China Recycling Energy Corporation Reports First Quarter 2011 Results

Highlights:

• Systems sales and contingent revenue was $11.56 million, an increase of 14.2% as compared to $10.1 million for the first quarter 2010.
• Net income was $4.56 million, up 108.2% from $2.19 million for the first quarter of 2010.
• Total Operating Income grew by 52.1% to $8.25 million from $5.42 million in the previous year.
• Fully diluted EPS of $0.09, as compared to $0.05 for the first quarter of 2010.
• On adjusted Non-GAAP measures, as defined below, non-GAAP net income grew to $5.3 million, or non-GAAP fully diluted EPS of $0.10, as compared to $3.9 million, or fully diluted EPS of $0.08, for the same period of 2010.

Summary of Financial Results:

Mr. Guohua Ku, Chairman and CEO of CREG commented, "We are very pleased with our first quarter 2011 financial results. CREG booked revenue growth of 14.2% in the quarter as compared to the corresponding quarter 2010. An increase in sales and interest income led to the rise in our revenue and net income during this three month period."

Mr. Ku continued, "In terms of completing projects, we had a very productive quarter. We are excited to announce that we have completed and booked the sale of the third 9MW capacity power station as a part of Erdos Phase II project. We are now in the midst of constructing Erdos Phase III, a 25 MW waste heat power generation system, which we anticipate will be completed in the third quarter of 2011, bringing our total capacity close to 146 MW."

"On an on-going basis, CREG employs its expertise to find more avenues to recycle energy and provide saving to new types of energy intensive industries. We have a wealth of projects ahead of us, some that we will embark upon and even more that we will evaluate and select for our energy recovery services down the road. China Cinda, one of our strategic partners, has provided CREG referrals to many of their industrial clients and we expect to source clientele from those relationships in the future. Right now, we are evaluating additional strategic financing options for our projects, and anticipate reducing the interest cost in this area in the future. We look forward to updating the investment community as more large projects are formerly signed and financed," concluded Mr. Ku.

Financial Results for Quarter Ended March 31, 2011

Revenue for the quarter ended March 31, 2011 was $11.56 million, comprised of $11.27 from system sales and $0.29 million from contingent rental income, as compared to revenue for the comparable 2010 quarter of $10.13 million, comprised of only system sales, an increase of $1.44 million or 14.2%. The increase primarily was due to the completion and sale of the third 9MW capacity power station of Erdos Phase II project through sales-type leasing in the first quarter of 2011 and contingent rental income of $0.29 million from actual usage of the electricity in addition to the minimum lease payments from our Shengwei Group - Tongchuan Project, Erdos Project and Shenmu Project. In the same quarter of 2010, we recorded $10.13 million revenue from the sale of the second 9MW capacity power station of Erdos Phase I project through sales-type lease.

Gross profit was $3.11 million for the three months ended March 31, 2011, as compared to $2.33 million for the same period of 2010, a gross margin of 27% and 23% for the comparable period of 2011 and 2010, respectively. The gross profit was mainly from the selling of the Erdos Phase II third 9MW capacity waste heat power generation (WHPG) system in the first quarter of 2011, and contingent rental income of $0.29 million. While in the first quarter of 2010, it was mainly for the sale of the second 9MW WHPG system from Erdos Phase I project. 

Operating income was $8.25 million for the first quarter of 2011, as compared to $5.42 million in operating income for the first quarter of 2010, an increase of $2.82 million or 52%. The growth in operating income was mainly due to the increase in interest income from selling and leasing our energy saving systems through sales-type leasing. Interest income on sales-type leases for the three months ended March 31, 2011 was $5.14 million, a $2.05 million or 66.3% increase from $3.09 million for the comparable period of 2010.  During the first quarter of 2011, the interest income was derived from eleven systems: two TRT systems, two CHPG systems, one WGPG system, two WHPG systems associated with our Erdos Phase I project and two systems of Erdos Phase II project, the Pucheng biomass power generation system and Zhongbao WHPG system. The third 9MW WHPG system of Erdos Phase II project was sold at the first quarter of 2011 and will start to generate interest income in April of 2011. In the first quarter of 2010, interest income was derived from seven systems: two TRT systems, two CHPG systems, one WGPG system, and two WHPG systems associated with our Erdos Phase I project.

