China Precision Steel Announces First Quarter Fiscal 2009 Results

November 11, 2008 7:00 AM EST

SHANGHAI, China, Nov. 11 /Xinhua-PRNewswire/ -- China Precision Steel (Nasdaq: CPSL), a niche precision steel processing Company principally engaged in producing and selling high precision cold-rolled steel products, announced today its fiscal 2009 first quarter results for the period ended September 30, 2008.

    First Quarter Highlights
    -- Net Income of $2.9 million resulting in EPS of 6 cents per share
    -- Revenue of $25.4 million, a decrease of 6.8% period-over-period
    -- Gross profit was $4.0 million, down 43.1% versus last year
    -- Exports represented 16.4% of total revenue

"Despite the global economic slowdown which resulted in reduced demand from manufacturers for auto components, we remain optimistic about our market position," commented Dr. Wo Hing Li, China Precision Steel's Chairman and CEO. "We believe that our competitive pricing and service is attracting manufacturers who are looking to reduce production costs. We continue negotiating new contacts with manufacturers who are switching from higher cost imports. However, the lead time for developing new customers' products can range from six months to over a year, depending on the complexity of the products."

Revenue for the first quarter of fiscal 2009 was $25.4 million, down 6.8% from $27.2 million in the first quarter of fiscal 2008. The decrease was mainly attributable to the decline in sales of high-carbon, cold-rolled coils driven by reduced orders from auto components customers and the cancellation of an export order for 500 tons of hard-rolled steel coils. High carbon and low carbon products accounted for 21.2% and 59.7% of sales, respectively, compared to 59.3% and 39.4%, respectively, from the prior year period. Subcontracting income accounted for 18.4% of sales, up from 0.3% of sales in the first quarter of fiscal 2008.

Gross profit in the first quarter was $4.0 million, down 43% from gross profit in the first quarter of fiscal 2008 of $6.9 million. Gross margin was 15.6% compared to 25.5% in the same period a year ago. With the rapid decline in steel prices experienced during the quarter, the Company made efforts to reduce inventory through direct sales of raw materials. The decline in gross margin was mainly due to two direct sales transactions of raw materials, totaling $2.7 million and accounting for 11% of the Company's revenue. Excluding the abovementioned two transactions, gross margin for the first quarter 2009 would have been 17.1%.

Selling expenses for the first quarter of fiscal 2009 were $211,298, up 110% from $100,705, in the same period last year. The increase in selling expenses was primarily due to increases in transportation costs for a broader customer base, which rose by 80% compared to the prior year period. Administrative expenses decreased 5% to $462,100 from $486,376 mainly due to the lower SEC compliance costs and professional fees as there was no financing activity during the quarter.

Total operating expenses were $699,601, down 43.0% from $1.2 million in the prior year period. The decrease in operating expenses was mainly attributable to a $625,998 provision for doubtful accounts recorded in the first quarter of fiscal 2008 as a partial reserve against advances to suppliers as the goods ordered were not received within ninety days. The Company did not record any provision for bad debts for the first quarter of fiscal 2009.

Operating income for the first quarter was $3.3 million, down 43.1% from operating income of $5.7 million in the same period a year ago.

During the first quarter of fiscal 2009, interests and finance costs decreased by 26% to $327,405 from the prior year period of $442,141. The decline was mainly attributable to the decrease in total interest expense due to lower loan balance during 2008 as compared to 2007.

Net income for the first quarter of fiscal 2009 was $2.9 million, down 51% from $5.8 million in the prior year period. Excluding two one-off write backs in 2008, net income for the first quarter of fiscal 2009 decreased by 8% from $3.1 million. For the first quarter of fiscal 2008, there was a one-time write back of impairment $1.6 million for consumable items, and a one-time write back of deferred income tax of $1.1 million. Fully diluted earnings per share were $0.06 compared to $0.15 in the comparable period a year ago. Weighted average diluted shares outstanding for the quarter increased to 46.7 million from 38.4 million in prior year period, due to private placement financings in November 2007.

Financial Condition

As of September 30, 2008, China Precision Steel had $10.3 million in cash and cash equivalents, no long term debt, total liabilities of $44.3 million and working capital of $59.7 million. Shareholders' equity was $123.5 million, compared to $120.3 million as of June 30, 2008.

Business Outlook

China Precision Steel has received the equipment for the third mill and is preparing to begin construction in November, 2008. The new mill is designed for 1450 mm and will be a tandem mill with best in class gauge control and shape performance capable of producing high quality steel for exposed and unexposed products. The Company expects to make an additional investment of $5.5 million to complete the third cold rolling mill, which is expected to commence production in the fourth quarter of fiscal 2009. Management believes that, once fully operational, the new mill will increase production capacity by 33% and expand product line offerings, creating new opportunities for the Company's growth.

