China Architectural in the Red - Analyst Blog

China Architectural Engineering Inc. (CAEI) reported yet another quarter of loss with a net loss of $8.7 million or 13 cents per share for its third quarter ended September 30, 2010. In the year-ago quarter the company had recorded a loss of $8.4 million or 16 cents per share.

A decline in contract revenue owing to fewer projects along with higher raw material and labor and administrative costs perpetrated the loss in the reported quarter.

Revenue plunged 83% on a year-over-year basis to $4.4 million in the reported quarter affected by dwindling projects, a derivative of declining global construction activity. The company's decision to abstain from international projects and instead focus on the domestic market has affected its revenues during the past few quarters.

Out of the total revenue earned, approximately $0.2 million pertained to ConnGame. China Architectural acquired a 60% ownership in Shanghai ConnGame, a game developer and operator in August 2010.

Cost & Margin Performance 

Gross loss was $1 million in the quarter compared with a gross profit of $0.5 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 because of increases in estimated costs of current projects were responsible for the loss in the quarter.

Selling, general and administrative expenses (SG&A) inched 1% to $5.6 million in third-quarter 2010 due to a decrease in revenue combined with a $3.3 million bad debt expense for certain projects. Payroll expenses accounted for approximately 33% of total expenses, followed by depreciation expenses of 5%, and rental expenses of 3%. Consequently, operating loss in the quarter was $6.6 million compared with an operating profit of $5.1 million in the year-ago period.

Financial Position

China Architectural had cash and cash equivalents of $3 million as of September 30, 2010, up from $0.6 million as of June 30, 2010. The company generated $5.6 million in net cash from operating activities for the nine months ended September 30, 2010, compared with $11.2 million in the comparable year-ago period.

The debt-to-capitalization ratio at the end of the quarter improved to 43% from 46% as of September 30, 2010.

Contracts

In the reported quarter, China Architectural signed contracts worth $18.9 million, which include projects like Beijing Jiangtai Business Centre, Wuhan Xinhaigeming Museum and Liuzhou Nanning Gymnasium and Natatorium. These projects are expected to be completed in either 2010 or 2011.

In addition, the company was awarded a contract of $3.2 million by the Overseas Chinese Town Group for its Joy Coast project, the first large-scale, high-end integrated urban ecotourism project in China. China Architectural will construct the Innovation Exhibition Center, one of the regional landmarks within Joy Coast.

Looking Ahead

China Architectural has been reporting losses since the third quarter of 2009, affected by fewer projects due to the global economic slowdown. The company, however, is beginning to see an improvement, as indicated by approximately $22.1 million worth of new contracts signed in the reported quarter.

The company will benefit from its corporate restructuring and its focus on online game developments and opportunities. In the online gaming segment, the company is all set for its first commercial launch. In the architecture construction and engineering segment, the company plans to be more selective and focus only on high-return and lower-risk projects.

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, energy saving building conservation systems and related products, for public works and commercial real estate projects.