Guohua Ku - CEO David Chong - CFO

Hello and welcome to the China Recycling Energy second quarter 2013 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded. Now I would like to turn the conference over to Ms. [Wei] please go ahead.

Thank you for joining us on today’s call. Before we start, I would like to remind you that the management’s prepared remarks contains forward-looking statements that are subject to risks and uncertainties and the management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risk as but not limited to saturations in customers demand, management of rapid growth, intensity of competition, general economic conditions, geo-political events and regulatory changes, and other information detailed from time to time in the company’s filings and future filings with the United States Securities and Exchange Commission. Accordingly, although the company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such adaptations will prove to be correct. In addition any projections as with the company’s due to performance represents management estimate as of today August 16, 2013. The company undertakes no obligations to correct or update any forward-looking statements provided as a result of new information, future events, or event change in our expectations. Joining us on today’s call are Mr. Ku, Chief Executive Officer and Mr. Chong, Chief Financial Officer. As there will be some translations during the call, we ask for your patience at that time. Mr. Ku, the Chief Executive Officer of China Recycling Energy Corporation will now deliver his opening remarks and I will just get them (inaudible).

[Foreign Language] Good morning and for those in China good evening. CREG saw a healthy income growth in the second quarter of this year, characterized by 205% increase in net spending from sales leasing compared to last year. As of June 30, 2013 the total sales including sales in contingent rental income was $13.91 million, an increase of $13.51 million compared to last year. During the three months ended June 30 the company completed two 3 megawatt (inaudible) gas turbine power generation systems in Shanxi Datong Phase 1 project and continue the construction for the ongoing project which is at Phase 2. Meanwhile the Jilin Ferroalloys Power Generation Project or the (inaudible) project are under construction. Before we get to Mr. Chong and financials I’d briefly like to discuss the current dynamics of our marketplace and debt market as well as our outlook going forward. [Foreign language] At the National People’s Congress (NPC) and Chinas People’s Political Consolidated Conference CPPC last year, the current environmental situation had drawn great attention from the government. As a result further controlling and lowering of environmental pollution will be conducted widely in the coming years in China. According to the document issued in August 2013, the state council issued special measurement (inaudible) for energy conservation and environmental protection industry requiring at least 15% annual growth rate of the industry output daily. The growth of the total output value RMB4.5 trillion until 2015. The energy savings and environmental protection industry will continue to become the pillar industry of the governmental economy. CREG will take this opportunity to seek co-operation with more enterprises that made great contributions in environmental protection and it's been as (Inaudible). Behind some methods we currently apply for waste power and generation, we are focusing on dissolving coke dry quenching (CDQ) waste heat power generation. With higher requirements of energy saving and large scale application of coke dry [quenching], CDQ is the trend in the future for the industry. By using CDQ technology, the energy will be used more efficiently and pollution will be greatly reduced. Therefore CDQ waste power generation could reduce the cost for electricity for enterprises and also help them to reduce environmental pollution. [Foreign Language] In terms of future growth, Xi'an TCH, a subsidiary of CREG, has formed a new company called Xi'an Huahong New Energy Technology Company Limited, which has recently entered into cooperative agreements [CDQ] power generation project for both (inaudible) company and [Jiangsu Tianue Energy and Chemical Company]. Xi'an TCH and Hongyuan Huifu Venture Capital Company has started establishing energy recycling plant to invent CDQ projects, an initial amount Chinese Yuan 460 million equivalent to US$74 million for the fund has been fully subscribed. Besides the CDQ project, we're developing new projects across the country. In addition we're seeking products, their financing solutions for our future projects. We are very optimistic of future growth and project pipeline ahead of us. In closing, I would like to again thank our shareholders and strategic partners for their support of CREG. We look forward to updating all of you this year and years to come. Now let me turn the call over to our CFO, Mr. Chong to review the second quarter 2013 financial results. After the prepared financial review, I will come back to take your questions. Thank you.

