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China Dredging Group Co., Ltd. Reports Unaudited Second Quarter 2012 Results

September 23, 2012

FUZHOU, China, Sept. 23, 2012 /PRNewswire/ — China Dredging Group Co., Ltd. (together with its consolidated subsidiaries and variable interest entities, “China Dredging,” the “Company,” “we,” “us” and “our”), one of the leading independent (non-state-owned) providers of dredging services in the PRC, today announced its unaudited financial results for the second quarter of 2012.

Six Months Ended June 30, 2012 Highlights

  • Revenues of $119.1 million, a 10.9% period-over-period increase
  • Gross profit of $63.5 million, a 3.5% period-over-period increase
  • Net income of $43.4 million, a 13.1% period-over-period decrease
  • Operating cash flow of $47.3 million, a 11.4% period-over-period increase
  • Cash of $158.4 million and working capital of $181.5 million as of June 30, 2012

Three Months Ended June 30, 2012 Highlights

  • Revenues of $59.6 million, a 4.1% period-over-period increase
  • Gross profit of $32.0 million, a 0.8% period-over-period decrease
  • Net income of $21.7 million, a 6.7% period-over-period decrease

“I am very pleased that we were able to deliver steady quarterly results in revenue in the first half of 2012,” said Mr. Xinrong Zhuo, Chairman and Chief Executive Officer of China Dredging. “We expanded our dredging volume in the first half of 2012 and have taken steps to reconfigure our modern dredging fleet to allow us to continue completing multiple projects simultaneously and to deliver our services more effectively in those projects that require a variety of dredging methods. We expect to continue to gain recognition and increase our market share in China’s dredging industry.”

Recent Developments

In July 2012, we did not renew two dredgers lease agreements when the contracts expired, and terminated leasing one dredger in the consideration of its working efficiency. We try to integrate our management and technology for new projects. These three dredgers are not suitable for the new upcoming projects. As a result, we currently have 10 dredgers in our fleet, including 6 non-self-propelling cutter suction dredgers, 2 trailer suction hopper dredgers and 2 grab dredgers.

2012 Second Quarter Operating Results

                                                            For the Three Months Ended                              For the Six Months Ended
                                              June 30,                                                                        June 30,
                                              --------                                                                        --------
                         2012                                                                         2011                                                   2012                          2011
                         ----                                                                         ----                                                   ----                          ----

    Contract Revenue                                                              $59,594,550                                            $57,224,466                  $119,094,081                                           $107,355,835
    Percentage Change                                                                     4.1%                                                                                10.9%

Contract revenue increased by $2.4 million, or 4.1% (1.7% without foreign exchange effect), to $59.6 million for the three months ended June 30, 2012, compared to $57.2 million for the same period of 2011. Contract revenue increased by $11.7 million, or 10.9% (7.4% without foreign exchange effect), to $119.1 million for the six months ended June 30, 2012, compared to $107.4 million for the same period of 2011. The increased contract revenue primarily resulted from the increase of our dredging volume and unit construction price, which is a price negotiated with the contractor for each specific project. We completed 32.8 million and 65.2 million cubic meters of dredging volume for the three and six months ended June 30, 2012, respectively, as compared to 31.9 million and 60.4 million cubic meters for the three and six months ended June 30, 2011, representing increases of 2.7% and 8.0%, respectively, in dredging volume. In addition, the unit construction price per cubic meter increased by $0.03, or 1.7% (-1.0% without foreign exchange effect), to $1.82 for the three months ended June 30, 2012 from $1.79 for the same period of 2011, and increased by $0.05, or 2.8% (-0.6% without foreign exchange effect), to $1.83 for the six months ended June 30, 2012 from $1.78 for the same period of 2011. The increase was primarily due to an increase of demand for our dredging services and general market conditions.