Dr. Li concluded, "Precision steel products are used in many consumer end markets making our industry a leading indicator for the economy. As such, our industry is the first to experience the impact of consumers' purchasing slowdown and will be the first to benefit from the rebound in consumer products. We believe we are appropriately positioned for these challenging economic conditions with a solid competitive position. By leveraging on our high technology in steel processing in China as well as relatively low raw material price in China compared to the rest of the world, we are confident to obtain an increasing number of customers switching from higher cost imports, expanding our customer portfolio and diversifying our revenue stream."

About China Precision Steel

China Precision Steel is a niche precision steel processing Company principally engaged in the production and sale of high precision cold-rolled steel products and provides value added services such as heat treatment and cutting medium and high carbon hot-rolled steel strips. China Precision Steel produces high precision ultra-thin, high strength (7.5 mm to 0.05 mm) cold- rolled steel products primarily for automotive components, food packaging materials, saw blades and textile needle manufacturing companies in the People's Republic of China. China Precision Steel is expanding its penetration in overseas markets such as Nigeria, Thailand, Indonesia and the Philippines. China Precision Steel was incorporated in 2002 and is headquartered in Sheung Wan, Hong Kong. A dditional information can be found at the Company's website http://chinaprecisionsteelinc.com .

Conference Call

China Precision Steel will host a conference call on Tuesday, November 11, 2008 at 8:00 am EST to discuss first quarter results. To participate in the live conference call, please dial the following number fifteen minutes prior to the scheduled conference call time: 888-339-2688. International callers should dial 617-847-3007. When prompted by the operator, mention Conference Passcode 105 463 41.

If you are unable to participate in the call at this time, a replay will be available for 14 days starting on Tuesday, November 11, 2008 at 10:00 a.m. Eastern Time. To access the replay, dial 888-286-8010 and enter the passcode 51928087. International callers should dial 617-801-6888 and enter the same passcode 51928087.

This conference call will be broadcast live over the Internet and can be accessed by all interested parties by clicking on http://www.chinaprecisionsteelinc.com . Please access the link at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software. For those unable to participate during the live broadcast, a 90-day replay will be available shortly after the call by accessing the same link.

Forward-Looking Statements

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Certain statements in this press release and oral statements made by China Precision Steel on its conference call in relation to this release, constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding our ability to prepare the Company for growth, the Company's planned manufacturing capacity expansion in 2007 and predictions and guidance relating to the Company's future financial performance. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs but they involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, business conditions in China, weather and natural disasters, changing interpretations of generally accepted accounting principles; outcomes of government reviews; inquiries and investigations and related litigation; continued compliance with government regulations; legislation or regulatory environments, requirements or changes adversely affecting the businesses in which China Precision Steel is engaged; cyclicality of steel consumption including overcapacity and decline in steel prices, limited availability of raw material and energy may constrain operating levels and reduce profit margins, environmental compliance and remediation could result in increased cost of capital as well as other relevant risks not included herein. The information set forth herein should be read in light of such risks. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. The forward-looking statements made herein speak only as of the date of this press release and the Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

                         --Financial Tables Follow--

                   China Precision Steel, Inc. and Subsidiary
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)

                                                    2008             2007
    Revenues

       Sales revenues                           $25,350,419      $27,187,235
       Cost of goods sold                        21,397,761       20,245,135

       Gross profit                               3,952,658        6,942,100

    Operating expenses
       Selling expenses                             211,298          100,705
       Administrative expenses                      462,100          486,376
       Provision for bad debts                           --          625,998
       Depreciation and amortization expense         26,203           13,632

       Total operating expenses                     699,601        1,226,711

    Income from continuing operations             3,253,057        5,715,389

    Other income (expense)
       Other revenues                               120,703            9,155
       Other expenses                                    --               --

       Interest and finance costs                  (327,405)        (442,141)


       Total other income (expense)                (206,702)        (432,986)

    Income from continuing operations
      before income tax                           3,046,355        5,282,403

    Provision for (benefit from) income tax
       Current                                      170,621          505,725
       Deferred                                          --       (1,064,028)

       Total income tax expense                     170,621         (558,303)

    Net income                                   $2,875,734       $5,840,706

    Basic earnings per share                          $0.06            $0.16

    Basic weighted average shares outstanding    46,556,107       37,378,143

    Diluted earnings per share                        $0.06            $0.15

    Diluted weighted average shares outstanding  46,692,711       38,397,325

     The Components of comprehensive income:
        Net income                               $2,875,734       $5,840,706
        Foreign currency translation adjustment      72,519          905,537

