China Recycling Energy Corporation Reports Third Quarter 2011 Financial Results

XI'AN, China, Nov. 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 nine months ended September 30, 2011.

Highlights:

• Interest income on sales-type leases increased by 55.2% to $16.09 million as compared to $10.37 million in the nine months ended September 30, 2010.
• Net income grew 65.3% to $16.91 million as compared to $10.23 million recorded in the nine months ended September 30, 2010.
• Fully diluted earnings per share ("EPS") of $0.33, up 57.1% from fully diluted EPS of $0.21 in the nine months ended September 30, 2010.

Summary of Financial Results:

Mr. Guohua Ku, Chairman and CEO of CREG commented, "Our third quarter 2011 showed great growth in net income, interest income from the leasing of our systems and earnings for our shareholders. CREG booked net income growth of 65.3% and interest income growth on sales type leasing of 55.2% in the first nine months of 2011 as compared to the corresponding period of last year. We were pleased to also add to our project portfolio with the reconstruction, sale and lease back of a biomass power generation system for our new customer, Shenqiu – whom we've engaged in a leasing arrangement with for an 11-year term. With this addition, we now have an estimated annual capacity of approximately 133 MW going into fourth quarter 2011."

Mr. Ku continued, "As for projects in the development stage, Erdos Phase III, a 25 MW heat power generation system, is currently under construction. Construction for Erdos Phase IV, a 25 MW heat power generation system will be re-started after the delivery of the Phase III system, as we focus our effort on Phase III, which has been delayed. In addition, we are also in the process of constructing a 23 MW system for our customer Shanxi Datong Coal.  Revenue on these systems is recognized at the point of system delivery and monthly lease payments, based on our off-take agreements with the customers, begin thereafter. "

"Due to our first mover advantage and stringent efforts by the government to curb industrial energy usage and waste, CREG's position in the waste-to-energy market in China is unparalleled. While waste-to-energy technology is not new globally, the market for these solutions in China is relatively immature and growing with numerous heavy industrial companies scrambling to reduce their energy usage and comply by government-issued mandates. With our proven track record of successful system integration and reliability, as well as our symbiotic partnership with Cinda to provide energy saving solutions to their industrial portfolio companies, we have the ability to grow tremendously in the coming years. In addition to evaluating new projects to take on, we are continuously seeking more cost-effective financing options for our company and our customers in an effort to better grow our business organically and via acquisition. CREG's business is designed to not only help customers comply with energy savings reform and grow their core business, but also to increase our company's profitability and further grow our recurring revenue stream derived from accruing interest income on sales-type leasing. We look forward to announcing the completion of projects currently under development now and in the future and bringing more savings to our company and our customers," concluded Mr. Ku.

Financial Results for Three Months Ended September 30, 2011

Total sales for the three months ended September 30, 2011, comprised of system sales and contingent rental income, was $18.84 million, as compared to $11.12 million recorded in the same period of 2010, an increase of $7.73 million. The increase was primarily attributed to an increase in system sales and contingent rental income during the third quarter of 2011, as compared to the same 2010 period. In the three months ended September 30, 2011, the Company recorded the completion and sale of the 12MW Shenqiu biomass power generation system ("BMPG") in addition to receiving $0.26 million in contingent rental income, as compared to the same period of 2010 in which sales included the 7MW Zhongbao waste heat power generation ("WHPG") system and $0.56 million in contingent rental income. The contingent rental income resulted from actual usage of the electricity in addition to the minimum lease payments received in the third quarter of 2011 from our Shengwei Group - Tongchuan Project and Erdos Project.  For sales-type leases, sales and cost of sales are recorded at the time of system delivery. Interest income from the sales-type leases is our other major revenue source in addition to system sales revenue

Cost of sales for the third quarter of 2011 was $14.33 million while cost of sales for the comparable period of 2010 was $8.16 million, an increase of $6.15 million. The increase was attributed to the sales-type lease of the Shenqiu BMPG system in the third quarter of 2011, as compared to the same period of 2010 when the Zhongbao WHPG system lease was entered into at a cost of $8.16 million.