                                                           For the Three Months Ended                              For the Six Months Ended
                                             June 30,                                                                        June 30,
                                             --------                                                                        --------
                         2012                                                                        2011                                                   2012                                                 2011
                         ----                                                                        ----                                                   ----                                                 ----

    Gross Profit                                                                 $32,021,439                                            $32,277,577                                          $63,498,852                                         $61,368,982
    Gross Profit Margin                                                                 53.7%                                                  56.4%                                                53.3%                                               57.2%

Gross profit decreased by $0.3 million, or 0.8% (3.0% without foreign exchange effect), to $32.0 million for the three months ended June 30, 2012, compared to $32.3 million for the same period of 2011. Gross profit increased by $2.1 million, or 3.5% (0.2% without foreign exchange effect), to $63.5 million for the six months ended June 30, 2012, compared to $61.4 million for the same period of 2011. Our cost of contract revenue for three months ended June 30, 2012 increased by $2.6 million, or 10.5% (7.9% without foreign exchange effect), to $27.6 million, from $24.9 million for the same period of 2011. Our cost of contract revenue for six months ended June 30, 2012 increased by $9.6 million, or 20.9% (16.9% without foreign exchange effect), to $55.6 million, from $46.0 million for the same period of 2011. As a percentage of revenue, our cost of contract revenue increased from 43.6% for the three months ended June 30, 2011 to 46.3% for the same period of 2012, and it increased from 42.8% for the six months ended June 30, 2011 to 46.7% the same period of 2012. The increases in cost of revenue were primarily due to the increased headcount of employees and vessel leasing fee, the increasing price of consumable parts as well as the increased quantity demands for the projects. As a result, our gross profit margin decreased from 56.4% for the three months ended June 30, 2011 to 53.7% for the same period in 2012, and it decreased from 57.2% in six months ended June 30, 2011 to 53.3% for the same period of 2012.

                                                                                              For the Three Months Ended                           For the Six Months Ended
                                         June 30,                                                                                June 30,
                                         --------                                                                                --------
                                           2012                                                                          2011                                                2012                                                2011
                                           ----                                                                          ----                                                ----                                                ----

    General and Administrative Expenses                                                                            $2,217,540                                          $2,201,241                                          $4,652,813                                        $4,151,924
    Percentage Change                                                                                                     0.7%                                                                                                   12.1%

General and administrative expenses were $2.2 million for the three months ended June 30, 2012 and 2011. General and administrative expenses increased by $0.5 million, or 12.1%, from $4.2 million for the six months ended June 30, 2011 to $4.7 million for the same period of 2012, which was primarily attributable to an increase in other taxes, such as business tax which is levied in the PRC based on revenue. General and administrative expenses as a percentage of revenue were 3.7% and 3.8% for the three months ended June 30, 2012 and 2011 and 3.9% for both the six months ended June 30, 2012 and 2011.

                                                                                                           For the Three Months Ended                 For the Six Months Ended
                                                 June 30,                                                           June 30,
                                                 --------                                                           --------
                                                   2012                                                                             2011                      2012                                        2011
                                                   ----                                                                             ----                      ----                                        ----

    Gain on Obligation under Make-Good Escrow                                                                             $            -                $6,135,280                               $           -                                     $12,433,807
    Loss on Derivative                                                                                                         $(728,720)              $(5,461,731)                                  $(921,677)                                    $(5,484,583)

For the three and six months ended June 30, 2012, we had $0.7 million and $0.9 million, respectively, in net losses from the reductions of estimated obligations to investors that had been incurred as a result of our fourth quarter 2010 Private Placement, as compared to net gains of $0.7 million and $6.9 million, respectively, for the same periods of 2011. The gain on obligation under the make-good escrow related to our meeting earnings targets both in 2010 and 2011, resulting in release of the contingent liability and a resulting gain, which significantly impacted our other income (expense) for the three and six months ended June 30, 2011. There is no such gain or loss in 2012 as the make-good escrow expired on December 31, 2011. The loss on derivative related to the fair value adjustment to the embedded derivatives in our preferred shares issued in our 2010 Private Placement. These gains or losses have no income tax effect.

