more specifically, do you expect what kind of a percentage savings are we going to have on those expense items?

Sam Tsang

I think the most obvious indication will be on our R&D expenses because we are going to start the clinical trial for the U.S. FDA application and also the [inaudible] E.U. application, so that means in the next two to three years, we will have to spend a lot of money carrying out these over 100 patient applications of clinical trial and this will cost us a lot of money.

And now with the sale of HIFU, that means we don’t need to spend such money for the clinical trail, and so this potential huge investment in R&D will not happen, so this is probably the benefits from in the R&D.

And for selling expenses because the distribution channel for the HIFU equipment is basically to the distributors and so the selling expenses is relatively low compared to our other business.

And G&A, basically it is comparable to the other business for the share of G&A expenses for the company.

Lewis Fan - Brean Murray Carret

Okay, so I guess you can’t really quantify like how much expense you are going to incur for the HIFU clinical trial over the next couple of years?

Sam Tsang

Actually, we expect if we proceed with the U.S. and European clinical trial, probably we need to spend more than $20 million in the next two to three years.

Lewis Fan - Brean Murray Carret

Okay, that’s good to know. Okay, thank you. The next question is based on your press release, you say you are going to do a one-time in-process R&D charge of $37 million with regard to the HPV acquisition. So when you take that $30 million out, so I guess we are expecting a negative fiscal 3Q net income. I just want to make sure that’s correct. And if we have a negative net income, how do you expect to treat the taxes?

Sam Tsang

That’s correct. We will face a one-time charge of the IP R&D of HPV SPR acquisition in the December quarter, this quarter. But at the same time, we expect to close the sale of the HIFU and we expect we will record a gain from this transaction, so whether it will be completely offset, more than offset or less than offset depends on the calculation of the gain from the sale of HIFU. So it may not be the case you expect to incur a loss in the December quarter, depending on whether we can, as we expect, close the HIFU sale transaction in this -- by the end of this month and also to calculate what is the gain from the sale of this HIFU business.

Lewis Fan - Brean Murray Carret

Well, in that case, where would you book the sale in the income statement? Where would you book the sales for HIFU then?

Sam Tsang

The sales for HIFU will be a gain we factored in the content of the net income of the entire company in this quarter, but it is part of the total net income of the company.

Lewis Fan - Brean Murray Carret

Okay, just one follow-up question, again with regard to HIFU, what’s the net income ratio does HIFU have anyway?

Sam Tsang

Unfortunately we normally we only look at the margin level of HIFU up to gross margin and because the operating expenses, especially D&A expense, we don’t normally divide these expenses into each business. And so -- and also as well as the interest income, interest expenses, et cetera. And so actually we don’t have that net margin for the HIFU in particular.

Lewis Fan - Brean Murray Carret

Okay, fair enough. Thank you very much.

Operator

Our next question is a follow-up question from the line of Ben Lee with Morgan Stanley. Please proceed.

Ben Lee - Morgan Stanley

Thanks. I just wanted to take a quick follow-up on the previous question by Lewis -- in terms of the gain of sale of HIFU, how should we think about -- what’s the cost for HIFU, or if you can remind us, what was the cost for HIFU when you originally bought this business, so we can understand the magnitude of the gain?

Sam Tsang

When we calculated the gain, it is basically using the selling price of these HIFU sales that are $53.5 million minus the cost, which is basically including the net assets of the HIFU business. So the net assets of the HIFU business normally include the assets like accounts receivable of HIFU, inventories of HIFU, fixed asset of HIFU, et cetera, minus the liabilities of HIFU, for example, the accounts payable and other related payables or liabilities related to HIFU to get the net assets of the HIFU business, and which is the cost of our HIFU business.

Ben Lee - Morgan Stanley

Okay, so the actual assets of HIFU is probably minimal compared to the inventories and accounts receivables and maybe other items -- is that fair to say that?

Sam Tsang

Can you repeat the first sentence you mentioned?

Ben Lee - Morgan Stanley

Okay.

Sam Tsang

What compared to --

Ben Lee - Morgan Stanley

So of all the parameters you’ve mentioned, which ones will be the predominant factor to determine the cost of HIFU business?

Sam Tsang

I think among the assets of HIFU, probably accounts receivable is relatively big items among other assets of HIFU.

Ben Lee - Morgan Stanley

Okay. All right, thanks.

Operator

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to our CFO, Sam, for any closing remarks.

Sam Tsang

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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