China HGS Announces Fiscal Fourth-Quarter and Full-Year 2010 Financial Results

Revenues grew 56.7% and net income increased 56.6% in fiscal 2010

HANZHONG, China, Jan. 12, 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 fourth quarter and fiscal year ended September 30, 2010.

Fourth-Quarter 2010 Highlights

• Gross revenues(*) decreased 27.3% to $14.2 million year over year from $19.5 million
• Gross profit was $6.8 million, with a gross margin of 47.7%
• Net income was $5.5 million, or $0.12 per diluted share, compared to $7.3 million, or $0.18 per diluted share, a year ago
• China HGS stock commenced trading on the NASDAQ Global Market in September 2010

Full-Year 2010 Highlights

• Gross revenues increased 56.7% to $47.3 million from $30.2 million in 2009
• Gross profit increased 56.4% to $20.9 million from $13.4 million
• Gross margin was 44.2% as compared to 44.3% in the fiscal year 2009
• Net income was $17.3 million, or $0.38 per diluted share, compared to $11.1 million, or $0.28 per diluted share, in the fiscal 2009 business year
• Total gross floor area ("GFA") sales were 138,316 square meters in the 2010 fiscal year, as compared to 100,850 square meters sold in the 2009 fiscal year

(*) Note: Starting in the fourth fiscal quarter of 2010, revenues are reported on a gross basis (excluding sales tax expense) versus previously on a net basis, and the Company's most recent and historical financial statements reflect that change.

"Despite the central government's tightening of credit to cool down the domestic real estate sector, market demand for residential properties in our core markets, Hanzhong and its surrounding areas, continued its solid growth trend. Although the revenues we recognized in our fourth fiscal quarter fell short of our increased guidance from our fiscal third-quarter earnings report, we still experienced higher price and sales volume of our existing projects and strong pre-sales of our newest project, Mingzhu Beiyuan, in the fiscal fourth quarter of 2010. We also benefited from higher margins due to our continued cost-control efforts, leading us to report fiscal 2010 net income in line with our guidance," commented Mr. Xiaojun Zhu, China HGS' Chief Executive Officer. "In September, our stock started trading on the NASDAQ Global Market under the new stock symbol, 'HGSH'. We view this as a major milestone and will continue to improve our operations and governance in an effort to increase shareholder value."

Fourth-Quarter 2010 Results

Gross revenue for the three months ended September 30, 2010 was $14.2 million compared to $19.5 million in the year-ago period. The decline in quarterly revenue was mainly due to differences in the mix of properties available for sale, selling prices and the number of properties sold in the two periods, and revenues and margins in the fiscal fourth quarter of 2009 were unusually strong.

During the three months ended September 30, 2010, China HGS had four ongoing real estate projects located in Hanzhong and Yang Counties: Yangzhou Pearl Garden (Yang County), Mingzhu Xinju (Hanzhong), Mingzhu Nanyuan (Hanzhong), and Mingzhu Beiyuan (Hanzhong). Among the Company's existing projects under construction, Mingzhu Beiyuan is a new project that broke ground in the fourth fiscal quarter of 2010.

Among the Company's new projects, Yangzhou Pearl Garden, Mingzhu Xinju, and Mingzhu Nanyuan contributed 23%, 58%, and 19% of gross revenues in the quarter, respectively. Below is a breakdown of project sales in the fourth quarter of 2010:

Gross profit was $6.8 million compared to $8.7 million for the three months ended September 30, 2009. Gross margin was 47.7% compared to 44.7% in the same period last year. The year-over-year increase in gross margin was primarily the result of the higher average selling prices for the Company's residential and commercial property as compared to the fiscal fourth quarter of 2009.

Selling, general and administrative expense in the fourth quarter of fiscal 2010 was $0.9 million, a decrease of 35.1% from $1.3 million in the fourth quarter of fiscal 2009. Selling expense was approximately $114,995 in the fourth quarter of 2010, as compared to $125,418 in the year-ago quarter. The decrease in selling expense was attributable to decreased revenue, advertising expense and sales commissions to employees. As a result of a strong and well-established brand in its home market, China HGS benefited from referrals from loyal customers, reducing the need to conduct sales promotion activities during the quarter. General and administrative expense in the three months ended September 30, 2010 was $0.8 million, as compared to $1.2 million in the same period 2009.

Net income was $5.5 million in the three months ended September 30, 2010, or $0.12 per diluted share, compared with net income of $7.3 million, or $0.19 per diluted share, during the same period of 2009. The diluted weighted average number of shares outstanding increased from 39.0 million in the three months ended September 30, 2009 to 45.1 million in the three months ended September 30, 2010, as a result of the share-exchange transaction completed last year.

Full-Year Fiscal 2010 Results

Gross revenue for twelve months ended September 30, 2010 was $47.3 million compared to $30.2 million in 2009, an increase of 56.7%. Gross profit was $20.9 million with a gross margin of 44.2%, compared to gross profit of $13.4 million with a gross margin of 44.3% for the twelve months ended September 30, 2009. Operating income was $18.2 million with an operating margin of 38.4%, compared to $11.4 million with an operating margin of 37.7% last year. Net income was $17.3 million, or $0.38 per diluted share, compared to $11.1 million, or $0.28 per diluted share, last year.

The diluted weighted average number of shares outstanding increased from 39.5 million in the twelve months ended September 30, 2009 to 45.1 million in the twelve months ended September 30, 2010, as a result of the share-exchange transaction completed last year.

Financial Condition

As of September 30, 2010, China HGS had $12.6 million in cash and cash equivalents, up from $0.8 million as of September 30, 2009. China HGS had working capital of $40.1 million, up from $9.2 million at the end of fiscal 2009. Shareholders' equity increased to $48.2 million from $29.9 million as of September 30, 2009. The Company had no long-term debt as of September 30, 2010, and generated $12.3 million of cash from operations in the twelve months ended September 30, 2010.

Business Outlook

"As China is more actively deploying its 'Go to the West' strategy to even out domestic economic development, we believe Hanzhong is located in an ideal location to benefit from the regional development in western China, since it represents one of the most important connecting points between northwest and southwest China," commented Mr. Zhu. "In addition, our solid track record and industry-leading position in Hanzhong has also started to improve China HGS' market recognition in several surrounding Tier-III cities in Shaanxi and surrounding areas. We have an attractive pipeline of planned and currently under-construction projects to drive solid growth in fiscal 2011 and beyond."

The Mingzhu Beiyuan projects include: buildings #1, #2, #4, #6, #27, and #28, which are comprised of 748 residential and commercial units with a total Ground Floor Area (GFA) of 79,853 square meters (through the end of fiscal 2011); multi-layer buildings #27 and #28 currently under construction, which have a total GFA of 32,826 square meters; in addition to 346 residential and commercial units, which are estimated to be completed by the fiscal first quarter of 2011. As of September 30, 2010, the Company had pre-sold 149 residential and commercial units at the Mingzhu Beiyuan projects and collected $3.5 million in customer deposits.

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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