Taxable income decreased by 0.7% and increased by 3.1% for the three and six months ended June 30, 2012, compared to the same periods of 2011. Income tax expense decreased by $0.1 million, or 0.7%, to $7.5 million for the three months ended June 30, 2012, compared to $7.6 million for the same period of 2011. Income tax expense increased by $0.4 million, or 3.0%, to $14.9 million for the six months ended June 30, 2012, compared to $14.4 million for the same period of 2011. The applicable income tax was 25%, which was effective on January 1, 2008 in the PRC.

                                                                                           For the Three Months Ended                            For the Six Months Ended
                                        June 30,                                                                              June 30,
                                        --------                                                                              --------
                                         2012                                                                         2011                                                 2012                                                 2011
                                         ----                                                                         ----                                                 ----                                                 ----

    Net Income                                                                                                 $21,723,917                                          $23,287,352                                          $43,392,735                                         $49,934,966
    Percentage Change                                                                                                 -6.7%                                                                                                    -13.1%
    Earnings per Diluted Ordinary Share                                                                              $0.35                                                $0.37                                                $0.69                                               $0.80

As a result of the foregoing, our net income decreased by $1.6 million, or 6.7% (8.6% without foreign exchange effect), to $21.7 million for the three months ended June 30, 2012, compared to $23.3 million for the same period of 2011. Our net income decreased by $6.5 million, or 13.1% (15.8% without foreign exchange effect), to $43.4 million for the six months ended June 30, 2012, compared to $49.9 million for the same period of 2011.

As of June 30, 2012, we had cash of $158.4 million, total current assets $204.9 million, total assets of $322.9 million, total current liabilities of $23.4 million, no non-current liabilities, and a balance to Class A Preferred Shares of $50.0 million. We had a positive operating cash flow for the six months ended June 30, 2012 of $47.3 million, primarily attributable to the decrease in accounts receivable and prepaid expenses.

About China Dredging

China Dredging is one of the leading independent (non-state-owned) providers of specialized dredging services to the Chinese marine infrastructure market. With a modern fleet of ten dredging vessels, China Dredging has broad capabilities with which it is able to address diverse types of dredging projects. Its services, which require significant engineering and project management expertise, include on-site investigation and measurement, cost estimation, sediment and obstruction removal and transport and disposal of dredged material in an environmentally responsible manner. China Dredging conducts dredging operations through Fujian Xing Gang Port Service Co., Ltd., in which it holds a 50% equity interest, with the remaining 50% interest controlled by China Dredging pursuant to variable interest entity agreements.

Cautionary Note Regarding Forward-Looking Statements

This press release contains “forward-looking” statements regarding China Dredging’s operating results and business prospects that involve substantial risks and uncertainties. You can identify some of these forward-looking statements by words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “likely to,” “may,” “plan,” “project,” “potential,” “predict,” “should,” “scheduled to,” “target,” “will,” “would,” or similar words, as well as statements in the future tense, in connection with any discussion of future operating or financial performance. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of China Dredging, or industry results, to differ materially from those expressed or implied by such forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to: continued public spending on PRC marine infrastructure; our ability to manage costs under our fixed-price contracts; our ability to maintain our concentrated customer base; the variable billing and payment cycles associated with our milestone contracts; our ability to maintain adequate working capital; our ability to expand our dredging fleet; unexpected adjustments or cancellations to our backlog; our ability to meet schedule requirements in our contracts; the significant competition in the markets in which we operate; our ability to attract and retain qualified personnel, including executive officers; extensive regulations of our business in the PRC; and political and economic policies of the Chinese government. Additional information and discussion of these risks, uncertainties, and other factors can be found in China Dredging’s Annual Report on Form 20-F for the year ended December 31, 2011 and other filings by China Dredging with the U.S. Securities and Exchange Commission.

