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China HGS Real Estate Inc. (NASDAQ: HGSH) August 2011
China HGS Real Estate Inc. (NASDAQ: HGSH)
August 2011
Forward Looking StatementForward Looking Statement
CAUTIONARY STATEMENT REGARDING FORWARD - LOOKING STATEMENTS
This presentation includes or incorporates by reference statements that constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. These statements relate to future events or to our future financial performance, andinvolve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,performance, or achievements to be materially different from any future results, levels of activity, performance orachievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-p p y g , y ylooking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,”“believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparableterminology. You should not place undue reliance on forward-looking statements since they involve known andunknown risks uncertainties and other factors which are in some cases beyond our control and which couldunknown risks, uncertainties and other factors which are, in some cases, beyond our control and which couldmaterially affect actual results, levels of activity, performance or achievements. The forward-looking statementscontained in this presentation are made only as of August 22, 2011 and HGSH is under no obligation to revise orupdate these forward-looking statements.
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Company OverviewCompany Overview
A leading residential real estate developer focusing on the fast growing markets for Tier III
F d d i 1995 H d d iTicker NASDAQ: HGSH
A leading residential real estate developer focusing on the fast growing markets for Tier III cities in Central and Western China
Founded in 1995, Headquartered in Hanzhong, Shaanxi Province
No.1 real estate developer in Southern
Share Price (8/16/2011) $2.42
Market Cap (8/16/2011) $109 MillionNo. real estate developer in SouthernShaanxi Province
Completed and fully sold 7 residential j t i th t t ith
Shares Outstanding (8/16/2011)
45.1 Million
Fiscal Year End September 30projects in the past ten years with aggregate GFA of 6.7 million Sq Ft and average net profit margin of 30%+
Revenue (TTM 6/30/2011) $53.3 Million
Net Income (TTM 6/30/2011) $23.7 Million
The Company possesses the National Grade II Real Estate designation
Li t d NASDAQ Gl b l M k t
EPS (TTM 6/30/2011) $0.53
Gross Margin (TTM 6/30/2011) 50.0%
3
Listed on NASDAQ Global Market Net Margin (TTM 6/30/2011) 44.5%
P/E (TTM 6/30/2011) 4.6X
Investment HighlightsInvestment Highlights
Leading Position In A Fast Growing Market
HGSH is the largest property developer in Hanzhong, Shaanxi Province, with 47% of the regional market shareHanzhong’s GDP grew at CAGR of 15.4% from 2001 to 2008 and disposable income grew at 12.5% CAGR during the same period Western cities will continue to benefit from job movement from Eastern provinces
Proven Track Record and Strong Project
Pipeline
HGSH has completed and fully sold 7 residential projects with an aggregate GFA of 6.7million sq. ft. and an average net profit margin of 30%+ (from 2005 to 2010)Currently have 4 projects in the construction or planning stage with a total GFA of 6.4million sq. ft.Additional land parcels are under negotiation including 2 new cities
Experienced Management Team
Additional land parcels are under negotiation, including 2 new cities
The founder and CEO, Mr. Xiaojun Zhu, has over 20 years of experience in China’s real estate industry and is a well‐known industry leaderSenior management team has average of over 10 years experience in real estate market
Scalable Business Model and Efficient C M
Targets sub‐963 sq. ft. unit, which is a preferred size for 1st time home buyersEmphasizes markets where urbanization is just beginning and has a longer population expansion and wage growth period aheadPlans individual phase development for high asset turnover, with the goal of being in and outCost Management
Strategically P i i d
Plans individual phase development for high asset turnover, with the goal of being in and out of a particular phase within 24 to 30 months. Dramatic increase in IRR and ensure 30% net margins when this phasing is employed
HGSH has maintained a strong balance sheet, zero debt, geared toward expansion in a capital short market
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Positioned to Capitalize on The Market Trend
Tier‐III cities are the focal points of real estate growth. Tier III cities have more potential for growth as they are yet to experience the property boom that has happened in Eastern cities.
