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China Recycling Energy Corporation (NASDAQ:CREG)

Q2 2014 Earnings Conference Call

August 15, 2014 08:30 AM ET

Executives

Guohua Ku - CEO

David Chong - CFO

Analyst

Operator

Good day and welcome to the China Recycling Energy Corporation Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I’d now like to turn the conference over to Jacky [indiscernible].

Please go ahead.

Unidentified Company Representative

Thank you. 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 but not limited to fluctuation in customer demand, management of rapid growth, intensity of competition, general economical conditions, geopolitical events and the 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 to the company’s future performance represents management’s estimate as of today August 15, 2014.

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

Joining us on today are Mr. Ku, CEO of the company; and Mr. Chong, our Chief Financial Officer.

Because there will be some translations during the call, we ask for your patience at that time. Mr. Ku, the CEO of the China Recycling Energy Corporation will now deliver the opening remarks and our translator then thereafter. Mr. Ku, please go ahead.

Guohua Ku

Good morning and for those in China, good evening. We’re very pleased to report that during the quarter we’ve achieved a strong growth in our top and bottom lines. Our two main revenues is sales of systems and the interest income on sales-type business increased by 39% and 29% respectively. And our net income rose 76% a year over year period. We continue to benefit from the rising marketing demand in energy saving and recycling industry in China and as government supportive policies.

China continues to face challenges in energy conservation and emission reduction. According to a mid-term assessment in 2013 the nation fell behind in some of its pollution target over the past three years. So the government data stating efforts over the last two years to ensure China energy and environment growth for 2015 within reach on May 26, 2014. 2014-2015 energy saving and the low carbon development action plan was issued by the State Counsel General Officer. The action plan sets a target for the reduction of the carbon emission of at least 4% in 2014 and a 3.5% in 2015.

In addition, a Chinese Government official announced that in the next five year plan starting in 2016 where for the first time included a control on carbon emission by authorized tests. Therefore local officials, who have faced greater accountability for this performance in saving energy and cutting emission to ensure realizing the emission targets and a more supportive policies, carbon pricing tax financing, will be launched to facilitate all these efforts.

Therefore we continue to see more opportunities to apply our energy saving kind of recycling system, to energy intensive industries. During the quarter we have entered into an Asset Transfer Agreement and a lease agreement for coke oven gas powered generation with [indiscernible] subsidy (poluida) [ph] cost selection company material.

This new lease to system has brought up the one time sales of systems of about $90 million and we have generated recurring interest income on sales type lease for the next 15 years. As a CHCD system leased by Jing Yang Shengwei expired on June 30, 2014 and was transferred to the customers. We now have 15 energy saving and recycling system leased to our customers. This have helped our customer improve energy efficiency and comply with government environmental regulation at the same time.

We have six projects under construction for a total 135 MW in power capacity including projects for Shanxi Datong Coal Group, Xuzhou Tian'an, Xuzhou Huayu, Xuzhou Zhongtai, Shandong Boxing and Tangshan Rongfeng. Among these projects two projects with the 40 megawatt in power capacity expected to be completed in 2014 and three projects with 75 megawatt in power capacity are expected to be completed in 2015.

By the time, they are completed the total capacity of the project in operation will be nearly doubled. These six projects represent a total investment of about $177 million. Upon completion we’ll receive long term cooperation agreement with the objective return on investments. The demand for the CREG waste-to-energy services and as a potential list of the heavy industry customers is very fast but our advantage over our competitors is our ability and resources to finance our customer directly which stabilized our customers to many folks on its competitiveness without investing additional capital to comply with governmental environment regulation and reduce its energy cost. We are responsible for financing project through our own funding resources which include many channels such as introduce strategic investors, banks loans, funds et cetera.

Recently we entered into a standby equity distribution agreement with YA Global Master SPV Ltd. Under the term of the agreement YA Global is committed to purchase up to $50 million of our common stock over a period of two years. However, we have absolute discretion to determine the timing of the capital raise at the (read) [ph] price. This will provide us additional equity funding to allow us to expand our business more rapidly.

As you can see we’re utilizing various financing measures to fund our business growth. We carefully evaluate every finance option available to make sure the comparative service company’s long term development goals and interest of our shareholders. Based on our good track record we know we can sustain a solid growth as long as we got obtain adequate funding. We remain positive and optimistic on future earnings potential.

Looking ahead we expect that our interest income on sales-type leases will remain strong through the rest of 2014 and we will continue our efforts to secure funds for our future growth and future -- and further expand our waste-to-energy power generating capacities.