The forward-looking statements contained in this press release are made only as of the date hereof and China Dredging does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise.

                                                                    CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES
                                                                              CONSOLIDATED BALANCE SHEETS
                                                                                    (IN US DOLLARS)

                                                                                  (Unaudited)
                                                                                 June 30, 2012                                  December 31, 2011
                                                                                 -------------                                  -----------------
    Assets
    Current assets
                            Cash                                                                                   $158,421,471                   $112,409,544
                            Accounts receivable                                                                      23,478,578                     27,020,183
                            Cost and estimated earnings in excess of billings
                               on contracts in progress                                                              19,595,364                     14,008,972
                            Prepaid expenses                                                                                  -                      4,767,072
                            Inventories                                                                               3,374,289                      2,048,158
                            Other receivables                                                                             3,621                          3,364
    Total current assets                                                                                            204,873,323                    160,257,293
                                                                                                                    -----------                    -----------

    Other assets
                            Prepaid dredger deposits                                                                 22,823,862                     23,038,180
                            Security deposits                                                                        48,418,070                     48,872,718
                            Property, plant and equipment, net                                                       46,777,556                     51,131,051
    Total other assets                                                                                              118,019,488                    123,041,949
                                                                                                                    -----------                    -----------

    Total assets                                                                                                   $322,892,811                   $283,299,242
                                                                                                                   ============                   ============

    Liabilities and equity
    Liabilities
    Current liabilities
                            Accounts payable                                                                         $3,619,025                     $3,653,008
                            Advance from a shareholder                                                                    1,006                              -
                            Advance from related companies                                                               13,536                         13,664
                            Income tax payable                                                                        7,510,272                      8,295,538
                            Accrued liabilities and other payables                                                    3,070,387                      4,045,227
                            Derivative liability                                                                      9,201,504                      8,279,827
    Total current liabilities                                                                                        23,415,730                     24,287,264
                                                                                                                     ----------                     ----------
    Total liabilities                                                                                                23,415,730                     24,287,264
                                                                                                                     ----------                     ----------

    Class A Preferred Shares, no par value; 25,000,000 shares                                                        50,064,935                     50,064,935
        authorized; 10,012,987 shares issued and outstanding
        (liquidation preference $50,064,935, less $0 discount)

    as of June 30, 2012 and December 31, 2011

    Shareholders' equity
                            Ordinary shares, no par value; 225,000,000 shares                                                 -                              -
                               authorized; 52,677,323 shares issued and outstanding
                               as of June 30, 2012 and December 31, 2011
                            Statutory reserves                                                                       15,386,316                     15,386,316
                            Additional paid-in capital                                                               79,185,284                     79,185,284
                            Retained earnings                                                                       141,951,831                     98,559,096
                            Accumulated other comprehensive income                                                   12,888,715                     15,816,347
    Total shareholders' equity                                                                                      249,412,146                    208,947,043
                                                                                                                    -----------                    -----------

    Total liabilities and equity                                                                                   $322,892,811                   $283,299,242
                                                                                                                   ============                   ============

                                                                   CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES
                                                                   CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                                                                                  (IN US DOLLARS)

                                                                          For the Three Months Ended              For the Six Months Ended
                                                                                   June 30,                               June 30,
                                                                                  --------                               --------
                                                                                                  2012                                   2011          2012          2011
                                                                                                  ----                                   ----          ----          ----

    Contract revenue                                                                       $59,594,550                            $57,224,466  $119,094,081  $107,355,835

    Cost of contract revenue, including depreciation of $1,836,678                         (27,573,111)                           (24,946,889)  (55,595,229)  (45,986,853)
       and $1,781,374 for the three months ended June 30, 2012
       and 2011, respectively, and $3,683,238 and $3,509,175 for
       the six months ended June 30, 2012 and 2011, respectively

