Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CHLN > SEC Filings for CHLN > Form 10-Q on 20-Nov-2013All Recent SEC Filings

Show all filings for CHINA HOUSING & LAND DEVELOPMENT, INC.

Form 10-Q for CHINA HOUSING & LAND DEVELOPMENT, INC.


20-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

We prepare our interim condensed consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are inherently uncertain. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reading our interim condensed consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

The unaudited interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2012, as amended ("2012 Annual Report"). They do not include certain footnote disclosures and financial information normally included in annual consolidated financial statements prepared in accordance with GAAP and, therefore, should be read in conjunction with the audited consolidated financial statements and notes included in the Company's 2012 Annual Report.

Warrants and derivative liability

On January 28, 2008, the Company issued Senior Secured Convertible Debt due in 2013 (the "Convertible Debt") and warrants to subscribe for common shares for an aggregate purchase price of $20 million. Both the warrant and embedded conversion option associated with the Convertible Debt meet the definition of a derivative instrument according to the standard "Accounting for Derivative Instruments and Hedging Activities". Because the warrant and the Convertible Debt are denominated in U.S. dollars but the Company's functional currency is the Chinese RMB, the exemption from derivative instrument accounting provided by the standard is not available and therefore the warrant and embedded conversion option are recorded as derivative instrument liabilities and periodically marked-to-market.

The Convertible Debt was fully repaid as of December 31, 2012. Therefore, for the three and nine months ended September 30, 2013, there were no changes in fair value for the warrants and embedded derivatives. For the three months ended September 30, 2012, the Company recorded decreases in fair value for the warrants and embedded derivatives of $976 and $109,344, respectively. For the nine months ended September 30, 2012, the Company recorded decreases in fair value of the warrants and embedded derivatives of $4,162 and $330,628, respectively, in the unaudited interim condensed consolidated statements of income.

The carrying value of the Convertible Debt was accreted to its stated amount on maturity using the effective interest method. The effective interest rate was determined to be 15.42%. There were no interest and accretion costs for the three and nine months ended September 30, 2013. Related interest and accretion costs for the three months ended September 30, 2012 were $130,806 and $254,023, respectively, and for the nine months ended September 30, 2013 were $389,549 and $728,174, respectively.

Pursuant to accounting guidance, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settle in a Company's Own Stock", the warrants issued contained a provision permitting the holder to demand payment based on a valuation in certain circumstances. Therefore, the Company recorded the warrants issued through private placements in 2007 as a liability at their fair value on the date of grant and then revalued them at each reporting date using the CRR Binomial Lattice Model using the following Assumptions:

These warrants expired during fiscal year 2012. As such, there were no changes in fair value of the warrants issued through private placements in 2007 for the three and nine months ended September 30, 2013. The gains from the change in fair value of the warrants issued through private placements in 2007 for the three and nine months ended September 30, 2012 were $Nil and $1,060, respectively.

Including the fair value of warrants associated with the Convertible Debt, the total gains from the change in fair value of warrants for the three and nine months ended September 30, 2012 were $976 and $4,162, respectively.

Real estate held for development or sale, intangible assets and deposits on land use rights

We evaluate the recoverability of our real estate developments taking into account several factors including, but not limited to, our plans for future operations, prevailing market prices for similar properties and projected cash flows.

We review real estate projects, intangible assets and deposits on land use rights whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the assets, we recognize an impairment loss based on the fair value of the assets.

Our judgments and estimates related to impairment include our determination of whether an event has occurred to warrant an impairment test. If a test is required, we will have to make additional judgments and estimations such as our expectations of future cash flows and the calculation of the fair value of the impaired assets.

When real estate costs are determined to be impaired, they are written down to their estimated net realizable value. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of real estate costs deemed impaired are recorded as adjustments to the cost basis.

The following summarizes the components of real estate inventories as at September 30, 2013 and December 31, 2012:

                                                           September 30,      December 31,
                                                                2013               2012
Real estate projects completed and held for sale
Junjing I                                                  $    1,823,440     $   2,065,376
Junjing II                                                              -           175,326
Tsining 24G                                                             -            45,370
Gangwan                                                             9,732            19,117
Tsining Home IN                                                         -            60,943
Junjing III                                                     1,169,026         1,309,347
Puhua Phase I                                                   7,118,134         9,205,681
Puhua Phase II - West Region                                    4,419,557         7,834,598
Real estate completed and held for sale                        14,539,889        20,715,758

