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China Recycling Energy Corporation (NASDAQ:CREG)

Q1 2014 Earnings Conference Call

May 15, 2014 8:30 AM ET

Executives

Guohua Ku – CEO

David Chong – CFO

Operator

So, we’ll start now. Welcome to today’s China Recycling Energy Corporation Earnings Call for the financial results of the first quarter 2014. For the first part of this call, all participants will be in listen-only mode and afterwards there will be a question-and-answer session. Mr. Ku, Please begin

Guohua Ku

(Foreign Language – Chinese)

Unidentified Company Representative

Okay, thank you for joining us on today’s call. Before we start, I would like to remind you that management’s prepared remarks contain forward-looking statements that are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks as but not limited to fluctuations in customer demand, management of rapid growth, intensity of competition, general economic conditions, geopolitical events and regulatory changes, and other information detailed from time-to-time in the Company’s filings and future filings with the United States Securities and Exchange Commission.

Accordingly, although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. In addition, any projections as with the company’s future performance represents management's estimate as of today May 15, 2014.

The company undertakes no obligation to correct or update any forward-looking statements provided as a result of new information, future events, or event change in our expectations.

Joining us on today's call are Mr. Ku, Chief Executive Officer; and Mr. Chong, Chief Financial Officer.

Of course, there will be some translations during the call, we ask for your patience at that time. Mr. Ku, the Chief Executive Officer of China Recycling Energy Corporation will now deliver with the opening remarks. And Mr. Chong will translate them thereafter. Go ahead sir.

Guohua Ku

(Foreign Language – Chinese)

David Chong

(Interpreted)

Thank you Mr. Question. I’ll now do his speech in English. Good morning, and for those in China, good evening. We are pleased with the fact that during the quarter interest income on sales-type leases reached a record high of US$6.3 million, an increase of 65% year-over-year.

Sales saw a decline year-over-year since no project under construction was completed; this is due to the nature of the business model. Here I would like to take this chance – the opportunity to give you a brief overview of our business and revenue model.

We construct waste energy recycling power generating systems and lease them to our customers. On a U.S. GAAP our leases of systems to customers have treated as sales-type leases.

A one-time sale of system is recognized in the inception of the lease after system completion and a interest income of the sales-type leases is recognized on a monthly cash lease payments of the cost of the lease term at a constant periodic rate for our projects commending in operation, lease terms are generally 5 to 30 years.

So, a stable and recurring revenue stream from interest income and sales-type leases has become a major revenue driver and contributes strongly to the long-term sustainable growth of our business.

Income from extra electricity usage in excess of the minimum lease payments for each project is accounted for as contingent rental income.

In the first quarter of 2014, our current 15 waste-to-energy systems in operation ran smoothly and generated constant cash flow. Our customers continue to benefit from our one package solution to reduce pollution and emissions and generate lower cost electricity on-site.

As you have known, the Chinese government has continued to invest and implement policies to curb pollution and reduce waste of energy at a fast growing economy and rapid urbanization has caused serious environmental issues.

In order to meet the target to reduce carbon intensity by 40% to 50%, 45% below the 2005 levels, by 2020, that this government set forth new intensity targets in the 12th Five Year Plan from 2011 to 2015.

Under the new target, energy consumption per unit of GDP will be reduced by 16% and carbon emissions per unit of GDP will be reduced by 17% below the 2010 levels by the end of 2015.

Given the new targets that Chinese government has continued to promote recycling and hence encourage enterprises to implement with energy recycling projects.

In February 2014, Mr. Li Keqiang, Chinese Premier and Participatory of the State Council had an Executive Meeting of the State Council to discuss environmental protection and in particular, air pollution.

Now environmental protection and energy conservation has become the focus of concern at all levels in China as it begin to make large investments in environmental protection infrastructure. This propels surety with a very good opportunity to further expand this potential customer base for waste energy systems.

In the first quarter there are five projects under construction were progressing well and on schedule including projects for Shanxi Datong, Coal Group, Yang Shengwei and Pucheng (Foreign Language) (Inaudible) with a total 115 megawatt power capacity.

In addition, our wholly-owned subsidiary, Xi'an TCH has signed an energy management contract with Tangshan Baoliyuan Coking to invent the Coke Dry Quenchin waste heat power generation system 25 megawatt capacity.

Moreover Xi’an TCH has also entered into a framework agreement with Hebei Xuyang Coking to build a CDQ system and a CDQ waste heat power generation system with total 15 megawatt power capacity.

Our existing 15 projects bring recurring revenues which was a clear which was a clear current business development in addition; we have a strong pipeline providing substantial growth potential.

Bank loans and other financing will cover anticipated capital expenditures in 2014. In the first quarter we have entered into two into two trust loan agreements with an aggregate amount of US$46.6 million from Zhongrong International Trust Company to support our CDQ projects.

