China Recycling Energy Corporation Reports Second Quarter 2011 Financial Results

XI'AN, China, Aug. 15, 2011 /PRNewswire-Asia/ -- China Recycling Energy Corp. (NASDAQ: CREG; "CREG" or "the Company"), a leading industrial waste-to-energy solution provider in China, today announced results for the three months and six months ended June 30, 2011.

Highlights:

• System sales was $11.34 million and contingent rental income was $0.58 million for the six months ended June 30, 2011
• Net income grew 16.6% to $8.257 million as compared to $7.67 million for the first six months of 2010.
• Interest income on sales-type leases increased by 65% over 2010 comparable periods
• Fully diluted EPS of $0.16, as compared to $0.15 for the first six months of 2010.
• On adjusted Non-GAAP measures, as defined below, non-GAAP net income was $7.5 million, or non-GAAP fully diluted EPS of $0.18 for the first half of 2011.

Summary of Financial Results:

Mr. Guohua Ku, Chairman and CEO of CREG commented, "As expected, the second quarter 2011 showed steady growth in net income, significant increase in interest income from the leasing of our systems and decreased revenue as compared to last year's second quarter. CREG booked net income growth of 16.6% and interest income growth on sales type leasing of 65.4% in the first six months of 2011 as compared to the corresponding period of 2010. The decrease in sales was anticipated since there were no system completions and revenue from system sales booked in the second quarter. Erdos Phase III, a 25 MW heat power generation system, is expected to be completed in the next several months, bringing our annual capacity to 146 MW, an increase of roughly 20% by year-end 2011."

Mr. Ku continued, "In terms of projects under construction, we have three projects that we are currently developing and integrating for our customers. Erdos Phase IV, a 25 MW heat power generation system, is under construction and is expected to be completed by the end of the year and will begin receiving interest income from our leasing model shortly thereafter. Shannxi Datong Coal's 23 MW project is currently under construction as well. In May 2011, we entered into a letter of intent with ShenQiu YuNeng Thermal Power Ltd Co. for the reconstruction and transformation of their current 12 MW thermal power generation system, which we expect to be completed within a few months. It's important to note that system sales revenue on these projects are recognized at the point of system delivery and monthly lease payments, based on our off-take agreements with the customer, begin immediately thereafter."

"As for the remainder of the year and going forward, the demand for CREG's waste-to-energy services and the potential list of heavy industrial customers is extremely vast. We have the advantage over our competitors of not only having Cinda's support of their heavy industrial, energy intensive portfolio companies to using CREG for their energy recovery needs but also we have the ability and the resources to finance our customers directly, an advantage that no meaningful player in the market has right now. Announced in July, Cinda has recently provided a financial leasing option to us for financing which was negotiated at a very good rate in comparison to onshore lending. Looking ahead and as mentioned before, we are currently in the midst of evaluating other strategic financing options for our projects, in an effort to better grow our business organically and via acquisition. We look forward to updating the investment community and our shareholders on this endeavor. In the meantime, we will continue to execute on our growth strategy of bringing more energy savings to our customers and growing our client portfolio," concluded Mr. Ku.

Financial Results for Three Months Ended June 30, 2011

Net sales of systems for the three months ended June 30, 2011 were $0.37 million while net sales for the same period of 2010 were $22.54 million, a decrease of $22.17 million. The decrease was primarily due to the fact that there were system sales in the second quarter of 2011, as compared to the same period of 2010, when completion and sale of Pucheng biomass power generation system was recorded. For the three months ended June 30, 2011, the Company received contingent rental income of $0.29 million, compared to $0.74 million contingent rental income for the same period in fiscal year 2010. The contingent rental income resulted from actual usage of the electricity, in addition to the minimum lease payments received in the second quarter of 2011 from our Shengwei Group - Tongchuan Project, Erdos Project and Shenmu Project.  For the sales-type lease, sales and cost of sales are recorded at the beginning of the leases. Interest income from the sales-type leases is our other major revenue source as described below. 

Cost of sales for the second quarter of 2011 was $68,640 while our cost of sales for the comparable period of 2010 was $16.80 million, a decrease of $16.1 million. The decrease was attributed to the fact that there were no systems completed and sold during the second quarter of 2011, as compared to the same period of 2010 when the Pucheng biomass power generation system lease was entered into at a cost of $16.80 million.

Gross profit was $0.30 million for the three months ended June 30, 2011, as compared to $5.74 million for the same period of 2010, reflecting a gross margin of 81% and 25% for the comparable period of 2011 and 2010, respectively. Because no system was completed and sold during the second quarter of 2011, the gross profit was all derived from contingent rental income, while in the second quarter of 2010 it was mainly from the sale of the Pucheng biomass power generation system. Note that due to the sporadic sale of our systems in any given year and our recurring revenue stream from sales-type leasing, gross margin can fluctuate significantly and therefore it is not the best indicator in determining our company's profitability.

Interest income on sales-type leases for the three months ended June 30, 2011 was $5.49 million, a $2.17 million or 65.4% increase from $3.32 million for the comparable period of 2010.  During the second quarter of 2011, the interest income was derived from twelve 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, and the 3rd 9MW WHPG of Erdos Phase II project. During the second quarter of 2010, the interest income was from seven systems: two TRT systems, two CHPG systems, one WGPG system, and two waste heat power generating systems associated with our Erdos Phase I project.

