China HGS Announces Fiscal Third-Quarter 2011 Financial Results

HANZHONG, China, August 16, 2011 /PRNewswire-Asia-FirstCall/ -- China HGS Real Estate Inc. (NASDAQ: HGSH) ("China HGS" or "the Company"), a leading residential property developer in China's southern Shaanxi province, reported financial results for the fiscal third quarter of its 2011 fiscal year ended June 30, 2011.

Fiscal Third-Quarter 2011 Highlights:

• Revenue increased 55.2% year-over-year to $12.7 million
• Gross profit increased 96.0% year-over-year to $7.2 million
• Gross margin was 56.5%, compared with 44.7% in the fiscal third quarter of 2010
• Net income increased 102.3% year-over-year to $6.4 million, or $0.14 per basic and diluted share, compared with $0.07 in the year-ago period
• Signed two residential apartment bulk purchase agreements in Hanzhong for an aggregate price of RMB 180 million (approximately $27.7 million) for delivery in 2012 to 2013.
• Acquired the development and use rights for 62,700 square meters (approximately 675,000 square feet) of construction land in Hanzhong for a total price of RMB 178.7 million (approximately $27.5 million)

"We are delighted to report a strong quarter with solid growth in both revenue and net income. Due to robust demand and the increasing property prices in our market, we were also able to achieve higher gross profit and net income for the quarter," stated Mr. Xiaojun Zhu, Chairman and Chief Executive Officer of China HGS Real Estate, Inc. "During the fiscal third quarter of 2011, we secured a substantial amount of future revenues from two residential-apartment bulk sales at our Mingzhu Beiyuan projects, for which we expect to collect 50% of the total payment, or about $13.9 million, by the end of August. We were also pleased to successfully acquire a large piece of land in downtown Hanzhong, which will become an important platform for our ongoing business development in the next several years. Finally, we are continually striving to improve our transparency and corporate governance. We plan to hire a senior capital-market executive. We also expect to engage a Sarbanes-Oxley consultant to activate our SOX compliance program by the end of August 2011."

Third-Quarter Fiscal 2011 Results

China HGS recognizes revenue from the sales of real property in accordance with the full-accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. The Company believes that this is a conservative and appropriate accounting practice.

During the fiscal third quarter ended June 30, 2011, gross revenue increased 55.2% to $12.7 million, from $8.2 million in the year-ago quarter. This significant growth in gross revenue was mainly attributable to the sales of the Yangzhou Pearl Garden project and higher unit sales prices. For the quarter ended June 30, 2011, China HGS sold a total of 262 units of residential and commercial properties, of which 233 units derived the sales of the Yangzhou Pearl Garden project, which generated $11.0 million in gross revenue, or 86.4% of the Company's quarterly sales. The average sales prices of at Yangzhou Pearl Garden was $400 per square meter and $316 per square meter for the three months ended June 30, 2011 and 2010, respectively, representing a year-over-year increase of $84 per square meter, or 26.7%.

In the fiscal third quarter, China HGS generated all of its revenue from the following three ongoing real estate projects located in Hanzhong and Yang Counties: Yangzhou Pearl Garden (Yang County), Mingzhu Nanyuan and Mingzhu Beiyuan (Hanzhong), and Central Plaza. Below is a breakdown of project sales in the third quarters of fiscal 2011 and fiscal 2010:

Gross profit increased 96.0% to $7.2 million compared to $3.7 million in the fiscal third quarter. The significant growth in gross profit was largely due to the growth in sales and a decrease in the cost of land use rights. The cost of land use rights includes the land premium paid to acquire land use rights for property development sites. The cost for land use rights for the three months ended June 30, 2011 was $0.8 million, as compared to $1.1 million for the three months ended June 30, 2010, a decrease of 31.8%. In the third fiscal quarter of 2010, China HGS sold one large clubhouse, one kindergarten, and certain multi-layer (typically six or fewer stories) commercial properties, of which the land use rights cost was five to seven times that of sub-high-rise (typically seven to 11 stories) or high-rise (typically 12 to 33 stories) buildings; whereas sales were mainly comprised of the sub-high-rise or high-rise residential and commercial units in the third fiscal quarter of 2011. As a result, the average land-use rights cost per square meter was $26.1 and $51.2 for the three months ended June 30, 2011 and 2010 respectively. Therefore, the aggregate land-use rights cost recognized in the current quarter was lower than that of year-ago quarter.