Real estate projects held for development
Puhua Phase II - East Region, III and IV                       90,673,668        80,834,955
Park Plaza                                                     68,783,202        77,765,333
Golden Bay (the Company signed a land use right
acquisition agreement subsequent to the peiod)                 19,139,136        12,415,111
Jiyuan                                                         19,404,241        16,500,575
Other                                                           6,086,885         3,941,746
Construction Materials                                            353,539           198,397
Real estate held for development                              204,440,670       191,656,117

Total real estate held for development or sale             $  218,980,559     $ 212,371,875

Intangible asset

The intangible assets consisted of the following at September 30, 2013 and December 31, 2012:

                                     September 30,      December 31,
                                         2013               2012
Development right acquired (a)      $    52,767,189     $  51,835,211
Land use rights acquired (b)              8,782,736         8,627,525
Construction license acquired (c)         1,230,093         1,208,354
                                         62,780,018        61,671,090
Accumulated amortization                 (7,487,066 )      (7,188,838 )
Intangible assets, net              $    55,292,952     $  54,482,252

(a) The Company purchased the exclusive development right (the "Intangible") through the acquisition of New Land in 2007. The cost of the Intangible was $51.8 million (323 million RMB) based on the purchase price allocation determined. This Intangible allows the Company to develop projects within a specified area in the Baqiao District in Xi'an (the "Specified Area") as defined in the Intangible agreement. This Specified Area is sub-divided into different land use rights ("LUR"). Under the Intangible agreement, the Company has preferential right to acquire LURs of land up to 487 acre within this Specified Area from the government. The development right will expire on June 30, 2016. We expect to acquire the land use right for our Golden Bay project in 2013. A substantial portion of the 487 acres are not expected to be fully developed until after the 2016 contract expiration date. The actual purchase price of the LURs to be acquired through the Intangible is also expected to be significantly lower than the fair market value of the LUR when traded in the open market.

The Company amortizes the Intangible when it acquires a LUR within the Specified Area and the amortization of the Intangible is determined by calculating the profit that the specific LUR may generate over the total estimated profit of the Intangible and applying this percentage to the Intangible. The Company records the amortized Intangible into real estate held for development or sale as a component of the cost of the related project and allocates it to each building based on the gross floor area ("GFA") of each building. When the units within the project are sold, the related capitalized amortization will be expensed as part of cost of real estate sales. This amortization policy ensures the amortization matches the realization of the economic benefit of the Intangible when the actual LUR is developed into condo projects and related revenue is recognized with the Company percentage of completion method.

The following table summarizes the information and assumptions used by the Company to amortize the Intangible at the time LURs were acquired. The table also includes forward looking information that may be used by the Company for future amortization when future LURs are obtained:

                                 2007           2009                 2013               2014        Beyond 2014

                            Land Sale          Puhua       Golden Bay (1)       Textile City          Remaining

            Acre (gross)           31             79               48 (5)            107 (5)            222 (5)

      Gross Profit* from   $     16.5     $     63.7              TBD (5)            TBD (5)            TBD (5)
    Intangible Agreement

         (numerator - in
               millions)

   Total Estimated Gross     $701 (2)       $701 (2)             $190 (4)           $190 (4)           $190 (4)
                 Profit*

       (Denominator - in
               millions)

              Percentage     2.4% (2)       9.3% (3)              TBD (5)            TBD (5)            TBD (5)

* Gross profit referred to the price difference between the estimated fair market value of the LUR and the estimated purchase price.

1) The Company signed the LUR acquisition agreement with the government on November 5, 2013 and expect to close the acquisition before the end of 2012.

2) When the Company entered into the New Land acquisition in March 2007, it was the Company's intention to sell part of the land and retain the remaining portion for our own projects. We estimated the total cost and gross profit based on the then current market conditions and determined that the total estimated profit from utilizing the Intangible would be approximately $168.9 million. As a result of the dedication by the Xi'an government to develop the Baqiao District, the real estate price increased substantially. We were able to sell 31 acre of land at $28 million and realized a gross profit of approximately $16.5 million, representing about 58% gross margin. Based on the high margin that we were able to realize through the LUR sale, we revised our estimated gross profit from $168.9 million to $701 million at the 2007 year end. The gross profit from this land sale was calculated as 2.4% of the total estimated gross profit from the whole 487 acre project. $1.2 million (2.4%) of Intangible was amortized through the Company's consolidated income statement.

