China HGS Announces First Quarter Fiscal 2012 Financial Results

HANZHONG, China, Feb. 14, 2012 /PRNewswire-Asia-FirstCall/ -- China HGS Real Estate Inc. (NASDAQ: HGSH) ("China HGS" or "the Company"), one of the largest residential and commercial property developer in China's southern Shaanxi Province, today announced its financial results for the first quarter ended December 31, 2011.

Fiscal First-Quarter 2012 Highlights:

• Customer deposits reached $25.1 million (current portion $12.9 million), expected to be transferred to revenue when related construction is completed and property delivered
• Net income increased to $1.0 million, or $0.02 per basic and diluted share, compared with a loss of $0.1 million in the year-ago period

"While we experienced strong year-over-year results, the first quarter of fiscal 2012 was an extremely challenging period for the Company," stated Mr. Xiaojun Zhu, Chairman and Chief Executive Officer of China HGS Real Estate, Inc. "The restrictive policies in first- and second-tier cities started to have an impact on the real estate market in third- and fourth-tier cities in late 2011. As a result, our sales volume dropped significantly compared to the average quarterly sales during fiscal 2011. Our sales, gross margin and net income for the three months ended December 31, 2011 represented approximately 4%, 7% and 6% of fiscal 2011 annual sales, gross margin and net income, respectively. We expect the deterioration in market conditions to continue into the second fiscal quarter of 2012, which will put our business under increasing pressure."

"Despite the declining transaction volume and cooling real estate market, housing prices in third- and fourth-tier cities and counties have not shown a substantial correction," Mr. Zhu continued. "With some of our current properties under construction scheduled to be completed and delivered to buyers in the third and fourth quarter of fiscal 2012, we believe the Company's performance will improve in the second half of the year."

First-Quarter Fiscal 2012 Results

During the fiscal first quarter ended December 31, 2011, revenue increased 1,740.3% to $2.5 million, from $0.1 million in the year-ago quarter. The increase was mainly attributable to higher unit sales prices and extenuating circumstances in the comparable period of 2011. The decrease in revenue recognized for the three months ended December 31, 2010 was attributable to the delay of revenue recognition caused by the inability of the Company to obtain property sales invoices from the Hanzhong City Local Taxation Bureau during the first quarter of fiscal 2011. As a result, the Company could not transfer the property ownership to the buyers and the related sales were deferred.

For the quarter ended December 31, 2011, China HGS sold a total of 37 units of residential and commercial properties, of which 24 units were derived from sales of the Yangzhou Pearl Garden project, which generated $1.1 million in revenue, or 45.4% of the Company's quarterly sales. The average sales price at Yangzhou Pearl Garden was $444 per square meter for the three months ended December 31, 2011, a year-over-year increase of $61 per square meter, or 16%, compared to fiscal 2011's average selling price of $383 per square meter.

In the fiscal first quarter, China HGS generated all of its revenue from the following three ongoing real estate projects located in Hanzhong and Yang counties: Mingzhu Nanyuan and Mingzhu Beiyuan (Hanzhong), Yangzhou Pearl Garden (Yang County), and Mingzhu Xinjun. Below is a breakdown of project sales in the first quarters of fiscal 2012 and fiscal 2011:

Gross profit was approximately $1.4 million for the three months ended December 31, 2011 as compared to approximately $0.001 million for the three months ended December 31, 2010, an increase of $1.4 million, which was mainly attributable to the increase in revenue. The overall gross profit as a percentage of real estate sales before tax was 57.7% for the three months ended December 31, 2011, compared to 1.0% in the same quarter last year, mainly due to the increase in sales and more commercial properties with higher selling prices sold in the first quarter of fiscal 2012.

Total operating expenses increased by 253.9% or $259,152 to $361,213 for the three months ended December 31 2011 from $102,061 for the three months ended December 31, 2010 as a result of an increase in general and administration expenses of $247,626. The increase in general and administrative expenses for three months ended December 31, 2011 was primarily due to the fact that there was a significant recovery of general administrative expenses for the three months ended December 31, 2010 as the Company entered into a settlement agreement in December 2010 with respect to fees owed in connection with its reverse acquisition in 2009, pursuant to which approximately $167,000 of general and administrative expenses were recovered. A portion of the increase in general administrative expense for the three months ended December 31, 2011 was also attributed to higher executive compensation, taxes and travel expenses.

Operating income increased to $1.1 million in the fiscal first quarter of 2012, from a loss of $0.1 million in the same period a year ago.