Gross margin was 56.5% in the fiscal third quarter, compared to 44.7% in the same period of 2010. The strong increase in gross margin was due to the combination of higher unit sales prices and lower land-use rights costs, as compared to the same period of last year.

Total operating expenses increased 73.4% to $0.6 million during the fiscal third quarter from $0.3 million in the same period last year. The increase in operating expenses was mainly due to the increased selling expenses and fees related to being a public company in the U.S., such as service fees for U.S. legal counsel, auditors and investor relations.

Operating income increased 98.4% to $6.6 million in the fiscal third quarter of 2011, from $3.3 million in the same period a year ago. Operating margin was 51.7%, compared to 40.5% 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 June 30, 2011 was $181,218, representing a 2.8% 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 increased 102.3% to $6.4 million in the third quarter of fiscal 2011, or $0.14 per basic and diluted share, compared to net income of $3.2 million, or $0.07 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 third quarter.

First Nine Months of Fiscal 2011 Results

Gross revenue increased 17.8% to $39.1 million for the nine months ended June 30, 2011, compared to $33.1 million for the nine months ended June 30, 2010. Gross profit increased 40.4% to $19.9 million, with a gross margin of 50.9%, compared to $14.1 million, with a gross margin of 42.7% for the same period a year ago. Operating income grew 52.6% to $18.8 million, with an operating margin of 48.1%, compared to $12.3 million, with an operating margin of 37.1% for the year ago period. Net income rose 54.2% to $18.1 million, or $0.40 per basic and diluted share, compared to $11.7 million, or $0.26 per basic and diluted share, for the nine months ended June 30, 2010.

During the nine months ended June 30, 2011, China HGS generated all of its revenue from the following four ongoing real estate projects located in Hanzhong and Yang Counties: Mingzhu Nanyuan and Mingzhu Beiyuan (Hanzhong), Mingzhu Xinju (Hanzhong), Yangzhou Pearl Garden (Yang County), and Central Plaza.

Among the Company's new projects, Mingzhu Nanyuan and Mingzhu Beiyuan, Mingzhu Xinju, Yangzhou Pearl Garden, and Central Plaza contributed 37.1%, 3.1%, 53.4% and 6.5% of gross revenues in the first nine months of fiscal 2011 respectively. Below is a breakdown of project sales in the first nine months of fiscal 2011 and 2010:

Financial Condition

As of June 30, 2011, China HGS had $2.6 million in cash and cash equivalents, as compared to $12.6 million as of September 30, 2010. The decrease in cash was primarily due to a $27.7 million payment for the development and use rights for 62,700 square meters (approximately 675,000 square feet) of construction land in Hanzhong and a $15.5 million payment for the bid bond of the use rights for another piece of land in Hanzhong. The Company did not acquire the land use right, and the bid bond was fully refunded to the Company in July 2011.

As of June 30, 2011, China HGS had working capital of $25.6 million. Shareholder's equity was $68.4 million, as compared to $48.2 million on September 30, 2010. The Company had no long-term debt and used $16.9 million of operating cash in the nine months ended June 30, 2011. As discussed above, operating cash flow was mainly affected by the land acquisition related expenses of $27.7 million and $15.5 million, respectively, during the three months ended June 30, 2011. Based on its current operating plan, China HGS believes that its existing cash and cash equivalents, as well as cash to be generated from operations will be sufficient to meet its working-capital and capital requirements for its current plans.

Business Outlook

"We have already earned the net income we earned in all of fiscal 2010 in just the first nine months of fiscal 2011. Looking ahead, we believe demand for properties will continue to rise in Hanzhong and surrounding areas, as the local economy and Gross Domestic Product ("GDP") are continuing to improve rapidly under the China central government's guidance for the development of the economies in western regions. Hanzhong's GDP registered a year-on-year increase of 15.1% in 2010. (Source: Statistical Bureau of Hanzhong). According to a Hanzhong government interim report, Hanzhong's GDP for the first half of 2011 is expected to increase 14% from the prior comparable period. In addition to the 62,700 square meters (approximately 675,000 square feet) land we acquired in May 2011, we are actively seeking additional land. We believe that continuous land acquisition will help ensure the sustainability of our business development. We also anticipate a strong fiscal fourth quarter, which is normally a peak season for the real estate market. In summary, we are very positive about the dynamics in our market and we feel confident that China HGS will continue its steady and healthy growth over the next several years," 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., specializes 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-II 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. These statements relate, but are not limited to, demand for property in Hanzhong and its surrounding areas, legislation affecting real estate on the national and local level, and property pricing. 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.

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