China Oumei Real Estate Inc. Reports Fourth Quarter and Year 2010 Results

Fiscal Fourth Quarter 2010 Highlights

• Total sales decreased 58.1% to $21.7 million in the fiscal fourth quarter of 2010 from $51.8 million in the fiscal fourth quarter of 2009.
• Gross profit decreased 71.8% to $6.2 million from $21.9 million in the fourth quarter of 2009.
• Gross margin decreased to 28.4% from 42.2% in the fourth quarter of 2009.
• Operating income decreased 74.2% to $4.9 million from $19.0 million in the fourth quarter of 2009.
• Net income increased 50.2% to $20.9 million from $13.9 million in the fourth quarter of 2009.
• Diluted net income per share increased to $0.62 from $0.46 per share in the fourth quarter of 2009.

Fiscal Year 2010 Highlights

• Total sales increased 17.2% to $110.5 million from $94.3 million in FY 2009.
• Gross profit decreased 7.5% to $33.3 million from $36.0 million in FY 2009
• Gross margin decreased 8.1 basis points to 30.1% from 38.2% in FY 2009.
• Operating income decreased 14.1% to $26.4 million from $30.8 million in FY 2009.
• Net income increased 65.2% to $34.9 million from $21.2 million in FY 2009.
• Fully diluted net income per share increased to $1.07 from $0.70 per share in FY 2009.

Mr. Weiqing Zhang, Chief Executive Officer of China Oumei, said, "We are pleased to have achieved our FY 2010 revenue and earnings targets in a year influenced by an increasingly challenging macroeconomic environment in our industry. Our Dongli Garden and Longhai Mingzhu projects were the primary revenue contributors during 2010, accounting for 56% of the year's sales. Our growth was driven by our focus on middle-income customers in second-tier and third-tier cities in one of the most rapidly growing coastal markets and economic regions in China. Those markets are characterized by the rapid emergence of a large middle-income population and accelerating urbanization. These growth drivers, combined with continued progress on our cost-improvement initiatives, make us feel confident of our outlook for FY 2011."

Fiscal Fourth Quarter 2010 Results

Total sales for the quarter ended December 25, 2010 were $21.7 million compared with $51.8 million for the same period of 2009, a decrease of 58.1%. The decrease was primarily attributable to two major projects, Longhai Mingzhu and Dongli Garden. For the Longhai Mingzhu project, a significantly higher number of contracts were signed in the fourth quarter of 2009 (as the project entered its peak selling phase at 80% completion) than in the same period of 2010. For Dongli Garden Phase I, the fourth quarter of 2009 was the peak season of the villagers (residents who were the prior holders of the land use rights) relocation process, which continued into 2010 and tapered off in the second half of 2010.

Gross profit for the fourth quarter of 2010 was $6.2 million compared with $21.9 million for the same period in 2009, a decrease of 71.8%. Gross margin was 28.4% compared with 42.2% for the same period last year. The decrease in the gross profit was due to the decrease in total sales as noted above and a compression in gross profit margin. In the fourth quarter 2010, for the Longhai Mingzhu projects, we recorded an additional $2.1 million in cost of sales to account for a portion of the difference between book value and the fair market value of the assets when we acquired the entity that owned the project, which significantly contributed to the decrease in the gross profit margin. Another contributing factor is the fact that in the fourth quarter of 2009 we sold a significantly higher number of accessory spaces (storage units and garages), to which no construction cost was allocated, leading to a higher gross profit margin in the fourth quarter of 2009 than in the fourth quarter 2010.

Total operating expenses for the fourth quarter of 2010 were $1.2 million, or 5.7% of sales, compared with $2.8 million, or 5.5% of sales, for the same period last year.  Such decrease was mainly due to higher recovery of bad debts and lower general and administrative expenses. Compared with the fourth quarter of 2009, the Company put more effort in the fourth quarter of 2010 into collecting receivables, particularly focusing on projects that previously had high receivable amounts outstanding, such as Qilu Textile Centre, Fuxiang Huayuan, and Longhai Lidu. General and administrative expenses were lower, fourth quarter to fourth quarter, because the Company incurred more land appreciation tax in the fourth quarter of 2009 than in the same period of 2010. It also incurred expenses in the fourth quarter of 2009 in anticipation of the April 2010 reverse acquisition of Leewell Investment Group Limited and a concurrent private placement transaction, which were absent in the fourth quarter 2010.

Operating income for the quarter ended December 25, 2010 was $4.9 million, or 22.7% of sales, compared with $19.0 million, or 36.8% of sales, for the same period last year, a decrease of 14.1%. The decrease in operating income was primarily due to lower sales, which outpaced the decrease in operating expenses.

Other income (net of other expenses) for the fourth quarter 2010 was $23.7 million, compared with $0.1 million for the same period of last year. The increase was primarily due to a sale of land use rights in the fourth quarter of 2010. On December 16, 2010, the Company executed a buyout transaction with the government of Licang District, Qingdao, in which the government agreed to pay approximately $23.7 million in exchange for the pre-development land use right in connection with our planned Dongli Garden II project. We had previously planned to build residential units on the land, subject to the government's re-zoning procedure. Prior to the transaction, the historical cost of the land use right was zero since it was categorized as "state allocated land," which had no value until zoned by the government for commercial development. Therefore, no cost was incurred in connection with this transaction, and the income of approximately $23.7 million was included in other income.