    Gross profit                                                                            32,021,439                             32,277,577    63,498,852    61,368,982

    General and administrative expenses                                                     (2,217,540)                            (2,201,241)   (4,652,813)   (4,151,924)
                                                                                            ----------                             ----------    ----------    ----------
    Income from operations                                                                  29,803,899                             30,076,336    58,846,039    57,217,058

    Other income (expense):
       Interest income                                                                         182,678                                122,927       331,085       195,055
       Gain on exchange difference, net                                                              -                                      -         1,124             -
       Gain on obligation under Make-Good Escrow                                                     -                              6,135,280             -    12,433,807
       Loss on derivative                                                                     (728,720)                            (5,461,731)     (921,677)   (5,484,583)
                                                                                              --------                             ----------      --------    ----------
    Total other (expense) income                                                              (546,042)                               796,476      (589,468)    7,144,279
    Income before income taxes                                                              29,257,857                             30,872,812    58,256,571    64,361,337

    Income tax expense                                                                      (7,533,940)                            (7,585,460)  (14,863,836)  (14,426,371)
                                                                                            ----------                             ----------   -----------   -----------
    Net income                                                                              21,723,917                             23,287,352    43,392,735    49,934,966

    Accretion of discount on Class A Preferred Shares                                                -                               (400,519)            -    (6,135,012)
                                                                                                   ---                               --------           ---    ----------

    Net income attributable to ordinary shareholders                                       $21,723,917                            $22,886,833   $43,392,735   $43,799,954
                                                                                           ===========                            ===========   ===========   ===========

    Earnings per ordinary share
        - Basic                                                                                  $0.41                                  $0.43         $0.82         $0.83
                                                                                                 -----                                  -----         -----         -----

        - Diluted                                                                                $0.35                                  $0.37         $0.69         $0.80
                                                                                                 -----                                  -----         -----         -----

    Weighted average number of ordinary shares outstanding
        - Basic                                                                             52,677,323                             52,677,323    52,677,323    52,677,323
                                                                                            ----------                             ----------    ----------    ----------

        - Diluted                                                                           62,690,310                             62,690,310    62,690,310    62,690,310
                                                                                            ----------                             ----------    ----------    ----------

                                                           CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES
                                                     CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                                                           (IN US DOLLARS)

                                                               For the Three Months Ended                   For the Six Months Ended
                                                                        June 30,                                    June 30,
                                                                       --------                                    --------
                                                                                       2012                                        2011        2012         2011
                                                                                       ----                                        ----        ----         ----

    Net income attributable to ordinary shareholders                            $21,723,917                                 $22,886,833 $43,392,735  $43,799,954

    Other comprehensive income
    Foreign currency translation (loss) gain                                     (2,771,628)                                  2,716,752  (2,927,632)   4,131,474
                                                                                 ----------                                   ---------  ----------    ---------
    Total comprehensive income                                                  $18,952,289                                 $25,603,585 $40,465,103  $47,931,428
                                                                                ===========                                 =========== ===========  ===========

                                                                                                                                                                                    CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES
                                                                                                                                                                        CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
                                                                                                                                                                                        FOR THE SIX MONTHS ENDED JUNE 30, 2012
                                                                                                                                                                                                   (IN US DOLLARS)