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

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

David Chong

Okay. Thank you Mr. Ku. And before we start I’d like to state that all our numbers are presented in U.S. dollars and that all comparisons are between Q2 2014 and Q2 2013, except for balance sheet items.

In the second quarter ended June 30, 2014 total sales including sales of systems and contingent rental income were $19.16 million compared with $13.91 million.

Sales of systems were $18.95 increased by 39.1% compared with $13.62 million. For the three months ended June 30, 2014 the Yida project 15 megawatt waste gas power generation system was sold. In comparison in the same period of 2013 the Shanxi Datong Phase I project two units of 3 megawatt BPRT power generation systems was completed and sold. Contingent rental income was $0.21 million compared to $0.29 million. This represents income from the sale of electricity in excess of the minimum leased payments. For sales type leases, sales and cost of sales are recognized at the time of sale on inception of the lease.

In addition to sales revenue, CREG's other major source of revenues is interest income from sales-type leases. Cost of sales was $14.59 million increased by 39% compared to $10.5 million. This increase was mainly due to the larger sale of the Yida project compared to last year same period.

Gross profit was $4.56 million an increase of 33.8% compared with $3.41 million. A blended gross margin slightly decreased from 25% to 24%. The decreased profit margin was mainly attributable to the lower contingent rental income received in the quarter. Interest income on sales-type leases was $6.12 million up 29.3% from $4.73 million.

This increase was primarily due to the greater number of sales-type leases during the quarter. Interest income was derived from 15 sales-type leases including TRT system to Zhangzhi (13 year term), CHPG system to Jing Yang Shengwei (5 year term), BMPG system to Pucheng Phase I and II (15 year and 11.9 year respectively), BMPG systems to Shenqiu Phase I (11 year term) and Shenqiu Phase II (9.5 year term), WHPG system to Zhongbao (9 year term), WHPG systems of Jitie (24 year term), and two BPRT systems to Datong (30 year term), and five power and steam generating systems to Erdos (20 year term).

And in comparison during the same period of 2013, interest income was derived from 12 systems. Here I’d like to give you a bit more color on the interest income. According to system leading contracts signed with our clients the minimum rental payment has to be paid to the company regardless the client operates the system or not. In this way interest income under sales-type leases is protected by relevant contractual terms and become our major and consistent regular revenue.

Operating expenses totaled $0.76 million up 11.6% compared with $0.68 million. The increase was mainly due to an increase of $0.14 million of consulting expense but offset with a certain office expenses. Non-operating expenses consisted of non-sales-type lease interest income, interest expense, bank charges and miscellaneous expenses. For the second quarter of 2014, net non-operating expenses were $1.35 million, compared with $1.23 million.

Income tax expense was $2 million a decrease by 15.4% compared with $2.37 million. The decrease in income tax expense was mainly due to a decrease in the consolidated effective income tax rate, which was 23.4% for the second quarter of 2014, compared with 38%. This is mainly due to the 15% preferential income tax rate of the Company's wholly owned subsidiary Xi'an TCH in 2014, and income tax rate of Xi'an TCH for the second quarter of 2013 was 25%. In July 2013, Xi'an TCH was re-approved for high-tech enterprise status and enjoyed a 15% preferential income tax rate effective on January 1, 2013. This however was done on the retroactive basis with adjustments in Q3 and Q4 of 2013.

Net income was $6.59 million, increase by 76% compared with $3.73 million. This significant increase in net income was mainly due to the increased sales, increased interest income on sales-type leases, and decreased income tax expense compared with the same period of 2013. Basic and fully diluted EPS was $0.11, compared to $0.07.

Now let me discuss our balance sheet highlights. As of June 30, 2014, the Company had cash and cash equivalents of $6.62 million. Other current assets were $18.71 million and current liabilities were $52 million. Total shareholder’s equity was $162.91 million, as compared with $154.68 million as of December 31, 2013.

The net tangible asset per share was $2.67 as of June 30, 2014. And please note that we have never had to write off any bad debts. Net investment in sales-type leases consist of the sum of total minimum lease payments receivable less unearned interest income and estimated [indiscernible] cost. Unearned interest income is amortized income over the lease term so as to produce a constant period rate of return on the next investment in the lease.

As of June 30, 2014 net investment in sales-type leases was $196.39 million compared to $184.5 million as of December 31, 2013. The total future minimum lease payments receivable was $611.01 million.

And with that let me join Mr. Ku our CEO to take your questions. Operator, can you please begin the Q&A?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Guohua Ku

Thank you Andrew.

David Chong

Thank you Andrew, thank you Jacky.

Operator

I will ask one more time. (Operator Instructions) Thank you. The call has concluded. You may disconnect your line at this time.

Guohua Ku

Thanks Andrew.

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