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CHLN > SEC Filings for CHLN > Form 10-K on 24-Mar-2014All Recent SEC Filings

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

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


24-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis

FORWARD LOOKING STATEMENTS

Some of the statements contained in this Form 10-K that are not historical facts are "forward-looking statements" that can be identified by the use of terminology such as estimates, projects, plans, believes, expects, anticipates, intends, or the negative or other variations of those words, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products, and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation: our ability to attract and retain management, and to integrate and maintain technical information and management information systems; our ability to raise capital when needed and on acceptable terms and conditions; the intensity of competition; and general economic conditions. All written and oral forward-looking statements made in connection with this Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Critical Accounting Policies and Estimates

We prepare our 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 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.

Effect of Change in Estimated Total Contract Sales and Costs

Revisions in estimated gross profit margins related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring the revisions become known. During 2013, real estate development projects with gross profits recognized in 2012 had changes in their estimated gross profit margins. As a result of these changes of gross profit, net income for the year ended December 31, 2013 decreased by $512,003 (2012 - increased by $347,706;) or basic and diluted earnings per share for the year ended December 31, 2013 increased by $0.015 and $0.015, respectively (2012 - increased by $0.01 and $0.01 in both basic and diluted earnings per share).

Real estate held for development or sale, intangible asset 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 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 as a result of 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 assets, we would 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 that warrants an impairment test. If a test is required, we will also have to make certain judgments and estimations concerning 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 fair value less cost to sell. 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 would be recorded as adjustments to the cost basis. There has been no impairment on the real estate inventories and no impairment loss has been recorded for the years ended December 31, 2013 and 2012.

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

                                                        2013              2012
Real estate projects completed and held for sale
JunJing I                                           $   1,842,556     $   2,065,376
JunJing II                                                      -           175,326
Tsining 24G                                                     -            45,370
Gangwan                                                     9,839            19,117
Tsining Home IN                                                 -            60,943
JunJing III                                             1,284,724         1,309,347
Puhua Phase I                                           7,128,395         9,205,681
Puhua Phase II - West Region and New Coastal Line       7,643,245         7,834,598
Real estate completed and held for sale                17,908,759        20,715,758

Real estate projects held for development
Puhua Phase II, III and IV                             92,388,308        80,834,955
Park Plaza                                             72,536,513        77,765,333
Golden Bay                                             77,997,482        12,415,111
Jiyuan                                                 21,835,276        16,500,575
Other                                                   6,629,575         3,941,746
Construction materials                                    178,899           198,397
Real estate held for development                      271,566,053       191,656,117

Total real estate held for development or sale      $ 289,474,812     $ 212,371,875

Intangible Assets



Intangible asset consists of the following as at December 31, 2013 and 2012:



                                                  2013              2012
          Development right acquired (a)      $  53,345,648     $ 51,835,211
          Land use right acquired (b)             8,878,924        8,627,525
          Construction license acquired (c)       1,243,565        1,208,354
                                                 63,468,137       61,671,090
          Accumulated amortization              (21,014,664 )     (7,188,838 )
          Intangible assets, net              $  42,453,473     $ 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 a renewal of the agreement due to the healthy relationship with the government. 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 gross margin in this case is just based on the assumption that the land is bought and sold directly, not including any other construction on the land. 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                2014
                                Land Sale           Puhua      Golden Bay A        Golden Bay B        Textile City
               Acre (gross)            31              79          17.5 (3)            17.1 (3)            29.7 (4)
         Gross Profit* from
       Intangible Agreement

  (numerator - in millions)   $      16.5     $      63.7         $15.2 (3)            14.5 (3)            23.7 (4)

      Total Estimated Gross
                    Profit*

(Denominator - in millions)      $701 (1)        $701 (1)     $       133.6 (5)   $       133.6 (5)   $       133.6 (5)

                 Percentage     2.44% (1)       9.89% (2)        24.96% (5)          23.79% (5)          38.92% (5)

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

* The Intangible's economic benefits are consumed as the LURs are acquired and the bidding priority and preferred prices are realized. As such, we follow ASC 350-30-35-6 to amortize the Intangible by amortizing the Intangible in a way that considers the identification of the profit on each LUR, which is betweenthe preferred LUR acquisition price and market price of the LUR. The acquisition price and market price of the LURs are the function of the acreage of the LUR acquired, locations and trend of Xian surrounding land use right value. The overall profit from the Puhua project or any other future projects under the Intangible require additional work and conditions such as: construction licenses, goodwill in the real estate industry, planning and actual construction works. However, none of these are directly related to the realization of profit from the Intangible.

1) 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 the Intangible was amortized through the Company's consolidated statement of operations.

2) 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 Praxfor the 25% interest in the Puhua project, although at that time we had only just acquired the LUR. 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 the 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 2013, 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)
2013 - $602,581 (or 3.70 million RMB)

3) In December 2013 and March 2014, the Company acquired the land of Golden Bay A and Golden Bay B projects, which were 17.5 and 17.1 acres, respectively. According to the market condition around this project, the gross profit margin, which is defined as the estimated profit divided by the fair value of the LUR, of the land of Golden Bay was determined as 30%. The gross profit of Golden Bay A and Golden Bay B was estimated to be $15.2 million and $14.5 million, respectively.

