China Energy Corp. Reports Financial Results for Second Quarter of Fiscal Year 2011

HOHHOT CITY, China, July 22, 2011 /PRNewswire-Asia-FirstCall/ -- China Energy Corporation (OTC Bulletin Board: CHGY), ("China Energy" or the "Company"), a producer and trader of coal for domestic heating, electrical generation, and coking purposes and a supplier of heating and electric energy services in Inner Mongolia, today announced financial results for the second quarter of its fiscal year ending May 31, 2011.

Summary Financials

Second Quarter Results

For the quarter ended May 31, 2011, the Company reported revenue of $32.2 million, a 57.1% increase over revenue of $20.5 million in the second quarter of fiscal year 2010. Quarterly sales from the Company's coal group increased to $26.2 million, or 81% of total sales, compared to $17.5 million, or 86% of total sales in the prior-year quarter. As a component of this, 42% of total Company sales came from coal production, and 39% came from coal trading during the quarter. China Energy produced approximately 322,000 metric tons of coal in the second quarter of 2011, compared to 227,000 metric tons in the same period of fiscal year 2010. The 41.9% year-over-year increase in production from the Company's Coal Group was mainly due to the approval by the local government of an increase in the amount of coal that the Company was allowed to produce in 2011. The volume of coal sold by our proprietary trading business was approximately 190,000 metric tons during the three months ended May 31, 2011, compared to 183,000 metric tons in the comparable three months in 2010. This increase was mainly attributable to a greater railway transportation quota obtained for 2011.

Sales from heat power group totaled $6.0 million in the second quarter of 2011, or 19% of total sales compared to $3.0 million, or 14% of total sales in the prior-year quarter.

"We are pleased to report another quarter of strong revenue growth, which benefited from the significant growth in sales from our Coal Group," stated Wenxiang Ding, chief executive officer and president. "We will continuously expand our proprietary coal trading business. We also expect the continued development of the XueJiaWan district to fuel growth in our Heat Power segment."

Cost of goods sold in the second quarter of fiscal year 2011 was approximately $21.6 million, compared to approximately $12.0 million in the second quarter of 2010. Gross profit was $10.6 million and the gross margin was 32.9% in the quarter, compared to $8.5 million in gross profit and a gross margin of 41.5% during the same period in fiscal year 2010. The year-over-year gross margin decrease was due to lower margins from the Company's Coal Group. In order to expand our proprietary coal trading business, Coal Group purchased more coal from third parties during the three months ended May 31, 2011, which were less profitable than coal purchased from Laiyegou coal mine in terms of gross margin and resulted in decrease of gross margin of coal trading business from 32% to 19%.

Total operating expenses for the second quarter of fiscal year 2011 were approximately $3.7 million, or 11.5% of revenue, compared to $2.0 million, or 9.8% of revenue in second quarter fiscal year 2010. Selling and marketing expenses in second-quarter fiscal year 2011 were $1.4 million, flat versus last year, due to lower transportation and storage expenses, offset by high sales tax. General and administration expenses totaled $2.3 million, compared to $0.6 million in the same period in fiscal year 2010 due to higher professional and other fees. This increase was mainly attributable to non-cash stock-based compensation charge of $1.5 million in the second quarter of 2011, which was not present in the year ago period.

Operating income for the second quarter of 2011 totaled approximately $6.9 million, a 7.8% increase from $6.4 million reported for the second quarter of 2010. Operating margins were 21.4% and 31.2% for the second quarter of 2011 and 2010, respectively. Excluding non-cash stock-based compensation of $1.5 million, adjusted operating income for the second quarter of 2011 was $8.4 million with operation margins of 26.1%. (Please see "About Non-GAAP Financial Measures" below.)

Net income during the quarter totaled approximately $3.8 million, or $0.08 per share, compared to $4.4 million, or $0.10 per share in the second quarter of fiscal year 2010. The weighted average common shares outstanding were 45.06 million and 45 million respectively, in each period. Adjusted Non-GAAP net income for the second quarter was $4.9 million, or $0.11 per diluted common share based on 45.06 million diluted common stocks outstanding for the second quarter of 2011. (Please see "About Non-GAAP Financial Measures" below.)

Six Month Results

For the six months ended May 31, 2011, the Company reported revenue of $54.5 million, a 32.0% increase over revenue of $41.3 million in the same period of fiscal year 2010. Six-month sales from the Company's Coal Group increased 26.9% to $42.5 million, or 78% of total sales, compared to $33.8 million, or 82% of total sales in the prior year. As a component of this, 37% of total Company sales came from coal production, and 41% came from coal trading during the six months period of time. China Energy produced approximately 454,000 metric tons of coal during the first six months of fiscal 2011, compared to 383,000 metric tons in the same period of fiscal year 2010 The 18.5% year-over-year increase in production from the Company's Coal Group was mainly due to the approval by the local government of the amount of coal that the Company was allowed to produce in 2011. The volume of coal sold by our proprietary trading business is approximately 382,000 metric tons during the six months ended May 31, 2011, compared to 353,000 metric tons in the comparable six months in 2010. The 8.2% year-over-year increase in proprietary coal trading volumes was mainly due to our railway transportation quota increase from 660,000 tons in 2010 to 760,000 tons in 2011. Sales at the Heat Power group totaled $12.0 million, or 22% of total sales compared to $7.5 million, or 18% of total sales in the same period of last year.

Cost of goods sold for the six months ended May 31, 2011 was approximately $35.9 million, compared to approximately $25.9 million in the prior year. Gross profit was $18.6 million and the gross margin was 34.1% in the six months of fiscal 2011, compared to $15.4 million in gross profit and a gross margin of 37.3% during the same period in fiscal year 2010.

Total operating expenses for the six months of fiscal year 2011 were approximately $6.1 million, or 11.2% of revenue, compared to $4.0 million or 9.7% of revenue same period in fiscal year 2010.

Net income for the six months of fiscal year 2011 totaled approximately $8.2 million, or $0.18 per share, compared to approximately $8.4 million, or $0.19 per share in the same period in fiscal year 2010. Net income margins were 15.0% for the first six months of fiscal year 2011. Per share amounts for the second quarters of 2011 and 2010 are based on 45.06 million and 45 million shares outstanding, respectively. Adjusted Non-GAAP net income for the first six months of 2011 was $9.3 million, or $0.21 per diluted common share. (Please see "About Non-GAAP Financial Measures" below.)

Balance Sheet and Cash Flow

Cash and cash equivalents totaled $23.0 million on May 31, 2011 compared to $4.6 million on November 30, 2010. The Company had total assets of $142.8 million versus total liabilities of $79.9 million as of May 31, 2011. For the first six months of fiscal year 2011, cash used in operation by the Company was $17.6 million versus cash generated from operating activities amounting to $4.8 million in the same period of fiscal year 2010 due to higher level of advances paid to suppliers for purchase of coal to assure the stability of our proprietary coal trading business.

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)

About Non-GAAP Financial Measures

To supplement the Company's consolidated financial statements, which statements are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: non-GAAP adjusted net income and non-GAAP adjusted EPS. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. The Company uses these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding the Company's performance and liquidity by excluding certain expenses and expenditures that may not be indicative of "recurring core business operating results", for example, operating performance excluding a non-cash stock-based compensation charge. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management's internal comparisons to historical performance and liquidity as well as comparisons to competitors' operating results. The Company believes these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of the business.