Operating expenses consisted of selling, general and administrative expenses totaling $1.68 million for the second quarter of 2011 as compared to $1.39 million for the same period of 2010, an increase of $0.29 million or 21%. The increase was due to proportional increases in our payroll, welfare, business trip and marketing expenses as a result of continuous expansion of our business. In addition, we recorded $0.34 million in compensation expense for stock options during the second quarter of 2011, as compared to $0.67 million for the same period of 2010.

Our net income for the three months ended June 30, 2011 was $3.70 million compared to $5.04 million for the same period of 2010, a decrease of $1.34 million or 26.6%. This decrease in net income was mainly due to no systems being completed and sold during the quarter, despite increased interest income from lease payments for energy saving systems compared with the second quarter of 2010.

For the three months ended June 30, 2011, GAAP diluted EPS was $0.07 with approximately 55,447,423 shares of common stock outstanding, as compared with $0.10 in the same period of 2010 when the Company had 48,754,609 million shares of common stock outstanding.

Financial Results for Six Months Ended June 30, 2011

Net sales of systems for the six months ended June 30, 2011 was $11.93 million, while our net sales for the same period of 2010 was $32.66 million, a decrease of $20.74 million or 63.5%. In the six month period of 2011, the company completed and sold the 3rd 9MW capacity power station of Erdos Phase II project through sales-type leasing arrangements and $0.59 million from contingent rental income, as compared to same period of 2010, when the company completed and sold a second 9MW capacity power station of Erdos Phase I project and the Pucheng biomass power generation system as well as booked contingent rental income of $0.74 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. For the sales-type lease, sales and cost of sales are recorded at the beginning of the leases. As mentioned, the interest income from the sales-type leases is our other major revenue source in addition to sales revenue. 

Cost of sales for the six months ended June 30, 2011 was $8.52 million while our cost of sales for the comparable period of 2010 was $24.60 million, a decrease of $16.08 million. There was only one system completed and sold during the six months ended June 30, 2011, which was the 3rd 9MW capacity power station of Erdos Phase II project, as compared to the same period of 2010, when the cost of sales consisted of the second 9MW capacity power station of Erdos Phase I project and Pucheng biomass power generation system.

Gross profit was $3.4 million for the six months ended June 30, 2011 as compared to $8.06 million for the same period of 2010, representing a gross margin of 29% and 25% for the comparable period of 2011 and 2010, respectively.

Interest income on sales-type leases for the six months ended June 30, 2011 was $10.63 million, a $4.21 million or 65.5% increase from $6.42 million for the comparable period of 2010.  During the six months ended June 30, 2011, the interest income was derived from twelve systems:  two TRT systems, two CHPG systems, one WGPG system, two waste heat power generating 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, and the 3rd 9MW waste heat power generating system of Erdos Phase II project. During the six months ended June 30, 2010, the interest income was from seven systems: two TRT systems, two CHPG systems, one WGPG system, and two waste heat power generating systems associated with our Erdos Phase I project.

Operating expenses consisted of selling, general and administrative expenses totaling $3.45 million for the six months ended June 30, 2011 as compared to $2.75 million for the same period of 2010, an increase of $0.7 million or 25%. The increase was due to proportional increases in our payroll, welfare, business travel and marketing expenses as a result of the continuous expansion of our business. In addition, we recorded $1.45 million in compensation expenses for stock options during the six months ended June 30, 2011, as compared to $1.41 million for the same period of 2010.

Our net income for the six months ended June 30, 2011 was $8.26 million, as compared to $7.18 million for the same period of 2010, representing an increase of $1.08 million or 15.04%. This increase in net income was mainly due to the increased interest income from lease payments for our energy saving systems as compared to same period of 2010.

For the six months ended June 30, 2011, GAAP diluted EPS was $0.16 with approximately 55,084,616 shares of common stock outstanding, as compared with $0.15 in the same period of 2010 when the Company had 48,886,504 million shares of common stock outstanding.

Financial Position as of June 30, 2011

The Company had cash and cash equivalents of $10.56 million, other current assets were $12.52 million and current liabilities were $23.92 million. Total investments in sales-type leases were $127.91 million, as compared to $117.59 million as of December 31, 2010. Total shareholders' equity was $83.63 million, as compared to $70.8 million as of 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.

Financial Results Conference Call

The Company will host a conference call at 8:30 a.m. ET on Tuesday, August 16, 2011, to discuss the Company's second quarter 2011 financial results. Mr. Guohua Ku, Chief Executive Officer, and Mr. David Chong, Chief Financial Officer, will be hosting the call.

Investors are invited to participate on the live call by dialing 1-877-407-4018 for domestic investors. International investors can dial 1-201-689-8471.  For investors that would like to listen to the webcast, please visit log on to http://viavid.net/dce.aspx?sid=00008BAC approximately 5 minutes before the start of the call. Please reference event ID: 377556.

If you are unable to participate in the call at this time, a replay of the call will be available for one week following the call starting at 11:30 a.m. ET, August 16, 2011 and ending at 11:59 p.m. ET on August 23, 2011. To list to the replay, domestic investors can dial +1 (877) 870-5176 and International investors can dial +1 (858) 384-5517.  The pass code for the replay is: 377556.

For more information regarding China Recycling Energy's financial performance during the three and six months ended June 30, 2011, please refer to the Quarterly Report on Form 10-Q to be filed with the Securities and Exchange Commission.

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.

SOURCE China Recycling Energy Corp.