4) In December 2010, we signed a preliminary contract with the government disclosing our intention to acquire an additional 107 acre tract of land of Textile City. We estimate that we may obtain the land use right for this piece of land during the second half of 2014. The estimated bidding price should be 10 percent higher than the price of Golden Bay because of the increase of market selling price. The gross profit margin of Textile City was determined as 20 percent because it is not located in a prime location like the Golden Bay project.

5) After the acquisition of the land of Golden Bay and Textile City, there are still 313 acres available for the Company to develop in the Baqiao area. But since we don't have specific plan on when this land will be available for purchase, we determined to amortize the remaining intangible asset to the Golden Bay and Textile City projects. The amortization schedule will be updated when any new project in this area arises. According to the gross profit margin of the Golden Bay and Textile City, the total gross profit of these two projects was determined to be $53 million. The total gross profit of the five pieces of land will be $133.6 million. The Company acquired part of Golden Bay A's land use right and recorded amortization of $13,274,633 during fiscal 2013 and capitalized this amount in the real estate held for development or sale. The $13,274,633 amortization recorded was calculated by multiplying the original gross amount of $53 million of the development right by 24.96% which is the percentage of profit margin realized over the total expected profit margin to be realized.

Because the government has issued various policies to slow down the sale of land, we currently do not have specific development plans for the remaining 313 acre of land under the Intangible agreement. We will continue the discussion with the local government to locate potential projects. As part of our periodic reporting procedures, we review and update our estimates of 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 also assesses impairment and has determined that the expected future profit from the exclusive right is still well above the carrying value and has concluded that no impairment has occurred.

(b) The land use right was acquired through the 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 year ended December 31, 2013, the Company has recorded $224,185 (2012 - $218,480) amortization expense on land use right. The amortization was included in selling, general and administrative expenses. For the next five years, the Company will amortize approximately $220,000 annually on the land use right.

(c) The construction license was acquired through the 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 it will be able to continuously renew the license in future years. The license is subject to renewal on January 1, 2016.

The Company evaluates its intangible asset for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Based on the discounted estimated future cash flows, the Company will record a write-down for impairments if the discounted cash flows are over the carrying value of the intangible asset.

No impairment write-down was recognized for December 31, 2013 and 2012.

Deposits on land use rights

2013 2012

Deposits on land use rights 59,155,165 42,748,017

The deposits on land use rights are mainly for the land in Baqiao area, including Textile City textile city and Golden Bay B. The Company acquired the land of Golden Bay B in March, 2014. The deposits on land use rights after the acquisition of Golden Bay only includes the $16.5 million (RMB 100 million) for Textile City.

The Company conducts regular reviews of its deposits on land use rights. After review and assessment, the Company concluded that there were no significant decreases in market prices and therefore no impairment write-downs were required.

Income producing properties

The total rental income (cash inflow) from leasing the Tsining JunJing I commercial retail property was $0.8 million (RMB 5.1 million) during 2013 compared with $0.8 million (RMB 5.0 million) during 2012. Based on the $0.8 million (RMB 5.1 million) of net cash receipts in 2013, it will take the Company approximately 12.4 years to recover the $10.4 million (RMB 63) 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 $0.5 million (RMB 3 million) (non-cash item) per year over 30 years.

We do not believe the property cannot be sold with reasonable effort. Many potential customers have shown their 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 year 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 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.

During the fourth quarter of 2012, we sold 7,367 square meters of JunJing I commercial property for $14.9 million (RMB 94.3 million). The carrying value of the sold property was only $8.5 million (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 $6.4 million (RMB 38.5 million). The market selling price of properties like TsiningJunJing 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.

We are also generating income from other income producing properties.

Material trends and uncertainties that may impact our 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 fiscal year ended December 31, 2013. The average selling price of residential increased by 1% to RMB 6,893 (US$1,121) per square meter than 2012.

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 they need in order to purchase our homes, as well as the ability of prospective move-up 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. Additional government policies were implemented by the local government in February 2011 to curb speculation in the real estate market. These new policies included capping year-over-year housing unit average selling price increases to 15%, restricting third-time home purchases for local residents and second-time home purchases for non-local residents. 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 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 and/or securities offerings. 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 December 31, 2013, we had $21,320,071 of cash, compared to $6,121,448 as of December 31, 2012, an increase of $15,198,623.

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 whom 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.

CONSOLIDATED OPERATING RESULTS

Fiscal Year Ended December 31, 2013 Compared With 2012

Revenues

Our revenues are primarily derived from the sale of residential and commercial units in western China, mainly in Xi'an and the surrounding area. We also perform infrastructure work for the local government as well as preliminary land development projects.

The revenues from our real estate sales in the year ended December 31, 2013, increased 38% to $159.2 million from $115.3 million as compared to 2012. We believe the primary reasons for the increase were stable sales and increased revenue recognition due to higher percentage of completion. Our JunJing III project, Puhua Phase One and Phase Two projects continued serving as main revenue contributors during the year.

Revenues by project:                                           2013              2012
US$
Project Under Construction
Puhua Phase Two - East Region                                 13,097,087        13,947,456
Puhua Phase Three                                             39,854,198                 -
Park Plaza                                                    62,565,846                 -
Ankang Project                                                18,148,162                 -
Projects Completed
Puhua Phase Two - West Region and NCL (NCL under project
under construction in 2012)                                   21,450,765        40,735,681
. . .
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