Competitive Residential PropertiesCompetitive Residential Properties
Affordable, convenient and high quality apartments in modern gated communities inAffordable, convenient and high quality apartments in modern gated communities in Tier III cities in Central and Western China
Three main types of residential properties offered:yp p p
Multi‐ story Apartment Buildings
Up to six stories
Construction cycle ~ 200 to 270 days
f % f i
Sub‐ high‐ rise Apartment Buildings
Seven to 11 stories
Construction cycle ~ 300 to 370 days
f % f i
High‐ rise Apartment Buildings
12 to 33 stories
Construction cycle ~ 500 to 900 days
A t f ~20% f ti
5
Accounts for ~70% of our properties Accounts for ~10% of our properties Accounts for ~20% of our properties
China’s Growing Real Estate MarketChina s Growing Real Estate Market
China’s residential real estate industry has grownrapidly since the industry’s commoditization in 1998– Total RMB residential sales have grown on average34% from 2000 to 2010, outpacing the average GDP
Real Estate Development and Per Capita GDP
2010 Per Capita GDP $4,382
growth (China National Bureau of Statistics)
The total gross floor area (GFA) of residentialproperties sold in China reached 9.6 billion sq ft in2009, representing an average growth rate of 22%, p g g gfrom 2000 (China National Bureau of Statistics)
The ASP per m2 of the residence buildings has grownon average 8% from 2000 to 2008, and hit a recordjump of 25% in 2009
Source: China National Bureau of Statistics
NOTE: $4,382 US dollars per capita GDP in China in 2010 (IMF)
jump of 25% in 2009
Total Residential Sales (in Billion RMB) ASP of Residential Buildings in China (RMB)
4390
52505000
6000
4695 50345000
6000
570 770 10401810 2050
29902410
1000
2000
3000
4000
2715 28183224 3424 3612 3887 3882
1000
2000
3000
4000
6
570
0
1000
2002 2003 2004 2005 2006 2007 2008 2009 2010Source: China National Bureau of Statistics
0
1000
2002 2003 2004 2005 2006 2007 2008 2009 2010Source: China National Bureau of Statistics
China’s Residential Real Estate Market Outlook
Real housing demand continues to grow fuelled by China’s robust economy, increasing disposable income, high savingsrate and accelerating urbanization process
China s Residential Real Estate Market Outlook
rate and accelerating urbanization process
China’s GDP has grown on average of 10% from 2000 to 2010 and is expected to maintain that growth rate in 2011 and2012
Chinese home ownership rate is low compared to North American and European countries, especially in Western andChinese home ownership rate is low compared to North American and European countries, especially in Western andCentral China
Jobs migrating from Eastern to Central and Western China, income levels will rise rapidly in these regions
Average per capita annual income of Chinese urban households grew at an average rate of 12% from 2000 to 2009,g p p g gexpected to maintain the same growth rate in the next 2 years
According to China National Development & Reform Commission, the country’s urbanization rate is anticipated toreach 55% to 60% from the current 42% by 2020 Approximately 200 million to 250 million new urban residents orannual demand for 6 million homes for the next 8 yearsannual demand for 6 million homes for the next 8 years
Per Capita Disposable Income of Urban Households Urbanization Rate
60 0%
80.0%
15 0%
20.0%
20,000
25,000
0.0%
20.0%
40.0%
60.0%
0.0%
5.0%
10.0%
15.0%
0
5,000
10,000
15,000
7
1978 1990 2000 2008 2020
Urbanization rate
2000 2002 2004 2006 2008 2010
Per Capita Disposable Income (in RMB) Growth
Attractive Attributes of Our Target MarketAttractive Attributes of Our Target Market
Target residential markets in Tier III cities in Central and Western China and County level cities
Enormous market potential
Target residential markets in Tier III cities in Central and Western China and County level cities with ~ 3 million to 4 million population
Over 330 prefecture level cities and over 2800 county level cities in China
Large population migrating from rural areas and existing urban dwellers shifting from self‐built houses to modern communities with good infrastructures facilities such as natural gas, heating and running water etcetc.