Gross profit was $4.52 million for the three months ended September 30, 2011, as compared to $2.96 million for the same period of 2010, reflecting a gross margin of 24% and 27% for the comparable period of 2011 and 2010, respectively. The increase in gross profit was mainly from the sales-type lease of the Shenqiu BMPG system that has a gross profit margin of approximately 23%, and the contingent rental income accounted for 1% of total sales. While in the comparable period of 2010, gross profit was derived from the sales-type lease of the Zhongbao WHPG system that has a profit margin of approximately 23%, and the contingent rental income that accounted for 5% of total sales. Note that due to the uneven sales of our systems in any given year and our recurring revenue stream from sales-type leasing, gross margin can fluctuate significantly and therefore is not the best indicator of our company's profitability.

Interest income on sales-type leases for the three months ended September 30, 2011 was $5.47 million, representing a $1.52 million increase from $3.95 million recorded in the comparable period of 2010.  During the third quarter of 2011, interest income was derived from twelve systems:  two blast furnace top gas recovery turbine ("TRT") systems, two cement heat power generation ("CHPG") systems, one waste gas power generation ("WGPG") system, two WHPG systems associated with our Erdos Phase I project and two WHPG systems of Erdos Phase II project, the Pucheng BMPG system and Zhongbao WHPG system, and the 3rd 9MW WHPG system of Erdos Phase II project. During the third quarter of 2010, interest income was generated from eight systems: two TRT systems, two CHPG systems, one WGPG system, one BMPG system, and two WHPG systems associated with our Erdos Phase I project.

Operating expenses consisted of selling, general and administrative expenses totaled $0.38 million for the third quarter of 2011, as compared to $1.80 million for the same period of 2010, a decrease of $1.41 million or 78%. The decrease was mainly due to $0.16 million for stock option compensation incurred during the nine months ended September 30, 2011, as compared to $1.11 million for the same period of 2010, in addition to decreased expenses in our rental, low value consumable goods and insurance as a result of the improvement on cost control by management in the effort of further growing the business.

Net income for the three months ended September 30, 2011 was $8.66 million, as compared to $3.05 million for the same period of 2010, an increase of $5.61 million. This increase in net income was mainly due to the sale of the Shenqiu biomass power generation system during the third quarter, and increased interest income from lease payments for energy saving systems as compared to the third quarter of 2010.

For the three months ended September 30, 2011, GAAP diluted EPS was $0.16 with approximately 54.95 million shares of common stock outstanding, as compared with $0.06 in the same period of 2010 when the Company had 49.25 million shares of common stock outstanding.

Financial Results for Nine Months Ended September 30, 2011

Total sales for the nine months ended September 30, 2011, comprised of system sales and contingent rental income, was $30.77 million, as compared to $43.78 million recorded in the same period of 2010, a decrease of $13.01 million. The decrease was a result of lower system sales and a decrease in contingent rental income during the nine-month period of 2011, as compared to the same 2010 period. In the nine months ended September 30, 2011, the company recorded the completion and sale of the 3rd 9MW capacity power station of the Erdos Phase II project and the Shenqiu BMPG system through sales-type leasing arrangement in addition to receiving $0.85 million from contingent rental income. In comparison, for the same period in fiscal year 2010, the company recorded the completion and sale of the second 9MW capacity power station of the Erdos Phase I project, the completion of the transformation and sale of the Pucheng BMPG system, the completion of the transformation and sale of the Zhongbao WHPG system and contingent rental income of $1.31 million from actual usage of the electricity in addition to the minimum lease payments received from our Shengwei Group - Tongchuan Project, Erdos Project and Shenmu Project. For the sales-type leases, sales and cost of sales are recorded at the time of system delivery. Interest income from the sales-type leases is our other major revenue source in addition to sales revenue. 

Cost of sales for the nine months ended September 30, 2011 was $22.85 million while cost of sales for the comparable period of 2010 was $32.76 million, a decrease of $9.91 million. The 3rd 9MW capacity power station of the Erdos Phase II project and Shenqiu BMPG system were completed and sold during the nine months ended September 30, 2011, as compared to the same period of 2010 when cost of sales consisted of the second 9MW capacity power station of Erdos Phase I project, the Pucheng BMPG system and the Zhongbao WHPG System.

Gross profit was $7.92 million for the nine months ended September 30, 2011, as compared to $11.02 million for the same period of 2010, reflecting a gross margin of 26% and 25% for the comparable period of 2011 and 2010, respectively.