Operating expenses consisted of selling, general and administrative expenses totaling $1.77 million for the first quarter of 2011, as compared to $1.36 million for the same period of 2010, an increase of $0.41 million or 30%. The increase was due to proportional increases in our payroll, welfare, business trips and marketing expenses as a result of the sale of the third 9MW recycling WPHG system of Erdos Phase II project and continuous expansion of our business. In addition, we recorded $1.11 million in compensation expense for stock options during the first quarter of 2011, as compared to $0.74 million for the same period of 2010. 

Our net income for the three months ended March 31, 2011 was $4.56 million, as compared to $2.19 million for the same period of 2010, an increase of $2.37 million or 108.2%. This increase in net income was mainly due to the sale of the third 9MW WHPG system of the Erdos Phase II project, as well as increased interest income from lease payments for energy saving systems in the first quarter of 2011, as compared with the first quarter of 2010.

For the three months ended March 31, 2011, GAAP diluted EPS was $0.09 with approximately 55,126,048 shares of common stock outstanding, as compared with $0.05 in the same period of 2010 when the Company had 48,973,914 million shares of common stock outstanding.

As of March 31, 2011, the Company had cash and cash equivalents of $21.91 million, other current assets were $9.43 million and current liabilities were $28.06 million. Total investments in sales-type leases were $128.12 million, compared with $117.59 million as of the end of December 2010. Total shareholders' equity was $78.44 million, compared with $70.8 million at December 31, 2010.

Non-GAAP Financial Measures

We believe that "adjusted net income" and "adjusted earnings per share" information, when taken in conjunction with reported results, provide a useful measure of financial performance since they eliminate the impact of certain non-recurring, non-cash charges. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Additionally, the non-GAAP financial measures used by CREG may not be comparable to non-GAAP financial measures used by other companies.

For the quarter ended March 31, 2011, Non-GAAP net income was $5.3 million, or non-GAAP diluted EPS of $0.10, compared with $3.9 million of Non-GAAP net income, or $0.08 in Non-GAAP diluted EPS for the same period ended in 2010.

First Quarter 2011 Results Conference Call

The Company plans to host its first quarter 2011 results conference call today, Tuesday, May 17, 2011 at 9:00 a.m. ET. Investors are invited to participate on the live call by dialing (877) 407-4018, International investors should dial (201) 689-8471 both parties should reference event ID: 372770.  A replay of the call will be available for 1 week following the call. Domestic investors can dial (877) 870-5176 and International investors can call (858) 384-5517 both parties can enter pass code 372770.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude the effect of non-cash, non-operating expenses related to the Convertible Notes issued in April 2008, and the compensation expenses for the fair value of stock options, as well as deferred income tax expenses. The Company uses non-GAAP financial measures when it internally evaluates the performance of its business and makes operating decisions, including internal budgeting and performance measurement. The Company believes that providing the non-GAAP measures is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand CREG's financial performance in comparison to historical periods, and it allows investors to evaluate CREG's performance using the same methodology and information as that used by the Company's management. However, investors need to be aware that non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP, and they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure.

About China Recycling Energy Corp.

China Recycling Energy Corp. (NASDAQ: CREG or "the Company") is based in Xi'an, China and provides environmentally friendly waste-to-energy technologies to recycle industrial byproducts for steel mills, cement factories and coke plants in China. Byproducts include heat, steam, pressure, and exhaust to generate large amounts of lower-cost electricity and reduce the need for outside electrical sources. The Chinese government has adopted policies to encourage the use of recycling technologies to optimize resource allocation and reduce pollution. Currently, recycled energy represents only an estimated 1% of total energy consumption and this renewable energy resource is viewed as a growth market due to intensified environmental concerns and rising energy costs as the Chinese economy continues to expand. The management and engineering teams have over 20 years of experience in industrial energy recovery in China. For more information about CREG, please visit http://www.creg-cn.com.

Safe Harbor Statement

This press release may contain certain "forward-looking statements" relating to the business of China Recycling Energy Corp. and its subsidiary companies. 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. Investors 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 at 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.