China HGS Announces Fiscal Second-Quarter 2011 Financial Results

Fiscal Second-Quarter 2011 Highlights:

• Revenue increased 88.6% year-over-year to $26.2 million
• Gross profit increased 124.5% year-over-year to $12.7 million
• Gross margin was 48.4%, compared with 40.6% in the fiscal second quarter of 2010
• Net income increased 136.0% year-over-year to $11.8 million, or $0.26 per diluted share, compared with $0.11 in the year-ago period

"Due to the continuing strong demand for new residential real-estate properties in our core Hanzhong market, we have achieved solid operating results in the fiscal second quarter of 2011.  Several of our projects, such as the Yangzhou Pearl Garden Phase III project, have experienced brisk sales thus far in 2011," stated Mr. Xiaojun Zhu, Chief Executive Officer of China HGS Real Estate Inc. "During the previous quarter, our revenue recognition was affected by the delay of government initiatives to launch an online invoicing system, which was ultimately completed and activated in late February 2011.  In order to ensure that China HGS will be immune from similar factors, we have modified our internal accounting process to embrace a model that recognizes revenue only when the keys are handed over to the buyer.  We believe this modified internal practice will help us to more effectively and accurately report our operating performance in the future."

Second-Quarter Fiscal 2011 Results

Fiscal second quarter gross revenue increased 88.6% to $26.2 million, from $13.9 million in year-ago quarter. This significant growth in revenue was mainly attributable to the recognition of the deferred revenue from fiscal first quarter of 2011 when the Company was unable to obtain property sales invoices from the Hanzhong City Local Taxation Bureau's website.

In the past several years, China HGS has been recognizing revenues when the keys are delivered to the buyers, which signifies that the buyers have taken ownership of the properties and the Company has no further obligations under the contracts. Historically, China HGS delivered the keys together with the property sales invoice obtained from the Hanzhong City Local Taxation Bureau, which was issued manually by government officials, along with the delivery of the key to customers. In November 2010, the Hanzhong City Local Taxation Bureau implemented a new Web-based property invoicing process, which requires all property sales invoices to be issued through its designated website. However, this website was not officially launched by Hanzhong government until late February 2011. Because China HGS' internal accounting closing process recognized revenue upon the delivery of keys and the issuance of the sales invoices, this delay of the government website launch significantly affected the accounting closing process and therefore, the revenue recognition of China HGS in the three months ended December 31, 2010.

Since the implementation of the new policy of property invoicing process, China HGS has continued to assess the relevancy of sales invoices to the overall closing process, taking into consideration China HGS's revenue recognition policy and China HGS's obligations to the buyers. China HGS's obligations to the buyers under the sales contracts are fulfilled and the revenue earning process has been completed at the time the keys are delivered to the buyers, with or without the sales invoices. The issuance of a sales invoice is a routine matter and the lack of such invoice does not prevent a buyer from taking legal ownership of the property, nor make the sales contract voidable. Therefore, China HGS determined that the issuance of the property sales invoice is not a critical component of the accounting book closing process. As a result, beginning in the current quarter and going forward, China HGS recognized the revenue only upon the delivery of property keys to customers. The sales invoices will be provided to the buyers as soon as they can be obtained from the local government taxation bureau.

During the three months ended March 31, 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 53.2%, 4.6%, and 37.1% and 5.1% of gross revenues in the quarter, respectively. Below is a breakdown of project sales in the first quarters of 2011 and 2010:

Gross profit increased 124.5% to $12.7 million compared to $5.7 million in the second quarter of fiscal 2011.  Gross margin was 48.4%, compared to 40.6% in the same period of 2010. The substantial growth in gross profit was largely due to the significant growth in sales.  The strong increase in gross margin was a result of increased unit sales price as compared to the same period of last year.  During the three months ended March 31, 2011, the average property sales price has increased to $48,845 per unit from $35,255 per unit in the same period in 2010.

Total operating expenses were $387,084 during the three months ended March 31, 2011, slightly decreased from $387,615 in the same period a year ago. The decrease in selling expense was due to reduced marketing expenses as a result of the Company's high brand recognition in its core market, which was partly offset by the increased general and administrative expenses related to being a public company.

Operating income increased 133.6% to $12.3 million in the fiscal second quarter of 2011, from $5.3 million in the same period a year ago. Operating margin was 46.9%, compared to 37.9% in the same period a year ago.

Net income increased 136.0% to $11.8 million in the second quarter of fiscal 2011, or $0.26 per diluted share, compared to net income of $5.0 million, or $0.11 per diluted share, in the year ago period.  Diluted earnings per share were calculated using weighted average shares of 45.1 million in the quarter ended March 31, 2011.

Fiscal First-Half 2011 Results

Net revenue increased 5.6% to $26.4 million for the six months ended March 31, 2011, compared to $25.0 million for the six months ended March 31, 2010. Gross profit increased 21.0% to $12.7 million, with a gross margin of 48.1%, compared to $10.5 million, with a gross margin of 42.0% for the same period a year ago.  Operating income grew 35.8% to $12.2 million, with an operating margin of 46.3%, compared to $9.0 million, with an operating margin of 36.0% for the year ago period. Net income rose 36.5% to $11.7 million, or $0.26 per diluted share, compared to $8.6 million, or $0.19 per diluted share, for the six months ended March 31, 2010.

During the six months ended March 31, 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 52.9%, 4.6%, and 37.4% and 5.1% of gross revenues in the quarter, respectively. Below is a breakdown of project sales in the first six months of 2011 and 2010:

Financial Condition

As of March 31, 2011, China HGS had $20.6 million in cash and cash equivalents, up from $12.6 million at September 30, 2010.  China HGS had working capital of $39.6 million.  Shareholder's equity was $61.0 million.  The Company has no long-term debt and generated $7.2 million of operating cash in the six months ended March 31, 2011.

Business Outlook

"As a Tier-III city, Hanzhong's real-estate demand is still mainly generated from inelastic demand from first-time home owners.  We believe this demand will continue to rise in Hanzhong and the surrounding areas and expect Hanzhong's real estate market to experience sustainable growth for the foreseeable future," 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 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, 2008, and 2009 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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