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CHINA HGS REAL ESTATE INC (HGSH)
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CHINA HGS REAL ESTATE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (form 10-Q)

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05/15/2018 | 05:27pm CEST
The following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
unaudited condensed consolidated financial statements of China HGS Real Estate,
Inc. for the three months ended March 31, 2018 and 2017 and should be read in
conjunction with such financial statements and related notes included in this
report.


As used in this report, the terms "Company," "we," "our," "us" and "HGS" refer to China HGS Real Estate, Inc. and its subsidiaries.

Preliminary Note Regarding Forward-Looking Statements.

We make forward-looking statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report based
on the beliefs and assumptions of our management and on information currently
available to us. Forward-looking statements include information about our
possible or assumed future results of operations which follow under the headings
"Business Overview," "Liquidity and Capital Resources," and other statements
throughout this report preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.



Forward-looking statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those expressed in
these forward-looking statements, including the risks and uncertainties
described below and other factors we describe from time to time in our periodic
filings with the U.S. Securities and Exchange Commission (the "SEC"). We
therefore caution you not to rely unduly on any forward-looking statements. The
forward-looking statements in this report speak only as of the date of this
report, and we undertake no obligation to update or revise any forward-looking
statement, whether as a result of new information, future developments or
otherwise. These forward-looking statements include, among other things,
statements relating to:



  • our ability to sustain our project development




  • our ability to obtain additional land use rights at favorable prices;




  • the market for real estate in Tier 3 and 4 cities and counties;



• our ability to obtain additional capital in future years to fund our

        planned expansion; or




    •   economic, political, regulatory, legal and foreign exchange risks
        associated with our operations.




Business Overview



We conduct substantially all of our business through Shaanxi Guangsha Investment
and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the
initiation of our business, we have been focused on expanding our business in
certain Tier 3 and Tier 4 cities and counties in China.



For the first six months ended March 31, 2018, our sales, gross profit and net
income were approximately $36.4 million, $6.1 million and $3.2 million,
respectively, representing an approximate 87.1%, 45.3% and 104.7% increase in
sales, gross profit and net income as compared to six months ended March 31,
2017, respectively. The increase in sales, gross profit and net income was
mainly resulted from more gross floor area ("GFA") sold during the first half of
fiscal 2018.


For the first six months ended March 31, 2018, we recognized revenue under the
percentage of completion method for Yangzhou Palace real estate Project because
the real estate project under development have met the criteria for revenue
recognition under the percentage of completion method as June 30, 2017. Total
revenue recognized under the percentage of completion method for the six months
ended March 31, 2018 was approximately $17.4 million (2017 - $Nil), representing
47.8% (2017 - Nil) of total revenue for the period, with related costs of these
real estate sales was approximately of $15.9 million (2017 - Nil), representing
52.7% (2017 - Nil) of the real estate costs in the period. The gross profit
before sales tax from the percentage of completion method was approximately $1.5
million (2017 - Nil), representing 24.4% (2017-Nil) of the total gross profit
for the period.



  22





For the six months ended March 31, 2018, the average selling price ("ASP") for
our completed real estate projects (excluding sales of parking spaces) located
in Yang County was approximately $445 per square meter, an increase of 35.1%
from the ASP of $329 per square meter for the six months ended March 31, 2017.
The increase in ASP was mainly due to the fact all the revenue in Yang County
was from sales of our residential units in Yangzhou Palace real estate Project,
which is our new project with a relatively higher selling price. However, the
ASP for Yang County Palace project for the three months ended March 31, 2018 was
still lower than the ASP of $461 for the year ended September 30, 2017 due to
our promotion on the related sales. The ASP of our Hanzhong completed real
estate projects (excluding sales of parking spaces) was approximately $553 per
square meter, slightly increase from the ASP of $533 per square meter for the
six months ended March 31, 2017, which reflected a normal price increase in
the
local real estate market.



Market Outlook



In 2018, the Company expects to focus on the development of the Liangzhou Road
related project. These projects will comprise of residential for end-users and
upgraders, shopping malls as well as serviced apartments and offices to satisfy
different market demands. Our customers continue to experience growth of their
disposable income. With a lower housing price to family disposable income ratio
and an increasing urbanization level, there is a growing demand for high quality
residential housing. From this perspective, the Company is positive about the
outlook for the local real estate market in a long term. In the meantime, the
Company is diversifying its revenue and developing more commercial and municipal
projects.