Net income for the fourth quarter of 2010 was $20.9 million, or $0.62 per diluted share, an increase of 50.2% from $13.9 million, or $0.46 per diluted share, for the same period last year.

Full Year 2010 Results

Total sales for FY 2010 were $110.5 million compared with $94.3 million for FY 2009, an increase of 17.2%.  The increase was primarily as a result of our sales of new units in our Weihai International Plaza and Xingfu Renjia projects in FY 2010. No revenue was recognized for these projects in FY 2009.

Our gross profit decreased 7.5% to $33.3 million in FY 2010 from $36.0 million in FY 2009. Gross profit margin (gross profit as a percent of sales) was 30.1% for FY 2010 and 38.2% for FY 2009. The decrease in gross profit margin was partly due to sales of new properties related to villager relocation efforts for our Dongli Garden project, which contributed approximately 26% of sales in FY 2010 compared with 12% in FY 2009. The project was a joint effort between China Oumei and local government agencies; Phase I of the project mainly involved relocating villagers previously residing on the parcel designated for Phase II. Therefore, as part of the government's urban modernization initiatives, the government strictly regulated the selling prices of all Phase I units, which were on average considerably below would-be market prices and in turn resulted in a lower profit margin. Meanwhile, we are required by the government to offer pricing concessions to relocated former villagers based on the sizes of parcels they previously resided on. In addition, in FY 2010, for the Longhai Mingzhu project, we booked an additional $2.1 million in cost of sales to account for a portion of the difference between book value and the fair market value of the assets when we acquired the entity that owned the project, which significantly contributed to the decrease in the gross profit margin. Another contributing factor is the fact that in FY 2009 we sold a significantly higher amount of accessory spaces (storage units and garages), to which no construction cost was allocated, leading to a higher gross profit margin in FY 2009 than in FY 2010.

Total operating expenses for FY 2010 were $6.9 million, or 6.2% of sales, compared with $5.3 million, or 5.6% of sales, for FY 2009. The increase was mainly due to higher sales and commissions expenses, plus higher general and administrative expenses related to the Company's public offering registration in FY 2010.

Operating income for FY 2010 was $26.4 million, or 23.9% of sales, compared with $30.8 million, or 32.6% of sales, for last year, a decrease of 6.9%.  The decrease in operating income was primarily due to the decrease in gross profit and increase in operating expenses noted above.

Net income for FY 2010 was $34.9 million, or $1.07 per diluted share, an increase of 65.2% from $21.2 million, or $0.70 per diluted share, for FY 2009.

Financial Condition

As of December 25, 2010, the Company had cash and cash equivalents of $33.6 million, compared with $2.3 million as of December 25, 2009. Working capital at fiscal year end was $102.6 million compared with $44.2 million at the end of FY 2009. Shareholders' equity was $144.6 million, compared with $94.4 million at the end of FY 2009.

Business Outlook

For FY 2011, the Company intends to focus on sales for projects that have recently been completed, or for which construction will be completed in 2011, including primarily the Weihai International Plaza, Qilu Textile Center (Residential), Longhai Mingzhu, and Xingfu Renjia 2 projects.

The Company also intends to continue its penetration into the high-end real estate market, which is expected to generate high returns within the next few years.  Two projects in planning in this category are expected to start construction in the second half of FY2011, including a large community of resort homes on the beach in Weihai (the Weihai Beach Resort project) and a luxury beachfront resort hotel that will be located just across the street from the Stone Old Man beach in Qingdao (the Longhai Hotel project).

Mr. Zhang said, "We aim to continue our strong performance in 2011, since we are currently seeing continuing growth in demand in the real estate industry in China, particularly in Shandong province and localities in which we operate. The growing number of middle-income consumers in China and a continued urbanization process have provided attractive and sustainable growth opportunities in second-tier and third-tier cities. We intend to continue to capitalize on these by continuing to offer high-quality, mid-sized residential units featuring modern designs and convenient facilities at competitive prices. Moreover, we expect that the planned start of the Weihai Beach Resort and the Longhai Hotel projects will unlock tremendous value in our land reserves."

China Oumei expects to file its annual report with the Securities and Exchange Commission on Form 20-F for the fiscal year ended December 25, 2010 on or before June 25, 2011.

About China Oumei Real Estate Inc.

China Oumei is one of the leading real estate development companies in Qingdao, Shandong province, China. The Company develops and sells residential and commercial properties, focused on middle and upper income customers in the coastal region of the Shandong peninsula in northeastern China, including the cities of Qingdao, Weihai, and Yanta and inland locations that include Weifang.

China Oumei has six projects currently under construction with a total gross floor area of 508,342 square meters. Since its operations began in 2001, China Oumei has completed 17 projects with a total gross floor area of 1,462,126 square meters, of which approximately 95% have been sold.

China Oumei's mission is to provide high-quality, comfortable, and convenient living and working space to middle and upper income customers, while also earning for its shareholders an internal rate of return that exceeds its cost of capital. For more information, please visit http://www.chinaoumeirealestate.com.  

Safe Harbor Statement

Certain of the statements made in this news release are "forward-looking statements" within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause the actual results, performance, capital, ownership, or achievements of the Company to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may," "will," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "estimate," "continue," "plan," "point to," "project," "could," "intend," "target" and other similar words and expressions of the future.

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. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this news 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.

Financial tables follow.