     Comprehensive income                        $2,948,253       $6,746,243



                   China Precision Steel, Inc. and Subsidiary
                      Condensed Consolidated Balance Sheets

                                                 (Unaudited)
                                                September 30,     June 30,
                                                    2008            2008
                         Assets

    Current assets
     Cash and equivalents                        $10,327,075     $18,568,842
     Accounts receivable
        Trade, net of allowances of
        $1,034,354 and $1,033,479 at
        September 30 and June 30,
        2008, respectively                        36,535,870      33,783,074
        Bills receivables                          7,260,878       4,309,703
        Other                                        575,519         571,746
     Inventories                                  18,154,946      17,815,087
     Prepaid expenses                                     --          58,105
     Advances to suppliers, net of
      allowance of $2,524,973 and
      $2,522,837 at September 30 and
      June 30, 2008, respectively                 31,082,560      33,027,365

    Total current assets                         103,936,848     108,133,922

    Property and equipment
     Property and equipment, net                  39,214,849      39,199,305
     Construction-in-progress                     22,930,167      16,476,454

                                                  62,145,016      55,675,759

    Intangible assets, net                         1,626,393       1,625,690

    Goodwill                                          99,999          99,999

    Total assets                                $167,808,256    $165,535,370

          Liabilities and Stockholders' Equity

    Current liabilities
     Accounts payable and accrued liabilities    $12,873,381     $12,047,981
     Advances from customers                       3,710,279       6,996,996
     Other taxes payables                          5,561,006       3,976,239
     Current income taxes payable                  4,746,404       4,742,387
     Notes payable                                17,392,980      17,465,799

    Total current liabilities                     44,284,050      45,229,402


    Stockholders' equity:
     Preferred stock: $0.001 per value,
      8,000,000 shares authorized,
      no shares outstanding at
      September 30, and June 30, 2008
     Common stock: $0.001 par value,
      62,000,000 shares authorized,
      46,562,955 and 46,472,955 issued
      and outstanding September 30,
      and June 30, 2008                               46,563          46,473
     Additional paid-in capital                   75,642,383      75,372,488
     Accumulated other comprehensive income        9,368,177       9,295,658
     Retained earnings                            38,467,083      35,591,349

    Total stockholders' equity                   123,524,206     120,305,968


    Total liabilities and stockholders' equity  $167,808,256    $165,535,370




                   China Precision Steel, Inc. and Subsidiary
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

                                                   2008               2007

    Cash flows from operating activities
     Net Income                                $2,875,734         $5,840,706
     Adjustments to reconcile net
      income to net cash provided by
      operating activities
       Depreciation and amortization              843,290            493,613
       Allowance for bad and doubtful
       debts                                           --            625,998
     Net changes in assets and
      liabilities:
       Accounts receivable, net                (5,622,477)       (23,095,388)
       Inventories                               (325,089)         8,039,005
       Deposits                                        --             82,758
       Prepayments                                     --            (14,702)
       Advances to suppliers                    1,974,708            284,972
       Accounts payable and accrued
        expenses                                  885,734         (1,362,139)
       Advances from customers                 (3,295,867)         6,549,629
       Other taxes payable                      1,582,948          1,230,830
       Current income taxes                            --          1,013,596
       Deferred income taxes                           --         (1,064,028)

    Net cash (used in) provided by
     operating activities                      (1,081,019)        (1,375,150)

    Cash flows from investing activities
     Purchases of property, plant and
      equipment including construction
      in progress                              (7,263,898)        (1,016,793)

    Net cash (used in) investing
     activities                                (7,263,898)        (1,016,793)

    Cash flows from financing activities
     Exercise of common stock warrants            269,985                 --
     Advances from/(to) directors, net                 --          3,047,524
     Notes payable proceeds                            --         16,490,833
     Repayments of notes payable                  (87,611)       (17,084,041)

    Net cash provided by financing
     activities                                   182,374          2,454,316

    Effect of exchange rate                       (79,224)           482,557

    Net increase in cash                       (8,241,767)           544,930

    Cash and cash equivalents, beginning
     of period                                 18,568,842          5,504,862

    Cash and cash equivalents, end of
     period                                    10,327,075         $6,049,792




    For more information, please contact:

    China Precision Steel
     Dan Carlson
     Email: DanielCarlson@comcast.net

    Elite IR
     Leslie J. Richardson, Partner
     Tel:   +852-3183-0283
     Email: Leslie.richardson@elite-ir.com

SOURCE China Precision Steel

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