China Energy Corp. Reports Financial Results for Third Quarter of Fiscal Year 2010

HOHHOT CITY, China, Oct. 18 /PRNewswire-Asia-FirstCall/ -- China Energy Corporation (OTC Bulletin Board: CHGY), ("China Energy" or the "Company"), a coal trader and a producer and processor of raw coal for domestic heating, electrical generation, and coking purposes for steel production and a supplier of heating and electric energy services, in Inner Mongolia, announced financial results for the third quarter of its fiscal year ending August 31, 2010.

Summary Financials

Third Quarter Results

For the quarter ended August 31, 2010, the Company reported revenue of $21.2 million, a 112% increase over revenue of $10.0 million in the third quarter of fiscal year 2009. Quarterly sales from the Company's coal group increased 87% to $17.2 million, or 81% of total sales, compared to $9.2 million, or 93% of total sales in the prior-year quarter. As a component of this, 45% of total company sales came from coal production, and 36% came from coal trading during the quarter. China Energy produced approximately 215,000 metric tons of coal in the third quarter of 2010, compared to 136,000 metric tons in the same period of fiscal year 2009. The 58% year-over-year increase was due to the fact that the production at LaiYeGou coal mine was partially shut down for the installation of the long wall automatic mining equipment and normal production resumed in mid July 2009 with the completion of the installation and adjustment of the equipment. Volume of coal sold by our proprietary trading business was approximately 144,000 metric tons during the three months ended August 31, 2010, compared to 114,000 metric tons in the comparable three months in 2009. This increase was mainly attributable to the increased railway transportation quota granted for 2010.

Sales from Heat Power Group totaled $4.0 million in the third quarter of 2010, or 19% of total sales compared to $0.8 million, or 7% of total sales in the prior-year quarter. The Company received a one-time government subsidy amounting to $3.3 million in connection with providing heat at the reduced rate set by the government to ensure that the local residents in the XueJiaWan area can afford to make the payments.  

"Due to our expanded production capacity and the efficiency of our long wall mining equipment, we expect revenue from coal production to remain robust, and expect incremental growth from our proprietary coal trading operation as we have been granted additional quota for space on trains from the local railway bureau," stated WenXiang Ding, chief executive officer and president. "Additionally, our momentum, financial strength, existing infrastructure, and proximity to additional coal resources in the region position the Company for expansion through potential acquisitions. We also expect the continued development of the XueJiaWan district to fuel growth in our Heat Power segment."

Cost of goods sold in the third quarter of fiscal year 2010 was approximately $12.5 million, compared to approximately $7.8 million in the third quarter of 2009. Gross profit was $8.7 million and the gross margin was 41% in the quarter, compared to $2.2 million in gross profit and a gross margin of 22% during the same period in fiscal year 2009. The year-over-year gross margin improvement was due to higher margins from its Coal Group and the $3.3 million government subsidy for the Heat Group.

Total operating expenses for the third quarter of fiscal year 2010 were approximately $2.3 million, or 11% of revenue, compared to $1.8 million or 18% of revenue in third quarter fiscal year 2009. Selling and marketing expenses in third-quarter fiscal year 2010 were $1.3 million compared to $0.8 million in the same period in fiscal year 2009 due to investments to expand its proprietary coal trading business. General and administration expenses totaled $1.0 million, flat versus last year, due to lower office expenses offset by higher salaries and benefits. Operating margins improved to 30% from 4% in the three months ended August 31, 2010.

Net income during the quarter totaled approximately $4.3 million, or $0.10 per share, compared to a loss of approximately $0.5 million, or $0.01 per share in the third quarter of fiscal year 2009. Third quarter 2010 net income included a one-time $3.3 million government subsidy, which did not occur in the third quarter of 2009. The weighted average common shares outstanding were 45.0 million in both periods.

Nine Month Results

For the nine months ended August 31, 2010, the Company reported revenue of $62.4 million, a 222% increase over revenue of $19.4 million in the same period of fiscal year 2009. Nine-month sales from the Company's Coal Group increased 311% to $51.0 million, or 82% of total sales, compared to $12.4 million, or 64% of total sales in the prior year. As a component of this, coal production and coal trading each accounted for 41% of total revenues in the first nine months of 2010. China Energy produced approximately 598,000 metric tons of coal during the nine months of fiscal 2010, compared to 158,000 metric tons in the same period of fiscal year 2009. The 278% year-over-year increase in production from the Company's Coal Group was primarily driven by the fact that production at the Company's LaiYeGou coal mine was partially shut down in 2009 due to the $10 million expansion and improvement program. Volume of coal sold by our proprietary trading business is approximately 497,000 metric tons during the nine months ended August 31, 2010, compared to 147,000 metric tons in the comparable nine months in 2009. The 238% year-over-year increase in proprietary coal trading volumes was mainly due to our railway transportation quota increasing from 500,000 tons in 2009 to 840,000 tons in 2010. Sales at the Heat Power Group totaled $11.4 million, or 18% of total sales compared to $7.0 million, or 36% of total sales in the same period of last year.