This reflects the continued confidence of the financial community in our business prospects on the back of a clear and strong commitment from the Chinese government to continue to address environmental challenges.

Looking forward, we expect interest income and sales-type leases to continue a strong momentum through the rest of 2014 and we will continue efforts to further expand our waste energy power generation systems.

Our win-win business model offers portable and flexible financial solutions to customers to reduce the energy cost and emission. Record has really proved sales as an efficient model. We are confident in our ability to continue to grow our business and increase shareholder value.

In closing, I would like to thank again our shareholders and strategic partners for the support of CREG. We look forward to updating all of you on our success this year and in the years to come.

Now, let me turn the call over to our CFO, Mr. Chong to review our first quarter 2014 financial results. After the prepared financial review, I will come back to take your questions. Thank you.

David Chong

Thank you, Mr. Ku. Before we start, we would like to state that all our numbers are presented in U.S. dollars and that all comparisons are between Q1 2014 and Q1 2013, except for balance sheet items.

In the first quarter ended 31st March, 2014, total sales including sales of systems and continued rental income were US$0.18 million compared to US$14.34 million. Sales of

Sales of systems were US$0, compared to US$14.08 million since no power generation system was completed and sold. In comparison, in the same period of 2013, the Shenqiu Phase II system was completed and sold.

Contingent rental income was US$0.18 million compared with US$0.26 million. This represents income from the sale of electricity in the phase of a minimum lease payment.

For sales-type leases, sales and cost of sales are recognized at the time of the lease inception; in addition to sales revenue, CREG's other major source of revenues is interest income from sales-type leases.

Cost of sales was US$0.02, a decrease of US$10.88 million, as compared with US$10.9 million. This decrease is mainly due to the lack of the completion and sales of any power generation systems for the first quarter of 2014, in comparison to the same period in 2013.

Gross profit was US$0.16 million, compared with US$3.44 million. The blended gross margin increased to 88%. The increase in profit margin was mainly attributable to contingent rental income; for the same period of 2013, the profit margin for project sales were lower ranging between 23% to 28%.

Interest income on sales-type leases was US$6.3 million, up 64.9% from US$3.82 million. This increase was primarily due to a greater number of sales-type leases, During the quarter, interest income was derived from fifteen sales-type leases, including TRT system to Changzhi, that's for 13-year term, CHPG systems to Jing Yang Shengwei for a five year term, BMPG systems to Pucheng Phase I and II for 15 years and 11.75 years, respectively. BMPG systems to Shenqiu Phase I, 11 years and Shenqiu Phase II, 9.5 years term. WHPG system of Zhongbao for 9 year term, WHPG systems of Jitie for 24 years term. Two TRT systems to Datong for 30 years and five power and steam generation systems to Erdos for 20 year term. In comparison, during the same period of 2013, interest income was derived from only 11 systems.

Operating expenses totaled US$0.84 million, down 21.9% compared with US$1.08 million last year. The decrease was mainly due to a US$0.25 million decrease in legal and consulting expense compared to the same period of last year.

Non-operating expenses consisted of non-sales-type lease interest income, interest expense, bank charges and miscellaneous expenses. For the first quarter of 2014, net non-operating expenses were US$1.28 million, compared to US$1.4 million last year.

Net income was US$3.12 million, a slight decrease of US$0.18 million compared to US$3.30 million, a significant increase in interest income from sales-type leases, not sufficient to offset the lack of sales during the quarter. Basic and fully diluted EPS was US$0.05, compared with US$0.07 last year.

Now let me discuss our balance sheet highlights. As at March 31, 2014, the Company had cash and cash equivalents of US$16.24 million. Other current assets were US$12.90 million and current liabilities were US$31.39 million. Total shareholders' equity was US$156.39 million, as compared with US$154.68 million as at December 31, 2013.

Net Investment in Sales-Type Leases consist of some of the total minimum lease payments receivable, less unearned interest income and estimated executory costs. Unearned interest income is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease.

As at March, 31, 2014, net investment in sales-type leases were US$180 million compared to US$184 million as of December 31, 2013. The total future minimum lease payment receivable was US$544.7 million, compared to $560.2 million as at December.

With that now let’s join Mr. Ku, our CEO to take any your questions. Operator, please begin the Q&A. Thank you. Operator, we can begin the Q&A now.

Unidentified Company Representative

Operator, please begin the question and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Mr. Chong, Mr. Ku, and Lin, at this stage, we have no questions.

Unidentified Company Representative

Okay, let’s conclude the call.

Operator

As there are no further questions, we will begin the closing comments. Please proceed.

Unidentified Company Representative

Thank you for joining us on China Recycling Energy Corporation's first quarter 2014 results conference call. We look forward to updating you on our second quarter 2014 results. Feel free to get in touch with us at anytime if you have any further questions, concerns or comments. Have a wonderful day.

Operator

That concludes our conference call. Thank you for attending.

Unidentified Company Representative

Okay. Thank you.

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