China Forestry Industry Group Inc. Announces First Quarter 2011 Financial Results

First Quarter 2011 Highlights

• Revenue totaled $10.4 million, up 143.4% from $4.3 million for the first quarter in 2010
• Gross profit totaled $3.6 million, up 136.3% from $1.5 million in the first quarter of 2010
• Gross margin was 34.3%, compared to 35.3% in the same period in 2010
• Operating income was $2.9 million, up 138.8% from $1.2 million in the first quarter 2010
• Net income was $2.1 million or $0.07 per fully-diluted share, compared to net income of $1.2 million or $0.06 per fully-diluted share in the first quarter 2010

"Our fiscal year 2011 began on a strong note with significant top and bottom line growth for the first quarter," said Mr. Yulu Bai, China Forestry Industry Group's Chairman and CEO. "The results were mainly driven by the performance of our laminate flooring subsidiary following the incorporation of Silvan Flooring and the accelerated marketing efforts to promote the "Silvan Touch" brand throughout 2010. Supported by our intention to expand our production capacity and sales network, we expect our growth momentum to continue as we strive to meet the strong demand for interior design and housing-related products in China."

First Quarter 2011 Results

China Forestry's achieved revenue of $10.4 million in first quarter of 2011, up 143.4% from the first quarter of 2010. The increase was primarily due to the expansion of the Company's sales and distribution network following the acquisition of the laminate flooring business Silvan Flooring in late 2009.

Laminate flooring accounted for $9.0 million, or 86.5% of total sales for the first quarter 2011, an increase of 75.33%, from $1.4 million, or 13.5% of total sales for the first quarter 2010. While the Company began the marketing and promotion of Silvan Touch products in the first quarter 2010, the effect of these activities kicked off in late 2010 and trend continued into the first quarter of 2011.

Fiber board accounted for $2.7 million, or 24.7% of total sales for the first quarter 2011, compared to $5.9 million, or 77.0% of total sales, for the corresponding quarter last year. As a result of the Company's strategic decision to concentrate on the production of laminate flooring, sale volume decreased by 18.84% to 18,488 sq. meters. However the effect on revenue was slightly offset by an 18.5% increase in the average selling price of fiber board to RMB 1,475 per cubic meters, as a response to increased raw material and logistics costs.

Cost of sales increased 147.2% to $6.9 million for the first quarter 2011 from $2.8 million for the first quarter 2010, mainly due to increased sales in the period.

Gross profit was $3.6 million, an increase of 136.3% from the corresponding period in the previous year.  Gross margin was 34.3%, compared to 35.3% in the corresponding three-month period last year. Gross margins have remained flat year-over-year, but increased from the fourth quarter 2010 largely due to increased sales of laminate flooring since the fourth quarter 2010 in proportion to fiber board, as laminate flooring generally enjoy a higher price premium. However, selling prices for the Company's laminate flooring were 18.7% lower year-over-year for the first quarter 2011 as the Company lowered prices to remain price competitive against peers, which offset the expansion in gross margin from the favorable product mix.

Selling and marketing expenses for the first quarter of 2011 were $349,595, an increase of 363.4%, from $75,435 for the corresponding period previous year. The increase was mainly due to increased advertisement expenses associated with the development of Company's sales distribution channels as well as increased costs for the improvement of the Company's online infrastructure.

General and administrative expenses for the first quarter of 2011 were $373,624, an increase of 53.5% from $243，364 for the corresponding period previous year. The increase was primarily attributable to higher costs associated with expansion of the Company's sales network such as travel costs, and employee remuneration.

As a result, operating income was $2.9 million, an increase of 138.8% from $1.2 million previous year. Operating margin was 27.3%, compared to 27.9% for the corresponding period previous year.

For the three months ended March 31, 2011, the Company had $0.2 million in other expenses, compared with $0.3 million in other income for the same period last year, mainly due to increased interest expenses in the first quarter 2011 and a government tax rebate in the first quarter of 2010.

Net income was $2.1 million, or $0.07 per diluted share, for the first quarter of 2011, compared to $1.2 million, or $0.06 per diluted share, for the corresponding three-month period during the previous year. The Company had 30,000,000 weighted average diluted shares outstanding for the three months ended March 31, 2011, compared with 20,500,000 for the corresponding period in 2010.

Financial Condition and Liquidity

As of March 31, 2011 the Company had cash and cash equivalents of $4.6 million, accounts receivable of $8.5 million, and working capital of $24.6 million. The Company had total debt of $15.4 million, of which $7.8 million were long term, as of March 31, 2011 compared with $4.5 million in short term debt as of December 31, 2010. Long-term debts were taken out to finance the purchase fiber boards and other chemical raw materials. Shareholders' equity was $35.1 million as of March 31, 2010.  

For the three months ended March 31, 2010, the Company used $8.5 million in cash in operating activities, mainly due to an increase in deposits and prepaid expenses in connection with deposits for raw materials and goods supplies, an increase in accounts receivable and a decrease in accounts payable. The Company made large prepayments for the purchase of raw materials to hedge against rising raw material costs in the second quarter of 2011.  

Business Outlook

Moving forward in 2011, the Company expects to focus on its five-pronged growth plan that involves the expansion of sales through its retail stores and distribution networks, brand building efforts, production capacity expansion for the fiber board and laminate flooring segment, raw material resource cultivation and expansion of forestry assets through maintenance and upstream acquisitions, and horizontal acquisitions of regional market leading flooring companies in key growth regions in China.

While the capacity for fiber board production is expected to meet customer demand in the coming quarters, current production capacity of laminate flooring may only suffice to cover customer orders for the second quarter of 2011 due to anticipated demand growth. The Company's planned capacity expansion remains on schedule with the new production facility to accommodate for the anticipated increase in demand expected to be completed by mid-2012.

"While our growth strategy is still in its early stages, we believe that our vertically integrated business model will help us become a market leader in the flooring industry in southwestern China and allowing us to benefit from the rising demand for flooring and fiberboard in the growth centers of our country," concluded Mr. Bai. "We expect the negative cash flow from operating activities to be temporary as large prepayments and deposits were made to acquire additional raw material for the second quarter. We do not expect any disruptions to our planned progress on capacity expansion as we expect to see a decrease in raw material spending in the second quarter and as we are implementing better cash management practices. Moreover, we actively promote more flexible credit terms to our customers, such as payments in installments, to encourage more effective cash collection. If necessary, we believe our Company will have access to additional banking facilities due to our strong forecasted revenue streams, planned capacity expansion and our solid relationships with local banks."

About China Forestry Industry Group Inc.

China Forestry Industry Group, Inc., through its operating subsidiaries, Aosen Forestry and Silvan Flooring, is involved in the production and sale of floor materials and related products to residential and commercial customers in China. The Company's product lines include laminate flooring and fiber floor boards which are manufactured in a variety of colors, dimensions and designs. The Company's manufacturing facility in Qianxinan, Guizhou Province has an annual production capacity of 6 million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. The Company is headquartered in Guiyang, Guizhou Province. For additional information please visit: http://www.chinaforestrygroup.com

Safe Harbor Statement

This announcement contains forward-looking statements. All statements other than statements of historical fact in this announcement are forward-looking statements, including but not limited to, the effectiveness, profitability, and the marketability of the Company's products; the future trading of the common stock of the Company; the ability of the Company to capitalize on its expanded production capacity; the period of time for which its current liquidity will enable the Company to fund its operations; the Company's ability to protect its proprietary information; general economic and business conditions; the volatility of the Company's operating results and financial condition; the Company's ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed in the Company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the Company and the industry. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, it cannot assure you that the Company's expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.

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