Cost of goods sold for the nine months ended August 31, 2010 was approximately $38.4 million, compared to approximately $16.7 million in the prior year. Gross profit was $24.0 million and the gross margin was 39% in the nine months of fiscal 2010, compared to $2.7 million in gross profit and a gross margin of 14% during the same period in fiscal year 2009.

Total operating expenses for the nine months of fiscal year 2010 were approximately $6.2 million, or 10% of revenue, compared to $3.3 million or 17% of revenue same period in fiscal year 2009.

Net income for the nine months of fiscal year 2010 totaled approximately $12.7 million, or $0.28 per share, compared to a loss of approximately $2.0 million, or $0.04 per share in the same period in fiscal year 2009. Net income margins were 20% for the nine months of fiscal year 2010. Per share amounts for third quarter 2010 and 2009 are based on 45 million shares outstanding.

Balance Sheet and Cash Flow

Cash and cash equivalents totaled $4.2 million on August 31, 2010 compared to $5.1 million on November 30, 2009. The Company had total assets of $124.2 million versus total liabilities of $86.6 million as of August 31, 2010. For the first nine months of fiscal year 2010, the Company generated $9.8 million in cash from operations versus $0.3 million in the same period of fiscal year 2009 due to higher income from operations and lower term deposit requirements.

Financial Guidance and Business Updates

The Company is reaffirming its previously reported fiscal year guidance, and anticipates reporting between $17 million and $18 million in net income for its fiscal year ending November 30, 2010. The midpoint of this range represents an increase of 243% from fiscal year 2009.

Management anticipates sales of its Coal Group, which includes coal mining and sales as well as coal trading, will represent approximately 80% to 90% of revenues during 2010. The Company expects to produce an aggregate of approximately 800,000 metric tons of coal for the fiscal year ending November 30, 2010. China Energy produced approximately 598,000 metric tons of coal in the first nine months of fiscal 2010 compared with 158,000 metric tons in the same period last year. The Coal Group's current annual railway transportation quota increased 68% from 2009 to 840,000 metric tons, 660,000 tons of which was acknowledged by local railway bureau in writing. Based on the Company's long track record of successfully filling the extra quota, China Energy will be able to grow its coal trading business through increased quotas granted by the local railway bureau in future.

Inner Mongolia became the largest coal producing region in China last year, producing approximately 637 million metric tons of coal. Currently PRC government policy encourages industry consolidation. According to Inner Mongolia Autonomous Region Bureau of Coal Industry, from 2000 to 2009, the number of coal mines fell from 2,009 to 501 as a result of consolidation and shut-downs. China Energy believes that this consolidation trend will lead to valuable, reasonably-priced acquisition opportunities for it in the marketplace.

The Company also expects higher levels of sales from the Heat Power group due to a 29% increase in coverage area of the Company's heating operations and an increase in the volume of electricity sold by its electric power operations. The Company's guidance does not include any contribution from future acquisitions by the Company. Management will continue to evaluate its business outlook as necessary and communicate any changes on a quarterly basis or when appropriate.

About China Energy Corporation

China Energy Corporation produces and processes raw coal for domestic heating, electrical generation and coking purposes for steel production primarily in the People's Republic of China, and acts as a brokerage in facilitating coal trade transactions. The Company produces coal through its subsidiary Inner Mongolia Tehong Coal Group Co, Ltd. ("Coal Group") and supplies heating and electricity requirements throughout the XueJiaWan district through its subsidiary Inner Mongolia Zhunger Heat Power Co., Ltd. ("Heat Power"). Through Heat Power, China Energy operates a thermoelectric plant and 32 heat transfer stations located in XueJiaWan, Ordos City in which the Company has a monopoly for heating supply granted to the Company by the local government. For additional information on China Energy Corporation see http://www.ceccec.com .

Cautionary Statement Regarding Forward-Looking Information

This press release may contain certain "forward-looking statements" relating to the business of China Energy Corporation, and its subsidiary companies. All statements, other than statements of historical fact included herein are "forward-looking statements" including statements regarding: the impact of the proceeds from the private placement on the Company's short term business and operations, the general ability of the Company to achieve its commercial objectives, including the ability of the Company to sustain growth; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov)

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SOURCE China Energy Corporation