3) During 2009, we acquired the LUR of a 79 acre parcel of land for the Puhua project for $46 million and the estimated fair market value was $109 million. Based on the $30 million invested by Prax on Puhua project for the 25% interest in Puhua, for which at the time only had the LUR just acquired. The $63 million gross profit was determined as 9.25% of the total estimated gross profit at the time of Puhua LUR acquisition and $4.6 million (9.25%) of Intangible was amortized and capitalized into real estate held for development or sale, specifically, the construction in progress ("CIP") of Puhua. As revenue is recognized on the percentage of completion basis, the CIP (including the Amortized Intangible) is expensed through cost of real estate sales based on the same percentage of completion revenue recognition calculation.

In each of years 2010 through 2012, the Amortized Intangible that was included in the cost of real estate sales are as follows:

2010 - $461,819 (or 3.12 million RMB)

2011 - $547,876 (or 3.54 million RMB)

2012 - $645,264 (or 4.07 million RMB)

4) Since 2010, the Chinese government initiated a series of restriction policies aiming to cool down the overheated real estate market. The Xi'an local government rolled out the local version of restriction policies. This increased the uncertainty of securing LUR for potential projects under the intangible agreement. Although it has always been the Company's intention to fully utilize the exclusive right, we decided in 2011 to amortize the intangible only over the projects which we have commenced negotiation and pre-acquisition procedures. Based on the current market conditions and estimates, the total estimated gross profit from these projects may be revised to approximately $190 million from $700 million when future LURs are obtained through the Intangible. Future Intangible amortization will be based on the new estimation on a prospective basis.

5) The information will be determined when the actual acquisition is closed.

The Company has a $43.5 million deposit on LURs as of September 30, 2013. The Company will utilize this deposit to offset the actual land use right acquisition price of the LURs of the 48 acre for Golden Bay and the 107 acre for the Textile City projects. We currently do not have specific development plans for the remaining 222 acre of land under the Intangible agreement. We will continue the discussion with local government to locate potential projects. As part of our periodic reporting procedures, we review and update our estimates total gross profit depending on the market conditions. Once we are able to secure a new project under the Intangible agreement, we will adjust the amortization table accordingly.

The Company did not acquire any new land use right with the intangible assets during the three and nine months periods ended September 30, 2013. The expected development period is between 2009 and 2020. The company will further negotiate with the government on acquiring more land use rights within this area.

The Company also assesses impairment and determines that the expected future profit of $109 million from the exclusive right is still well above the carrying value and concludes no impairment is required.

(b) The land use right was acquired through acquisition of Suodi. The land use right certificate will expire in November, 2048. The Company amortizes the land use right over 39 years starting from the date of acquisition. For the three and nine months ended September 30, 2013, the Company recorded $56,253 and $167,609, respectively of amortization expense on the land use rights (September 30, 2012 - $54,258 and $163,290). The amortization was included in selling, general and administrative expenses.

(c) The construction license was acquired through acquisition of Xinxing Construction. The construction license, which is subject to renewal every 5 years, is not amortized and has an indefinite estimated useful life because management believes the Company will be able to continuously renew the license in future. The license will be subject to renewal on January 1, 2016.

Deposits on land use rights

                               September 30,      December 31,
                                    2013              2012
Deposits on land use rights        43,517,062        42,748,017

The Company conducts regular reviews of the deposits on land use rights. After review and assessment, the Company concluded that there was no impairment to the carrying value of the deposits and therefore no write-down was required.

Property, plant and equipment

The total rental income (cash inflow) from leasing the Tsining Junjing I commercial retail property was RMB 1.2 million during third quarter of 2013 is slightly less than the 1.4 million in rental income RMB of the same period of 2012. Based on the RMB 1.2 million of net cash receipts in the third quarter of 2013, it will take the Company approximately 16 years to recover the RMB 79 million carrying value of the asset. There was no cash outflow in connection with the maintenance and repair of the property. The annual amortization of this property is RMB 3 million (non-cash item) per year over 30 years.

We believe the property can be sold with reasonable effort. Many potential customers have shown interest in buying this property. However, we have signed lease agreements with several parties and the longest term amongst these agreements does not expire until 2022. We may not be able to sell the property before the expiration date of the lease agreements. In addition, the Company currently uses this property as collateral for loans outstanding and due to the nature of our operation, we will likely use this property as collateral again in the future.

We assess whenever events or changes in circumstances indicate that the carrying amount of this property may not be recoverable. When these events occur, we measure impairment by comparing the carrying value to the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the asset, we recognize an impairment loss based on the fair value of the asset. Our judgments and estimates related to impairment include our determination of whether an event has occurred to warrant an impairment test. If a test is required, we will have to make additional judgments and estimations such as our expectations of future cash flows and the calculation of the fair value of the impaired asset.