                                                                                             Ordinary Shares,                                                                                                                                                                   Accumulated                                           Total
                                    with no Par Value                                                    other
                                    -----------------
                                                                                                 Number of                                                                         Statutory                                     Additional                                       Retained                                        comprehensive                                       shareholders'
                                                                                                  Shares                                   Amount                                  reserves                                   paid-in capital                                     earnings                                           income                                              equity
                                                                                                  ------                                   ------                                  --------                                   ---------------                                     --------                                           ------                                              ------
    Balance as of December 31, 2011                                                                       52,677,323                        $             -                                  15,386,316                                       79,185,284                                     98,559,096                                            15,816,347                                       208,947,043
    Net income                                                                                                     -                                      -                                           -                                                -                                     43,392,735                                                     -                                        43,392,735
    Foreign currency translation loss                                                                              -                                      -                                           -                                                -                                              -                                            (2,927,632)                                       (2,927,632)
                                                                                                                 ---                                    ---                                         ---                                              ---                                            ---                                            ----------                                        ----------
    Balance as of June 30, 2012                                                                           52,677,323                        $             -                                 $15,386,316                                      $79,185,284                                   $141,951,831                                           $12,888,715                                      $249,412,146
                                                                                                          ==========                        ===============                                 ===========                                      ===========                                   ============                                           ===========                                      ============

                                                                  CHINA DREDGING GROUP CO., LTD AND SUBSIDIARIES
                                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                                                                  (IN US DOLLARS)
                                                                                                                   For the Six Months Ended
                                                                                                                           June 30,
                                                                                                                           --------
                                                                                                                                            2012           2011
                                                                                                                                            ----           ----
    Cash flows from operating activities:
    Net income                                                                                                                       $43,392,735    $49,934,966
    Adjustments to reconcile net income to net
               cash provided by operating activities:
               Depreciation of property, plant and equipment                                                                         3,683,983      3,509,896
               Gain on obligation under "Make-Good Escrow"                                                                                   -    (12,433,807)
               Loss on derivative                                                                                                      921,677      5,484,583

    Changes in operating assets and liabilities:
               Accounts receivable                                                                                                   3,309,205     (3,858,493)
               Cost and estimated earnings in excess of billings
                  on contracts in progress                                                                                          (5,749,657)    (6,539,230)
               Other receivables                                                                                                          (291)        (1,090)
               Prepaid expenses                                                                                                      4,749,940              -
               Inventories                                                                                                          (1,352,935)      (292,991)
               Accounts payable                                                                                                              -      1,902,762
               Income tax payable                                                                                                     (712,176)     2,646,634
               Accrued liabilities and other payables                                                                                 (945,782)     2,104,309
                                                                                                                                     ---------
    Net cash provided by operating activities                                                                                       47,296,699     42,457,539
                                                                                                                                    ----------     ----------

    Cash flows from investing activities:
               Deposits paid for dredgers                                                                                                    -    (14,098,320)
               Changes in security deposits                                                                                                  -    (12,259,409)
               Purchase of property, plant and equipment                                                                                     -     (1,879,843)
                                                                                                                                           ---
    Net cash used in investing activities                                                                                                    -    (28,237,572)
                                                                                                                                           ---    -----------

    Cash flows from financing activities:
               Cash paid for deferred offering expenses                                                                                      -       (983,702)
               Advance from a shareholder                                                                                                1,006              -
                                                                                                                                         -----
    Net cash provided by/(used in) financing activities                                                                                  1,006       (983,702)
                                                                                                                                         -----       --------

    Net increase in cash                                                                                                            47,297,705     13,236,265

    Effect of exchange rate changes on cash                                                                                         (1,285,778)     1,858,191
    Cash at the beginning of the year                                                                                              112,409,544     88,532,472
                                                                                                                                   -----------     ----------
    Cash at the end of the period                                                                                                 $158,421,471   $103,626,928
                                                                                                                                  ============   ============

    Supplemental disclosures of cash flow information:

    Cash paid:
               Income tax paid                                                                                                     $15,576,011    $11,779,737
                                                                                                                                   -----------

    Supplemental disclosures of non-cash transactions:

    Accretion of discount on Class A Preferred Shares                                                                     $                  -     $6,135,012
                                                                                                                          --------------------     ----------

    Transfer of deposits paid for dredgers to property
               plant and equipment                                                                                        $                  -    $12,633,764
                                                                                                                           -------------------

SOURCE China Dredging Group Co., Ltd


Source: PR Newswire