Cash payments by first time home owners
High average savings rate and affordable unit prices lead to high percentage of cash payments (over 70%) for residential real estate purchasesfor residential real estate purchases
Household wealth and income growth outpace rise in housing prices in a majority of our target markets
Lack of significant competitors
Major players in top tier markets do not have the competitive cost structure to compete in low cost Tier IIIMajor players in top tier markets do not have the competitive cost structure to compete in low‐cost Tier III city markets
Current players in the Tier III cities lack the scale and access to capital to be a significant competitor
Land prices and supply are reasonable relative to the overcrowded tier I markets
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Land prices and supply are reasonable relative to the overcrowded tier I markets
Hanzhong : Our Core MarketHanzhong : Our Core Market
Weinan
HanzhongLocated in Shaanxi Province, an important gateway connecting Eastern China and Central China as well as Northwest and Southwest China, with Shanxi and Henan to its east, Ningxia andSouthwest China, with Shanxi and Henan to its east, Ningxia and Gansu to its west, Sichuan, Chongqing and Hubei to its south, and Inner Mongolia to its north
No. 1 real estate developer with 47% market share in Hanzhong
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1,100,000 sq ft of average annual area developed in the past 5 years
Hanzhong : Our Core Market (Cont)
Hanzhong GDP
Hanzhong : Our Core Market (Cont)
(HundredMillion RMB)
291353
443510
400
500
600(Hundred Million RMB)
129 141 163193 217
247291
100
200
300
38.240
45
02001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Average Disposal Income Real Estate Investment(RMB)
22.9 23
28.7
25
30
35
40
10155
1256214509
10000120001400016000
g p(Hundred Million RMB)
(RMB)
7.49.5
12.7 13.4 12.516.4
5
10
15
20
4440 4850 5184 5748 6257 69258209
2000400060008000
10000
10
0
5
2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
2000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Shaanxi Statistical Bureau , Hanzhong Statistical Bureau
Low Reliance on Credit PolicyLow Reliance on Credit Policy
U lik th l t t d l HGS hUnlike other real estate developers, HGS has no long term debt and is well positioned to benefit from even potential adverse government credit policies
108.5%
73.9%
Long term debt/equity1
policiesAchieve growth through internally generated cash flow
Not dependent on bank debt for operations or land 0
21.0%
Sample Customers Mortgage Profile2
Not dependent on bank debt for operations or land acquisitions
Unlike home buyers in top tier cities, our
0
HGSH CHLN XIN Vanke
Sample Customers Mortgage Profilecustomers (in tier III cities) seldom take on mortgages
Over 70% of our customers in Hanzhong make full h t f th h
Mortgage cash payments for the purchases
We require 50% cash down payment if our customer need bank financings, while in big cities, only 30% are required
Full cash payment
70%
Loan, 30%
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Note:1. From company filings data as of December 31, 20102. According to Company analysis of customers in Hanzhong City
Effective Cost Management
Effectively managing cost throughout the entire development cycle from land
Effective Cost Management
Effectively managing cost throughout the entire development cycle from land acquisition, project design, to construction and sales
Favorable treatment offered by local government in terms of landFavorable treatment offered by local government in terms of land acquisition fees, levies and taxes to compensate and encourage our infrastructure investments in the communities projects we develop
With 15 f i h t bli h d l t
Effectively Control Land Acquisition Cost
With over 15 years of experience, we have established long‐term relationships with key material suppliers and construction vendors
Our scale and creditworthiness also allow us to negotiate better rates
Stable Construction Material and Building Cost
About 70% of houses are pre‐sold by sales center near the site with several sales representatives
Group sales made to officers from government agencies, school Lower Operating Cost with
High Pre‐sale Rateteacher and doctors
~ 70% of our property products have construction period less than 300 days vs. 3 years for typical developers in tier I and tier II citiesFast Development Cycles to
M i i C i l Effi i
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y y yp p
Significantly lower capital cost and higher return to capitalMaximize Capital Efficiency
Leading Financial PerformanceLeading Financial Performance
HGS is one of the most profitable publicly listed Chinese real estate companies due to its f p f p y pcompetitive cost structure and unique end market characteristics
Margin Comparisons with National and Local Competitors
44.2%45.0%
50.0%
39.5%38.4%36.6%
30.0%
35.0%
40.0%
23.8%20.4%
18.8%
11.8%
22.1%
11.7%
17.4%
15.0%
20.0%
25.0%
2.5%
0.0%
5.0%
10.0%
HGSH XIN CHLN VANKE
13Note: Selected public company competitor, data from company filings data as of December 31, 2009
HGSH XIN CHLN VANKE
Gross Margin Operation Margin Net Margin
Sample Project Development ProcessSample Project Development Process
Standardized and scalable project development model has proven to beStandardized and scalable project development model has proven to be efficient and profitable
HGSH Sample Project Development Process (24 Months)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Initial Planning• Government release certain amount of land to real estate
Land Acquisition
Project Design
Bidding and Constr ction Permit
developers on annual basis
• Company participate in land bidding process
Bidding and Construction Permit
Pre-sale Permit
ConstructionConstruction period varies from 200 to 900 days from Multi-layer to high-rise
Pre sale Permit
Accessment and Delivery
Marketing and Pre-sale
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y
After-sale Service
Emphasis on Quality and ValueEmphasis on Quality and Value
Strict Quality Control Throughout the Entire Development Process