The general statutory income tax rate for China domestic enterprises is 25%. However, as an incentive to stimulate the local economy and encourage entrepreneurship, the local tax authority of Hanzhong City has assessed China HGS for income taxes at a rate of 1.25% on revenue in Yang County and 2.5% on revenue in Hanzhong, rather than at the statutory rate. As a result, income tax expense for the quarter ended December 31, 2011 was $48,338, representing a 4.5% tax rate. China HGS has received a favorable tax treatment from the local government for several years, and the Company does not expect any change in this tax treatment in the foreseeable future.

Net income was $1.0 million in the first quarter of fiscal 2012, or $0.02 per basic and diluted share, compared to a net loss of $0.1 million, or $0.00 per basic and diluted share, in the year-ago period. Diluted earnings per share were calculated using a weighted average of 45.1 million shares in the fiscal first quarter.

Financial Condition

As of December 31, 2011, China HGS had $0.4 million in cash and cash equivalents, as compared to $8.8 million as of September 30, 2011. The decrease in cash was primarily due to a $9.1 million deposit for land use rights. The decrease in cash was partially offset by cash generated from operating income and increased customer deposits.

As of December 31, 2011, China HGS had working capital of $34.9 million, an increase of $2.4 million as compared to $32.5 million as of September 30, 2011. Shareholders' equity was $71.0 million, as compared to $69.6 million as of September 30, 2011. The Company had no long-term debt and used $8.5 million in operating cash during the three months ended December 31, 2011. As discussed above, operating cash flow was mainly affected by the land use right security deposit of $9.1 million during the three months ended December 31, 2011.

China HGS's principal need for liquidity and capital resources is to maintain working capital sufficient to support its operations and to make capital expenditures to finance the growth of its business. To date, the Company has financed its operations primarily through cash flows from operations and borrowings from its principal shareholder. Due to the credit-tightening policies in China, banks were very slow to approve mortgage lending during the three months ended December 31, 2011. As a result, China HGS received fewer customer deposits from the pre-sale units which caused the cash and restricted cash balances to decrease to approximately $1.3 million at December 31, 2011. Such balances have slowly started to increase to over $1.8 million as of January 31, 2012.

Business Outlook

The Company keeps a vigilant watch on the impact of the restriction policies on the real estate market.  The increasingly restrictive policies started to have a significant impact on the real estate market in Tier-3 and Tier-4 cities in late 2011. These policies also negatively affected buyers' confidence, with some buyers taking a wait-and-see attitude. As a result, the sales volume for the three months ended December 31, 2011 dropped significantly compared to the average quarterly sales during fiscal 2011.

The People's Bank of China ("PBOC") posted a statement on its website on February 7, 2012, indicating that the PBOC would guarantee lending support to affordable housing projects and ensure that loan demand from first-time home buyers is met. With the ease of the mortgage policies from the PBOC and the lowering of mortgage rates by certain commercial banks in February 2012, the Company expects to see improvement of the real estate market in the remaining quarters of fiscal 2012.

"We believe the fundamentals underpinning real estate demand remain strong. Since most of our customers are first-time home buyers, and our affordable housing units are in the pre-sales stage, we expect our cash flow will continue to improve in the first half of 2012. Moving forward, we intend to remain focused on our existing construction projects in Hanzhong city and Yang County, deepen our institutional sales network, enhance our cost and operational synergies, improve cash flows, and strengthen our balance sheet. We expect these imperatives will help us cope with this difficult period and better position us to capitalize on opportunities during a future market upturn," added Mr. Zhu.

About China HGS Real Estate Inc.

China HGS Real Estate Inc., through its wholly owned subsidiary, Shaanxi Guangsha Investment and Development Group Co., Ltd., has specialized since 1995 in real estate development in China's third-tier and fourth-tier cities. The Company's real estate properties include multi-layer, sub-high-rise, and high-rise apartment buildings. The Company possesses the national Grade-I real estate qualification and was ranked as the No. 1 property developer in Hanzhong, Shaanxi Province in terms of market share in 2007, 2008, 2009, and 2010 successively.

Forward-looking Statements:

This press release contains certain statements that may include 'forward-looking statements'. All statements other than statements of historical fact included herein are 'forward-looking statements'. 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. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. 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. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

Contact:

Company Contact:
Mr. Randy Xiong, Deputy GM
E-mail: [email protected]
Tel: +86 (91) 6262 2612

Investor Relations Contact:
Jon Cunningham
RedChip Companies, Inc.
1-800-733-2447, Ext. 107
[email protected]
http://www.redchip.com

SOURCE China HGS Real Estate Inc.