China HGS Real Estate Inc. (CAHS.OB) Sets Record Results for Fiscal Year 2009

With a national grade II qualification for real estate and a ranking as the No.1 developer of properties (in terms of market share) for 2007 and 2008 in Hanzhong, Shaanxi Province, via its wholly owned subsidiary Shaanxi Guangsha Investment and Development Group Co., Ltd., CAHS is well-positioned to extend its success story into 2010 and beyond.

Chairman and CEO of CAHS Mr. Xiaojun Zhu pointed to the “broad property market recovery in China” as driving pre-sales on the Company’s residential projects and creating a “favorable pricing environment” which has enhanced “overall profitability”.

Mr. Xiaojun Zhu noted the Company’s “record revenue and net income growth” and “the growing recognition as a prominent real estate developer” as evidence of a leading market position.

Mr. Xiaojun Zhu also said that the rapid growth CAHS experienced last fiscal year could be attributed to “efficient pricing strategy and marketing efforts”, which led to increased sales of residential units due to the Company’s enhanced reputation within the market sector.

Due to increased construction and rising land acquisition costs, CAHS saw liquidity fall 38% from FY 08 to $0.8 million at the end of FY 09, but anticipates strong growth from increased operating activities in 2010, which will boost cash flows substantially. Having $29.1M in working capital at the end of FY 09 with no long-term debt, CAHS also saw shareholder’s equity rise 63%, to $29.9M.

With record revenue growth driven by sales of completed residential units, CAHS showed a 65% jump from FY 08 data to $28.5M for FY 09.

• Revenue was largely driven by sales at Mingpin Plaza, Hanzhong, which represented 40.2% ($11.4M) of revenue, while the Company’s Yang County projects – Weinan Lijing Garden (21.7%), Mingzhu Garden (20%), and Yangzhou Pearl Garden (18.2%) – contributed the remainder.

• Gross profits for FY 09 also showed record results, up 65.4% to $13.4M from $8.1M in FY 08, while gross margins also increased slightly (0.1%).

• Total operating expenses for FY 09 increased 9.7% from FY 08 to $2M, accounting for 6.9% of revenue, a marked decline from 10.4% in FY 08.

• Selling expenses were driven upwards 35.6% to $0.4M by increased advertising costs and rapid sales growth.

• General and administrative expenses were up 5.3% to $1.6M due to costs associated with going public, growth in sales, and consulting services.

• Operating income was up a whopping 81.3% to $11.4M, and operating margin also increased 3.6%.

• Interest expense also increased due to rising rates on the Company’s short term bank loan, up 31.4% to $121,372.

• Net income was also up, delighting investors with an 83.7% increase to $11.1M, or $0.28 per diluted share, a tantalizing jump to would be investors from the $0.15 per diluted share of FY 08.

Having sold all 192 apartments in Phase I of the Yangzhou Pearl Garden Project, and 87.3% of Phase II, CAHS has $42.5M in real estate projects currently being developed, which represents an 87.3% increase from last year.

With sales of $12.1M (GFA of 40,582 square meters) at its two major projects – the Yangzhou Pearl Garden in Yang County and Mingzhu Xinju in Hanzhong City – CAHS plans to dominate the Hanzhong market over the next three years while expanding into nearby markets with good fundamentals like Xi’an City in Shaanxi Province.

A recovery in the real estate market and sales pricing, together with “strong fundamentals” were cited as growth factors for CAHS in the Hanzhong market by Mr. Xiaojun Zhu, who went on to point out the “solid project pipeline” and “abundant land reserves” as ample basis to extend the “ongoing positive trend” of CAHS’s financial performance.

CAHS is projecting first quarter revenue of $12.5M (RMB 85.2M) for FY 10, as well as net income of $3.5M (RMB 23.8M), or $0.09 per diluted share.

CAHS is also projecting total revenues of $46.4M (RMB 317M) for FY 10, with net income of $13.0M (RMB 88.7M), or $0.37 per diluted share.