Disciplined bidding process for selecting partners
Developed systematic quality control process to monitor our property’s quality throughout all stages
Senior management closely supervises management and planning process
Long Term Collaboration with Design, Material and Construction Vendors
Engages leading property design companies to provide modern and high‐quality designs for our projects
Long‐term cooperation with selective vendors to guarantee quality as well as competitive price
Construction contracts include standard quality warranties and penalty provisions
Brand Name Recognition
Recognized as “2009 advanced taxpayer" by Hanzhong Municipal Government
“2010 Trustworthy Enterprise” Credit Association of Shaanxi Province
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“2010 advanced taxpayer” by Hantai District Government
Integrated Growth Strategy
Strict Cost ControlLarge scale Real Estate Development
Integrated Growth Strategy
Strict Cost ControlLarge‐scale Real Estate Development
•Enormous market opportunity•Very low land acquisition cost
• Long term construction partners•Close monitor and Supervision•Well‐managed and efficient sales•Well‐managed and efficient sales expenditure structure
To become the leading residential d l f d Chi ’property developer focused on China’s
Tier III cities
Pricing StrategyProduct Innovation
• Start with lower pricing and increase gradually
•High‐quality and modern Design•Project management
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g y•Moderate pricing•Targeting middle income group
•Apply Environmental friendly technologies
Experienced Management Team
Name Experience
Experienced Management Team
Age
Zhu XiaojunPresident, CEO &
President, CEO and Chairman of China HGS since 2007 and Chairman and General Manager of its predecessor since 1995
More than 20 years of experience in the real estate industry in China and a well-known industry leader
44Chairman industry leader
Rated as one of “Top 100 Management Elites in China’s Building Industry 2005”
Ma HaizhuDeputy General
Deputy General Manager of China HGS since 2008
Solid background in China’s construction and real estate industry60Deputy General Manager
Solid background in China s construction and real estate industry
Management experience in state-owned enterprises and government agencies
Li ShuminM f
Manager of Engineering of China HGS and its predecessor since 1999
Over 20 years of engineering work experience and 10 years of management experience
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53Manager of Engineering
Over 20 years of engineering work experience and 10 years of management experience
Strong technical and consulting skills
Luo ShenghuiManager of Finance since 2009 and Deputy Manager of Finance of its predecessor since 2000
53
41g
Manager of Finance Over 15 years of accounting and finance background with 10 years of management experience
41
Shi Jiachuan Manager of Marketing of China HGS and its predecessor since 200240
17
Manager of MarketingManager of Marketing of China HGS and its predecessor since 2002
Significant sales experience in the real estate development industry40
Financial Summary Financial Summary yy
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Financial OverviewFinancial Overview
Proven Financial Track Record
Robust top‐line and bottom‐line growth
Strong and consistent margin and profitability
S B l ShStrong Balance Sheet
Solid financial position with sufficient financing flexibility
Large amount of property under development to support revenue growth
High Visibility of Revenue and Profit
Promising projects under development and planning
ll ld b f lProjects are typically pre‐sold before completion
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Strong Revenue GrowthStrong Revenue Growth
$47.350
$28.5 $33.1 $ 39.1
40
50
on
$17.220
30
$US Millio
10
20
02008 2009 2010 9M 2010 9M 2011
20
Attractive Net Income GrowthAttractive Net Income Growth
17 3 $18.1 $20.0
17.3
$11 7 $14.0
$16.0
$18.0
$11.1 $11.7
$8.0
$10.0
$12.0
$6.0
$2 0
$4.0
$6.0
$-
$2.0
2008 2009 2010 9M 2010 9M 2011
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Selected Income StatementSelected Income Statement
9 Months Ended June 30
9 Months Ended June 30
Fiscal Year Ended September 30
Fiscal Year Ended September 30
2011 2010 2010 2009
Real estate sales $39,056,523 $33,140,919 $47,330,991 $30,204,666
Gross Profit 19,860,724 14,149,639 20,922,249 13,375,159
G M i 50 9% 42 7% 44 2% 44 3%Gross Margin 50.9% 42.7% 44.2% 44.3%
Operating Income 18,769,664 12,298,624 18,196,232 11,402,017Operating Margin 48.1% 37.1% 38.4% 37.7%Net Income 18,081,383 11,724,077 $17,312,762 $11,057,550 Net Margin 46.3% 35.4% 36.6% 36.6%
Strong track record of revenue and net income growth
Excellent profitability with effective internal cost management
Low level of operating and financing cost
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p g g
Selected Balance SheetSelected Balance Sheet
June 30 September 30 September 30
2011 2010 2009
ASSETS
Cash & cash equivalents 2,641,578 $12,621,845 $820,783
Restricted cash 1,233,017 923,245 412,373
Real estate property development completed 13,862,785 10,922,339 2,392,003
Real estate property under development 18,675,151 28,021,880 22,094,570
Total Current Assets 53,826,781 59,250,577 27,553,736
Real estate property under development, net of current portion
55,967,788 9,263,712 20,427,717
Total Assets 110 450 274 $69 179 878 $48 694 461Total Assets 110,450,274 $69,179,878 $48,694,461
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities 28,234,641 19,194,944 18,330,628
T t l h h ld ' it 48 155 522 29 862 955Total shareholders' equity 68,360,429 48,155,522 29,862,955
Total Liabilities and Shareholders' Equity 110,450,274 $69,179,878 $48,694,461
Financial flexibility to capitalize on attractive market opportunities
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Large amount of property under development to support revenue growth
Strong balance sheet position with no long‐term debt
Contact InformationContact Information
Company Contact
China HGS Real Estate Inc
IR Contact:CCG Investor Relations
China HGS Real Estate Inc.