Thank you, Mr. Ku. Before we start I would like to state that all our numbers are presented in U.S. dollars. I will start with the three months, second quarter and the June 30, 2013. Total sales for the three months ended June 30, 2013 was $13.91 million while total sales for the comparable period of 2012 was $0.40 million, an increase of $13.51 million as a result of increases in the sales of systems. Of the total sales, sales of systems for the three months ended June 30 was $13.62 million, as compared to $0 for the comparable period of 2012, an increase of $13.62 million. For the three months ended June 30, 2013, Shanxi Datong Phase I project, two units of 3 megawatts BPRT power generation systems were completed and sold. In comparison, in the same period of 2012, none of the company's power generation system were completed and sold, those under construction (inaudible). For the three months ended June 30, 2013, the company had received contingent rental income of $0.29 million from the usage of electricity in addition to the minimum lease payments, compared to $0.40 million for the comparable period in 2012. For the sales-type lease, sales and cost of sales are recorded at the time of mention of leases; interest income from sales-type leases is our other major revenue source. The cost of sales for the second quarter of 2013 was $10.50 million while our cost of sales for the comparable period of 2012 was $28,000, an increase of $10.48 million. This increase was mainly due to completion and sales of the Shanxi Datong Phase I project. Gross profit was $3.41 million for three months ended June 30 compared to $0.37 million for the comparable period of 2012. A combined gross profit margin of 25% and 93% for the comparable period of 2013 and 2012 respectively. The decreased profit margin in the three months ended June 30, 2013 was mainly due to the comparison in the corresponding period previously in which there was no system sales. The interest income on sales-type leases for the second quarter of 2013 was $4.73 million, a $0.02 million increase from $4.7 million for the comparable period of 2012. During the second quarter of 2013 interest income was derived from two (TRUST) systems consisting of one TRT system, two CHPG systems, two systems with Erdos Phase I project, three systems of Erdos Phase II project, the Pucheng biomass power generation system, and two Shenqiu biomass power generation systems and Zhongbao WHPG system. The company sold Shanxi Datong Phase I, which is two unit of 3 megawatt blast furnace power recovery turbine, BPRT power generation systems in June 2013 and started collecting payments in July 2013. In comparison, during the second quarter of last year 2012, interest income was derived from only 11 systems, which is one TRT systems, two CHPG systems, two Erdos Phase I, three Erdos Phase II, and Pucheng biomass power generation, Shenqiu biomass power generation system and Zhongbao WHPG system. Operating expenses consisted of selling, general and administrative expenses totaling $0.68 million for the three months ended June 30, 2013 as compared to $0.81 million for the comparable period of 2012, a decrease of $0.13 million or 16%. This was mainly due to a decrease of $0.09 million expense for stock option compensation and $0.04 million for consulting and IR service. Our net income for second quarter was $3.73 million compared to $1.22 million for the comparable period of 2012, an increase of $2.51 million. This increase in net income was mainly due to the increased sales, interest income on sales-type lease, and decreased non-operating expenses compared with the same period of 2012. For the three months ended June 30, 2013, GAAP diluted EPS was $0.07 with approximately 50.77 million shares of common stock outstanding, as compared with $0.03 in the same period of 2012 when the company had 51.379 million shares of common stock outstanding. Now I will discuss the six months ending June 2013, net sales of systems for six months ended June 30, 2013 was [$8.25] million, our net sales of same period last year 2012 was $0.55 million, an increase of [$7.7 million]. The increase was primarily due to Shenqiu Phase II project and Shanxi Datong Phase I project being completed and sold in 2013. No power generation systems were completed and sold in 2012 and only $0.55 million for contingent rental income during the six months ended June 2012. And for the six months month ended June 30, 2013, the company received contingent rental income $0.55 million from extra usage of electricity in addition to minimum lease payment versus the same for the comparable period 2012. And for the sales-type lease, sales and cost of sales are recorded at the time of leases commencement, the lease and interest income from the sales-type leases is our other major revenue source in addition to sales revenue of systems completion. Now the cost of sales for the six months ended June 30, 2013 was $21.4 million while the cost of sales for the comparable period of last year 2012 was $0.04 million, an increase of $21.36 million. This increase was of course due to the completion and sales of the Shenqiu Phase II project and Shanxi Datong Phase I project. Now gross profit was $6.85 million for the six months ended June 30, 2013 compared to $0.55 for the comparable period of 2012, gross profit margin of [4%] and 92% for the comparable period of 2013 and 2012 respectively. The decrease in profit margin was due to the comparisons (inaudible) corresponding period in which there was no system sales. The interest income in sales tax [leases] for the six months ended June 30, 2013 was [$3.5 million], a 0.97 million increase from $9.53 million for the comparable period of 2012. During the six months ended, June 30, 2013, interest income was derived from 12 systems. One TRT, two CHPG, two systems with Erdos Phase I, three systems with Erdos Phase II, Pucheng biomass and two Shenqiu biomass power generation and Zhongbao WHPG power generation system. The company sold Shanxi Datong Phase I in June 2013 and started (inaudible) in July. In comparison, during the six months ended June 30, 2013, the interest income was derived from only 11 systems, one TRT, two CHPG, two systems from Erdos Phase I and three from Erdos Phase II and the Pucheng biomass power generation, Shenqiu biomass power generation and Zhongbao power generation. Now operating expenses consist of selling, general and administration expenses totaling $1.77 million for six months ended June 30, 2013 compared to $1.55 million for a comparable period of 2012, an increase of $0.18 million or 11%. This was due to an increase of $0.12 million salary expense and increase of $0.08 million rental and office expenses, partially offset by a decrease in the stock option expense and decrease in the consolidating and IR expense for this. Net income for six months ended June 30, 2013 was $7.03 million compared to only $2.25 million for the comparable period of 2012, an increase of $3.78, this increase in net income was mainly due to two project completion being completed and so in 2013 compared with no system sales in the comparable period of 2012. And for the six months ended June 30, 2013, GAAP diluted EPS was $0.14 with approximately 50.57 million shares outstanding, as compared to $0.07 in the same period of 2012 when the Company had 51.285 million shares of the common stock outstanding. Our non-GAAP measures, CREG provides net income and earnings per share on a non-GAAP basis, in addition to the U.S. GAAP figures that we had and this non-GAAP basis as to non-cash, share-based compensation expense and non-cash interest expense on amortization of beneficial conversion feature for convertible notes and non-cash deferred income tax expense, to enable investors to better assess the Company's operating performance. Now for the second quarter of 2013, non-GAAP net income of $4.4 million and for the six months ended June 30, 2013 non-GAAP net income was $8.45 million. Now let’s go to (inaudible) highlights on the balance sheet. As of June 30, 2013 the company had cash and cash equivalent of $32.63 million, other current assets [$14.8] million and current liabilities for $62.53 million. Only investment in sales tax leases for $143.03 million as compared to $118.00 million as of December 2012. Now the total shareholders' equity is 127.33 million as compared to 114.98 million as of December 2012. And with that let me join Mr. Ku our CEO to pick up question and operator please begin the question-and-answer session. Thank you.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Okay we do have a question from (inaudible).

