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KH: Slow Growth?

|Includes: Medtronic plc (MDT)

 KH reported first quarter earning report this morning. After conference call, KH's share price dropped through $18 level. Obviously, the market was disappointed with KH's slower than expected net income growth. Is KH really slowing down right after IPO? Let's take a closer look. 

This is from KH's press release

"Third quarter 2010 net revenue increased 33.9% to RMB63.6 million ($9.5 million) from RMB47.5 million in the third quarter of 2009. 
Gross profit increased 35.6% to RMB45.7 million ($6.8 million) from RMB33.7 million in the prior year period.

Gross margin for the third quarter of 2010 was 71.9%, compared to 71.0% in the third quarter of 2009. In addition, gross profit increased sequentially by 17.7% in the third quarter of 2010, from gross profit of RMB38.8 million in the second quarter of 2010.



Operating income increased 52.8% to RMB32.4 million ($4.8 million) in the third quarter of 2010, from RMB21.2 million in the comparable period of 2009. Operating margin was 50.9% in the third quarter of 2010, compared to 44.6% in the prior year period."

The only item on the income statement that disappointed investors is the growth rate of net income. 

"Net income was RMB26.6 million ($4.0 million), equivalent to RMB 0.73 ($0.11) per diluted ADS, in the third quarter of 2010, compared to RMB24.4 million, equivalent to RMB 0.09 per diluted ADS, in the prior year period. Non-GAAP net income, which excludes share based compensation expenses, increased 4.4% to RMB28.2 million ($4.2 million) from RMB27.0 million in the prior year period."

So why Net Income growth is slowing down? 

If we check its income statement line by line, we can find in 2009, KH got RMB 6.6 million grants from government. In 2010, the grand decreased to RMB 0.33. Compared to its previous income statements, I think it is one time item. If we exclude this item, 
KH's adjusted income before tax should be RMB 30.3 million in the past quarter and RMB 21.6 million in the same period in 2009. The growth rate is more than 40%.

KH had RmB 2.9 million foreign exchange loss. My guess for the large one time foreign exchange loss is related to its IPO proceeds. A small part maybe from its export business. 

So my conclusion is: KH is still a high growth company. 

Disclosure: long KH