China Architectural Engineering Inc. (CAEI) reported a net loss of $3.3 million or a loss per share of 6 cents for its second quarter ended March 31, 2010. The company had earned $2.5 million or 5 cents per share in the year-ago quarter. A decrease in contract revenue due to a fewer number of projects along with higher raw material and labor and administrative costs perpetrated the loss in the quarter.
On a sequential basis, net loss narrowed from a loss of $3.5 million in the first quarter but remained flat with the loss per share of 6 cents.
Revenue plunged 81% on a year-over-year basis to $5.7 million, affected by dwindling projects, a derivative of declining global construction activity. Further, the company’s decision to abstain from international projects and instead focus on the domestic market aggravated the decline.
Cost & Margin Performance
Gross loss was $429,375 in the quarter, compared with a gross profit of $9.9 million in the year-earlier quarter. Increases in raw material, labor and administrative costs as well as adjustments made in accordance with the percentage-of-completion method of accounting were responsible for the losses in the quarter.
Selling, general and administrative expenses declined 70% to $1.8 million in the second-quarter 2010 and, as a percentage of revenues, were 32% versus 20% in the year-earlier period. Payroll expenses accounted for approximately 44% of the total expenses, followed by depreciation expenses of 8%, and rental expenses of 6%.
Consequently, operating loss in the quarter was $2.27 million, compared with an operating profit of $3.8 million in the year-ago period.
Financial Position
China Architectural had cash and cash equivalents of $631,444 as of June 30, 2010, up from $497,348 as of March 31, 2010. The company generated $2.1 million in net cash from operating activities in the second quarter compared with an outflow of $1.6 million in the year-ago quarter.
The debt-to-capitalization ratio at the end of the quarter increased to 46% from 44% as of March 31, 2010.
Looking Ahead
China Architectural has been affected by fewer projects due to the global economic slowdown. The company, however, is beginning to see an improvement, as indicated by approximately $21.5 million worth of new contracts signed in the reported quarter. The contract wins include the Terrace Garden Project and Xinhai Revolution Museum in Hubei, and Liuzhou Sports Centre in Guangxi. The company expects to recognize these revenues in the second half of fiscal 2010.
China Architectural has targeted China's high-end landmark projects that involve more design and consulting services. To date, such contracts include the Shenzhen Airport, Hangzhou Railway Station and Joy Coast at Overseas Chinese Town worth $3 million.
In the first quarter of 2010, China Architectural’s shareholders approved the acquisition of a majority interest of Shanghai ConnGame Network. China Architectural had signed a letter of intent in the fourth quarter of fiscal 2009 to acquire 60% ownership in Shanghai ConnGame, a game developer and operator in exchange for 25 million shares of the company's common stock. The company expects the acquisition to close soon.
China Architectural and ConnGame may appear to share few common grounds, but following the completion of this acquisition, the former expects to become a Web-based engineering and design service platform that complements ConnGame's core online gaming business.
In the architecture construction and engineering segment, the company plans to be more selective and focus only on high-return and lower-risk projects. In the online gaming segment, it plans to launch new games in the coming months, and expects the segment to drive the majority of its revenues. The company believes the ConnGame acquisition will enable it to leverage its core architectural engineering and design market, and more importantly, to capture China's large and rapidly growing online gaming market.
Zhuhai, China-based China Architectural Engineering Inc. specializes in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects.
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