China HGS Announces Fiscal First-Quarter 2011 Financial Results

HANZHONG, China, Feb. 28, 2010 /PRNewswire-Asia-FirstCall/ -- China HGS Real Estate Inc. (Nasdaq: HGSH) ("China HGS" or the "Company"), a leading residential property developer in Hanzhong, China, today reported financial results for the fiscal first quarter ended December 31, 2010.

"During the fiscal first quarter of 2011, our revenue recognition was disrupted by new procedures implemented by the Hanzhong City Local Taxation Bureau. We recognize revenue on the sale of a unit when the property sales invoice, which is obtained from the government, together with the keys, is delivered to the buyer.  Historically, sales invoices were generated manually by the Local Taxation Bureau.  Beginning in November 2010, new regulations required all property sales data to be entered into a system on the Local Taxation Bureau's web site so that invoices can be generated automatically online. Unfortunately, this system was still under construction and not functional during the fiscal first quarter of 2011 and we were only able to recognize a small amount of revenue in the quarter," stated Mr. Xiaojun Zhu, Chairman and Chief Executive Officer of China HGS Real Estate, Inc.

"We feel that our reported revenue does not accurately reflect the actual market demand for our properties during the quarter, since demand for residential property in Hanzhong continued to remain robust, and we experienced higher unit sales and traffic levels.  Customer deposits increased 53% sequentially in the quarter, which we consider a reasonable proxy for the performance of our sales.  We anticipate that we will be able to recognize the revenue, which was deferred due to the delay in issuing the sales invoices, in the fiscal second quarter of 2011, contingent on the completion of the receipt generating system on the Local Taxation Bureau's website.  We are optimistic that we will continue to achieve steady revenue growth in fiscal 2011."

Fiscal First-Quarter 2011 Results

Gross revenue for the three months ended December 31, 2010 was $135,952 compared to $11.1 million in the same period of fiscal 2010. The significant revenue decrease was primarily due to a delay in revenue recognition as a result of a change in tax regulation from the Hanzhong City Local Taxation Bureau during the quarter. Because of the new tax regulation and the delayed launch of local government's online invoicing system, the Company was only able to recognize revenues for four units that were sold using manually issued invoices that were issued prior to the effectiveness of the new regulations.

Therefore, recognized gross revenue in the first quarter of fiscal year 2011 did not reflect the actual market demand for our properties. During the quarter ended December 31, 2010, China HGS continued its rapid business growth trend as a result of strong local market demand for residential properties, as well as higher average real-estate prices in Hanzhong. Current customer deposits as of December 31, 2010 increased 53.4% to $21.2 million compared with $13.8 million as of September 30, 2010.

China HGS expects that the Local Taxation Bureau's online invoice generating system will become operational in March, and therefore the Company will be able to recognize the delayed revenue during the fiscal second quarter.

Gross profit was $1,130 for the three months ended December 31, 2010, as compared to $4.8 million in the same period last year. Gross margin was 1% compared to 43.8% in the same period last year. The significant year-over-year decreases in gross profit and gross margin were primarily due to the significant decrease in recognized revenue attributable to the new local tax regulations.

Selling, general and administrative expense in the fiscal first quarter of 2011 was $102,061, as compared to $1.1 million in the first quarter of fiscal 2010. Selling and distribution expense was $30,915 in the fiscal first quarter of 2011, as compared to $299,081 in the same period of fiscal 2010. Approximately $253,000 of the reduction in selling expense was due to the reduction in revenue. General and administrative expense in fiscal first quarter of 2011 was $71,146, as compared to $817,230 in the same period of fiscal 2010. Approximately $666,000 of the reduction in G&A expense was mainly due to management's decision not to accrue bonuses in the fiscal first quarter of 2011 and the lack of reverse-acquisition expense versus the same period in 2010.

The net loss was $96,295 in the fiscal first quarter of 2011, or $0.00 per diluted share, compared with net income of $3.6 million, or $0.08 per diluted share, during the same period of fiscal 2010. The diluted weighted average number of shares outstanding increased slightly to 45,059,434 in the three months ended December 31, 2010 from 45,050,000 in the three months ended December 31, 2009.

Financial Condition

As of December 31, 2010, China HGS had $17.5 million in cash and cash equivalents, up from $12.6 million as of September 30, 2010. As of December 31, 2010, China HGS had working capital of $35.8 million, down from $40.1 million as of September 30, 2010. Shareholders' equity increased to $48.7 million from $48.2 million as of September 30, 2010. The Company had no long-term debt as of December 31, 2010.

Business Outlook

"Considering the special circumstances of new regulation implemented by the Local Taxation Bureau, we hope our investors can understand this unusual temporary impact on our recognized revenue. We will be able to recognize the revenue backlog once the new invoice system becomes normalized and operational, which we expect to occur during the second quarter of fiscal year 2011.  Therefore, we have reason to believe that our attractive pipeline of planned and currently under-construction projects will enable us to continue our business growth in the fiscal year 2011," commented 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 second-tier and third-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 and 2008 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.

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