During the fourth quarter of 2012, we sold 7,367 square meters of Junjing I commercial property for RMB 94.3 million. The carrying value of the sold property was only RMB 52.8 million. Therefore, we believe there is no impairment for the commercial property. The remaining commercial property has a GFA of 5,371 square meters, with a carrying value of RMB 79 million. The market selling price of properties like the Tsining Junjing I commercial retail property was much higher than its cost when we reclassified it from inventory to fixed assets. Thus, our assessment does not show any impairment to the carrying value of the property.

Material trends and uncertainties that may impact continuing operations

Changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers and consequently fewer home purchases. According to E House (China) Real Estate Research Institute the average residential sale price in Xi'an city was stable in the quarter ended September 30, 2013. The average sales price decreased to RMB6,899 per square meter (approximately US$1,126 per square meter) from RMB7,530 in the same period of 2012, representing about a 8% year-to-year decrease.

Most purchasers of our homes finance their acquisitions through lenders providing mortgage financing. A substantial increase in mortgage interest rates or unavailability of mortgage financing would adversely affect the ability of prospective homebuyers to obtain the financing needed to purchase our homes, as well as the ability of prospective upgrading homebuyers to sell their current homes. For example, if mortgage financing became less available, demand for our homes could decline. A reduction in demand could also have an adverse effect on the pricing of our homes because we (and our competitors) may reduce prices in an effort to compete for home buyers. A reduction in pricing could result in a decline in revenues and margins. Additionally, Xi'an's local government required that the average selling price increase of newly built residential products should be less than 15%, and such an increase must not surpass Xi'an's GDP growth rate and disposable income growth rate. These new policies could result in buying hesitation amongst potential new customers and could impact our revenues.

The real estate development industry is capital intensive and development requires significant up-front expenditures to acquire land and begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding and land development activities. Although we believe that internally generated funds and our current borrowing capacity will be sufficient to fund our capital and other expenditures (including land acquisition, development and construction activities), the amounts available from such sources may not be adequate to meet our needs. If such sources are not sufficient, we may seek additional capital in the form of debt or equity financing from a variety of potential sources, including bank financings, third-parties and related party financings. The availability of borrowed funds to be utilized for land acquisition, development and construction may be greatly reduced, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with new loans. Failure to obtain sufficient capital to fund planned capital and other expenditures could have a material adverse effect on our business.

In addition, regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations such as building permit allocation ordinances and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from governmental agencies to grant us necessary licenses, permits and approvals could have an adverse effect on our operations.

As of September 30, 2013, we had $85,721,169 of cash, compared to $6,121,448 as of December 31, 2012, an increase of $79,599,721.

The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of our future projects, through cash flow provided by operations and additional funds raised by future financings. Upon acquiring land for future development, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure any loans that are needed. We believe that adequate cash flow will be available to fund our operations.

BUSINESS

Our Company

We are a leading residential real estate developer with a focus on fast growing Tier II and Tier III cities in western China. We are dedicated to providing quality and affordable housing to middle class families. The majority of our customers are first time home buyers and first time up-graders, that, we believe, will benefit from China's rapid gross domestic product ("GDP") growth and the middle classes' corresponding increase in purchasing power.

We commenced operations in Xi'an in 1999 and have been considered to be one of the industry leaders and one of the largest private residential developers in the region. We have experienced significant growth in the past 12 years and have completed over 1.3 million square meters of residential projects. Through the utilization of modern design and technology, as well as a strict cost control system, we are able to offer our customers high quality, cost-effective products. Most of our projects are designed by world-class architectural firms from the United States, Canada and Europe. These firms have introduced advanced "eco" and "green" technologies into our projects.

As we are focusing primarily on the demand from first time home buyers and first time up-graders in western China, the majority of our apartments have sizes in the range of 70 square meters to 120 square meters; with such sizes considered to be a stable market section of the residential real estate market in western China. Our typical residential project is approximately 100,000 square meters in size and consists of multiple high-rise, middle-rise and low-rise buildings as well as a community center, commercial units, educational facilities such as kindergartens and other auxiliary facilities. In addition, we provide property management services to our developments and have exclusive membership systems for our customers. We typically generate a large portion of our sales through the recommendations of our existing customers.

We acquire our land reserves and development sites through primary land development with the local government, open-market auctions and acquisition of old factories from the government and distressed assets from commercial banks. We do not depend on a single land acquisition method and this facilitates our acquisition of the land at a reasonable cost, which in turn results in us typically receiving higher returns on our investments from our developments. We intend to continue our expansion into other strategically selected cities in western China by leveraging our brand name and scalable business model.

Our Strategies

. . .

  Add CHLN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CHLN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.