Interest income on sales-type leases for the nine months ended September 30, 2011 was $16.09 million, a $5.72 million increase from $10.37 million recorded in the comparable period of 2010.  During the nine months ended September 30, 2011, 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 the Erdos Phase II project, the Pucheng BMPG system, the Zhongbao WHPG system, and the 3rd 9MW WHPG system of Erdos Phase II project. During the nine months ended September 30, 2010, interest income was generated from eight systems: two TRT systems, two CHPG systems, one WGPG system, two WHPG systems associated with Erdos Phase I project, and the Pucheng BMPG system.

Operating expenses consisting of selling, general and administrative expenses totaled $3.83 million for the nine months ended September 30, 2011 as compared to $4.54 million for the same period of 2010, a decrease of $0.71 million or 16%. The decrease was mainly due to $1.61 million stock option compensation incurred during the nine months ended September 30, 2011, as compared to $2.52 million for the same period of 2010, partially offset by proportional increases in our payroll, welfare, travel and marketing expenses as a result of the continuous expansion of our business.

Net income for the nine months ended September 30, 2011 was $16.91 million, as compared to $10.23 million for the same period of 2010, an increase of $6.68 million. This increase in net income was mainly due to a decrease in operating expenses and an increase in interest income from lease payments for energy saving systems, as compared to the same period of 2010.

For the nine months ended September 30, 2011, GAAP diluted EPS was $0.33 with approximately 55.08 million shares of common stock outstanding, as compared with $0.21 in the same period of 2010 when the Company had 49.37 million shares of common stock outstanding.

Financial Position as of September 30, 2011

The Company had cash and cash equivalents of $19.70 million, other current assets of $11.68 million, non-current assets of $180.12 million, current liabilities of $33.81 million and noncurrent liabilities of $72.77 million. Total shareholders' equity was $99.51 million, as compared to $70.81 million as of December 31, 2010.

Net Investment in Sales-Type Leases as of September 30, 2011

The Company, through its subsidiary, Shanghai TCH Energy Technology Co., Ltd ("Shanghai TCH"), sells and leases energy saving systems and equipment. Under sales-type leases, Shanghai TCH leased the following: TRT systems to Xingtai and Zhangzhi with terms of 5 and 13 years, respectively; CHPG systems to Tong Chuan Shengwei and Jin Yang Shengwei for 5 years, respectively; WGPG systems to Shenmu for 10 years; BMPG systems to Pucheng and Shenqiu for terms of 15 years and 11 years, respectively; and a power and steam generating system from waste heat from metal refining to Erdos for 20 years. The components of the net investment in sales-type leases as of September 30, 2011 and December 31, 2010 are as follows:  

As of September 30, 2011, the future minimum rentals to be received on non-cancelable sales-type leases by years are as follows: 

Non-GAAP Financial Measures

The Company believes 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.

Non-GAAP net income was $8.65 million in the three months ended September 30, 2011, as compared to $3.05 million in the same period of 2010. For the nine months ended September 30, 2011, Non-GAAP net income was $16.91 million, as compared to 10.23 million in the same nine-month period of 2010.

 
(1) CREG provides adjusted net income and earnings per share on a non-GAAP basis that excludes non-cash, share-based compensation expense and non-cash interest expense on the amortization of the beneficial conversion feature for the convertible notes and non-cash deferred income tax expenses, as described below, to enable investors to better assess the Company's operating performance. The non-GAAP measures are described below and reconciled to the corresponding GAAP measure in the section below titled "About Non-GAAP Financial Measures."

Third Quarter 2011 Financial Results Conference Call

The Company will host a conference call at 8:30 a.m. ET on Tuesday, November 15, 2011, to discuss the Company's third 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 and. 1-201-689-8471 for international.  For investors that would like to listen to the webcast, please log on to http://viavid.net/dce.aspx?sid=00008F7E approximately 5 minutes before the start of the call. Please reference event ID: 382472.

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 November 15, 2011 and ending at 11:59 p.m. ET on November 22, 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: 382472.

For more information regarding China Recycling Energy Corp's financial performance during the three and nine months ended September 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.

For more information, please contact:

In China:
Mr. Leo Wu
Investor Relations
China Recycling Energy Corp.
Tel:   +86-29-8765-1096
Email: [email protected]

In USA:
Mr. Howard Gostfrand
American Capital Ventures, Inc.
Tel:   +1-305-918-7000
Email: [email protected]

SOURCE China Recycling Energy Corp.