China Oumei Real Estate Company (NASDAQ:OMEI)

Fourth Quarter 2010 Results:

• Total sales decreased 58.1% to $21.7 million in the fiscal fourth quarter of 2010 from $51.8 million in the fiscal fourth quarter of 2009.
• Gross profit decreased 71.8% to $6.2 million from $21.9 million in the fourth quarter of 2009.
• Gross margin decreased to 28.4% from 42.2% in the fourth quarter of 2009.
• Operating income decreased 74.2% to $4.9 million from $19.0 million in the fourth quarter of 2009.
• Net income increased 50.2% to $20.9 million from $13.9 million in the fourth quarter of 2009.
• Diluted net income per share increased to $0.62 from $0.46 per share in the fourth quarter of 2009

Mr. Weiqing Zhang, Chief Executive Officer of China Oumei, said, "We are pleased to have achieved our FY 2010 revenue and earnings targets in a year influenced by an increasingly challenging macroeconomic environment in our industry. Our Dongli Garden and Longhai Mingzhu projects were the primary revenue contributors during 2010, accounting for 56% of the year's sales. Our growth was driven by our focus on middle-income customers in second-tier and third-tier cities in one of the most rapidly growing coastal markets and economic regions in China. Those markets are characterized by the rapid emergence of a large middle-income population and accelerating urbanization. These growth drivers, combined with continued progress on our cost-improvement initiatives, make us feel confident of our outlook for FY 2011."

In connection with a recent private placement on April 14, 2010, the Company entered into the Make Good Escrow Agreement with Longhai Holdings, the Company’s controlling shareholder, Collateral Agents, LLC, the escrow agent, and Access America Investments, LLC, as representative of the investors, pursuant to which the parties agreed to certain "make good" provisions in the event that the Company does not meet certain financial performance thresholds for fiscal years 2010 and 2011.

Pursuant to the Make Good Escrow Agreement, the parties agreed to the establishment of an escrow account and Longhai Holdings delivered into escrow certificates evidencing 7,500,000 ordinary shares held by it, to be held for the benefit of the investors.

If the Company’s after tax net income or earnings per share for either fiscal year 2010 or fiscal year 2011 is less than 90% of the applicable performance threshold, then the performance threshold will be deemed not to have been achieved, and the investors will be entitled to receive ordinary shares based upon a pre-defined formula agreed to between the parties.

"Selling stockholders” associated with proposed IPO..

* Less than 1%.

In response to concerns over the scale of the increase in property investments, the PRC government has implemented measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. On January 7, 2010, the PRC State Council issued a circular to control the rapid increase in housing prices and cool down the real estate market in China. It reiterated that the purchasers of a second residential property for their households must make down payments of no less than 40% of the purchase price and real estate developers must commence the sale within the mandated period as set forth in the pre-sale approvals and at the publicly announced prices. The circular also requested the local government to increase the effective supply of low-income housing and ordinary commodity housing and instructed the PBOC and the China Bank Regulatory Commission to tighten the supervision of the bank lending to the real estate sector and mortgage financing.

On February 25, 2010, the PBOC increased the reserve requirement ratio for commercial banks by 0.5% to 16.5% and has further increased it from 16.5% to 17.0% effective May 10, 2010. Further, in order to implement the requirements set out in the State Council's circular, the MLR issued a notice on March 8, 2010 in relation to increasing the supply of, and strengthening the supervision over, land for real estate development purposes.

In April 2010, the PRC State Council issued a further circular, which provided as follows: purchasers of a first residential property for their households with a gross floor area of greater than 90 square meters must make down payments of no less than 30% of the purchase price; purchasers of a second residential property for their households must make down payments of no less than 50% of the purchase price and the interest rate of any mortgage for such property must equal at least the benchmark interest rate plus 10%; and for purchasers of a third residential property, both the minimum down payment amount and applied interest rate must be significantly higher than the relevant minimum down payment and interest rate which would have been applicable prior to the issuance of the circular (the specific figures shall be decided by the relevant bank on a case-by-case based on the principle of proper risk management). Moreover, the circular provided that banks can decline to provide mortgage financing to either a purchaser of a third residential property or a non-resident purchaser.

The purpose of these measures appears to be to curb price speculations in certain housing markets from two sides. On the demand side, the objective appears to be to constrain speculative trends by requiring tighter conditions and stricter bank loans for “second, third, fourth, or more” homes than are typical for primary home buyers. The policy makes it more difficult and more costly to purchase homes only for price speculation.

On the supply side, the government is endeavoring to push for a higher quantity of homes to meet the needs of low-income and middle-income buyers of primary homes.

In considering all the government’s housing policies, given (a) the supply of affordable housing is likely to increase in the next year, (b) the government regulation of loans to developers to reduce speculative building for speculative buyers, (c) pressures for supplying affordable housing for primary buyers, (d) possible competitive market pressures for lower pricing as speculative owners of existing but unoccupied homes try to sell before the market weakens, and (e) bank loan restrictions that reduce the cash available for non-primary homes, we believe that the likely result will be incentives for and market pressures on developers to supply affordable housing in higher volumes, while at the same time moderating or lowering both the prices and the number of housing units available in the speculative portion of the housing market.

China Oumei plans for Initial Public Offering. (Company was originally a private shell that became a non-public operating entity  via a reverse merger).

Company Snapshot:

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. 

A Realestate Development Company

As of March 15, 2010, we have completed 14 projects having a gross floor area, or GFA, of 1,099,944 square meters, of which more than 90.7% has been sold. In addition, we have seven projects under construction with a total GFA of 739,642 square meters.

Industry Snapshot: (Management Commentary)

• China’s real estate sector is in the early stage of a long-term growth cycle, supported by growth in its gross domestic product, or GDP, rising demand for housing, and substantial structural changes.
  
• China’s real estate bull market began more than six years ago. Despite the moderations in growth caused by the global economic weakness in 2008 and 2009, we believe the structural forces in China support continuing good demand for real estate in China during the next 10 years. The two primary drivers for this long-term real estate demand in China are urbanization (which includes both the expansion and development of cities and the dramatic migration of people from rural to urban areas) and the rising disposable income per capita in the cities.
  
• The growth in China’s real estate industry is reflected in the growth of investment in real estate development, total GFA sold, and average home prices. According to the National Bureau of Statistics of China, total investment on real estate development in 2009 was RMB 4.307 trillion (approximately $630 billion), up 19.9% from 2008.

• China has experienced rapid economic growth in the last 20 years. According to China’s Department of Commercial Affairs, China’s GDP achieved an annual growth rate of 17.1% from 2004 to 2008. According to the National Statistics Bureau of China, China’s GDP in 2009 was RMB 33.5 trillion, up 8.7% from 2008. The official per capita data for 2008 and 2009 is not yet available as of the date of this report.

Despite the recent global economic recession, China is expected to achieve relatively good economic growth in the next several years, compared to many other major economies in the world.

Use Of proceeds:

We have no specific plan for the offering proceeds except to generate funds for working capital and general corporate purposes, including to fund potential future acquisitions, and to create a public market for our common stock

Underwriter: Brean Murray, Carret & Co.

Proposed offering price: TBA

Post IPO Share Calculation: TBA

Financial Snapshot:

In fiscal year 2009:

• Sales increased 22.4% to $94.3 million from $77.0 million in fiscal year 2008.
  
• Gross profit increased 17.3% to $36.0 million in fiscal year 2009 from $30.7 million in fiscal year 2008.
  
• Net income before extraordinary item increased 27.9% to $24.3 million in fiscal year 2009 from $19.0 million in fiscal year 2008.