Hi guys. Two question for you. The (inaudible) project in the Q it says that it’s going to be completed in this current quarter of 2013 but somewhere else I read it was going to be completed in 12 months is it going to be completed this year or next year?

This is the CFO speaking. For the new project to be completed in 12 months it will be next year.

And then in the past you have talked a quite a bit about the when you sign the deal Cinda important to our portfolio company we had and we might be able to get contract from that, is there anything common with that?

Yes, as on both 2000 as we now on our corporation with Cinda and they are always in the partner

Okay. Go ahead.

And you just go ahead, yeah.

And the last one I had was under the new [CDQ] stuff is that something that you're planning on expanding a lot more than what you announced today or I think do you think is the lot more potential for this kind of product?

CDQ there will be a lot more what we have announce as the first two days we have definitively signed and obtained financing for it. Let me just get the translation back to the CEO.

[Foreign Language]

(Operator Instructions). Alright, there are no more questions at the present time. So I would like to turn the call back over to management for any closing remarks.

So, is it no question is coming?

No, ma'am.

Okay. Thank you for joining us on China Recycling Energy Corporation second quarter 2013 results conference call. We look forward to updating you on our third quarter 2013 results. Feel free to get in touch with us anytime, if you have further questions, comments or concerns. Have a wonderful day. Thank you

Thank you, everyone.

Thank you.

This concludes our conference. You may now disconnect your phone lines. Thank you for participating and have a nice day.