Mr. Ran Xiong, President Finance
China HGS Real Estate Inc.
Mr. John Harmon, Sr. Acct. Mgr
Tel: +86 (10) 6561 6886
E‐mail: [email protected]：+86‐916‐2622612
E‐mail： [email protected]
j @ g
Independent AuditorFriedman LLP1700 Broadway New York NY 10019
Legal CounselThe Crone Law Group101 Montgomery Street1700 Broadway, New York, NY 10019
South New Jersey Office406 Lippincott Drive, Marlton, NJ 08503
101 Montgomery StreetSuit 1950,San Francisco, CA 94104
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,
Solid Track Record of Completed ProjectsSolid Track Record of Completed Projects
LocationType of Projects
Completion DateTotal GFA (sq ft)
% of Units SoldProjects ft)
Weinan Lijing Garden ‐ Project Weinan City M December 2008 1,120,255 100%
Yangzhou Pearl Garden ‐ Project Yang County M March 2011 2,273,786 100%
Mingzhu Nan Yuan Hanzhong M January 2011 490,026.8 100%
Mingzhu Bei Yuan Hanzhong H January 2011 361,516 100%
Mingzhu Xinju (Tower B) Hanzhong H September 2010 247,282 100%
Mingping Plaza(Central Plaza) Hanzhong H December 2008 310,413.6 100%
JingJiang Garden ‐ Project Hanzhang H December 2008 180,058.7 100%
Mingzhu Garden‐Project Hanzhong M/H September 2010 1,725,007 100%
Total 6,708,345 100%
25All data as of June 30, 2011
* The amounts for “total GFA” in this table are the amounts of total saleable residential GFA
Yangzhou Pearl GardenMingzhu Nanyuan (under construction)
Under Construction and Planned ProjectsUnder Construction and Planned Projects
Location Type of Projects
Expected Completion Date
Total GFA* (sq ft)
% of Units Pre‐soldj ( q )
Projects under Construction
Yangzhou Pearl Garden Yang County
MSeptember 2011 (12#,13#,34#,35#)
292.125Average over
65%g g y
MMarch 2012 (1#, 16#, 17#, 30#, 31#, 45#)
766,331Average over
55%
Mingzhu Xinju Project (Tower A) Hanzhong H September 2011 175,319Sale of complete
apartment
Mingzhu NanyuanHanzhong H August 2011 (8#)
355,244Sale of complete
apartmentHanzhong H August 2011 (9#)
Subtotal 1,589,019
Projects under Planning Expected Starting Date
Yangzhou Pearl Garden Yang County H 939,600 0.0%
HanzhongMingzhu Beiyuan (II)
Hanzhong City
H 3,888,000 0.0%
Subtotal 4,827,600 0.0%
Total 6,416,619
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All data as of June 30, 2011
•The amounts for “total GFA” in this table are the amounts of total saleable residential GFA
• M = Multi‐layer ; S = Sub‐high‐rise; H = High‐rise
Systematic & Standardized Project D l t PDevelopment Process
Project Planning & Design
Project Construction
& Management
Pre‐sale, sale & Marketing
After‐sale, Service
Land Acquisition Process
• Pre‐sale
• Customer Financing
OpportunityIdentification
Initial Planning
Land Acquisition
• Strategic • Feasibility • Financial
g
• Architectural & Engineering Design
• Construction
• Construction Supervision
• Registration Assistance
• Feedback CollectionPlanning
• Geographic and Market Analysis
• Preliminary Design
• Costing and
Projection
• Internal Approval
g
• Design Management
• Arrange
Supervision
• Quality Control
• Completion
Collection
• Advertising
• Property y
• Auction Opportunity Study
Costing and Financial Evaluation
• Biding Process
• Arrange Financing
pInspection
• Landscaping & Fixture Installation
Management
• Heating System
A systematic and standardized process to project development, which is implemented through
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several well‐defined phases
THANK YOU
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