We intend to remain focused on our existing construction projects in Hanzhong
City and Yang County, deepening our institutional sales network, enhancing our
cost and operational synergies and improving cash flows and strengthening our
balance sheet. In this respect, we began the construction of the following large
high rise residential projects in Hanzhong City and Yang County:



Liangzhou road and related projects



In September 2013, the Company entered into an agreement ("Liangzhou Agreement")
with the Hanzhong local government on the Liangzhou Road reformation and
expansion project (Liangzhou Road Project"). Pursuant to the agreement, the
Company is contracted to reform and expand the Liangzhou Road, a commercial
street in downtown Hanzhong City, with a total length of 2,080 meters and width
of 30 meters and to resettle the existing residences in the Liangzhou road area.
The government's original road construction budget was approximately $33 million
in accordance with the Liangzhou Agreement. The Company, in return, is being
compensated by the local government to have an exclusive right on acquiring at
least 394.5 Mu land use rights in a specified location of Hanzhong City. The
Liangzhou Road Project's road construction started at the end of 2013. In 2014,
the original scope and budget on the Liangzhou road reformation and expansion
project was extended, because the local government included more area and
resettlement residences into the project, which resulted in additional
investments from the Company. In return, the Company is authorized by the local
government to develop and manage the commercial and residential properties
surrounding the Liangzhou Road project. As of March 31, 2018, the main Liangzhou
road construction is substantially completed and is expected to be approved by
the local government in fiscal 2018. The Company's development cost incurred on
Liangzhou Road Project is treated as the Company's deposit on purchasing the
related land use rights, as agreed by the local government.



As of March 31, 2018, the actual costs incurred by the Company was approximately
$141.2 million (September 30, 2017 - $133.9 million) and the incremental cost
related to residence resettlement was approved by the local government. The
Company determined that the Company's Investment in Liangzhou Road Project in
exchange for interests in future land use rights is a barter transaction with
commercial substance. For the three and six months ended March 31, 2018 and
2017, the Company did not receive government's subsidies for its Shanty Area
Reform Project surrounding Liangzhou Road located in Hantai District, Hanzhong
City, respectively, and the Company recorded the subsidies to offset against the
development cost of Liangzhou Road Project.



The Liangzhou road related projects mainly consists Oriental Garden Phase II,
Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou Road
area. The Liangzhou road related projects mainly consists Oriental Garden Phase
II, Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou
road
area.



  23





Oriental Pearl Garden Phase II

Oriental Garden Phase II project is planned to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The project will also include a farmer's market.


Liangzhou Mansion


Liangzhou Mansion project is planned to consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.



Pearl Commercial Plaza



Pearl Commercial Plaza is planned to consist one office building, one service
apartment (or hotel), classical architecture style of Chinese traditional houses
and shopping malls with total planned GFA of 124,191 square meters



The Company plans to start these three real estate projects in 2018 after the
road construction is fully completed and passes local government's inspection
and approval in fiscal 2018. These related projects may take 2-3 years to fully
complete.



Other projects



Yangzhou Palace


The Company is currently constructing 9 high-rise residential buildings and 16
sub-high-rise residential and multi-layer residential buildings with total GFA
of 285,244 square meters in Yangzhou Palace located in Yang County. The
construction started in the fourth quarter of fiscal 2013 and is expected to be
completed by the beginning of 2018. The Company has obtained pre-sale license in
September 2016 and started to sell the residential units in Yangzhou Palace
during fiscal 2017.



Road Construction



Other road construction projects mainly included a Yang County East 2nd Ring
Road construction project. The Company was engaged by Yang County local
government to construct East 2nd Ring Road with total length of 2.15 km and
budgeted price approximately of $26.7 million (or RMB 168 million) approved by
local Yang County government in March 2014. The local government is required to
repay the Company's project investment within 3-4 years with interest based on
the commercial borrowing rate with the similar term published by China
Construction Bank. The local government also was allowed to refund the Company
by reducing local surcharges or taxes otherwise required in the real estate
development. The Company is expected to deliver these two road construction
projects to local government in early 2018.



In September 2012, the Company was approved by the Hanzhong local government to
construct four municipal roads with a total length of approximately 1,192
meters. The project was deferred and then restarted during the quarter ended
March 31, 2014. As of March 31, 2018, the local government was still in the
process of planning and assessing the scope and budget for these projects. We
expect these initiatives will help us during this difficult period and better
position us to capitalize on opportunities from a future market upturn.



  24





Summary of real estate projects completion status


                                                Actual (estimated)       Estimated time
                                                Completion time of         to sell of
                                                   construction           the property
Development completed
Hanzhong City Mingzhu Garden                   Majority was completed

(Mingzhu Nanyuan & Mingzhu Beiyuan) during the third quarter

                                                       of fiscal 2012       

2018

Hanzhong City Nan Dajie (Mingzhu Xinju) Phase one completed in

                                                   2010 and Phase two
                                                    completed in 2011       

2018

Hanzhong City Mingzhu Garden Phase II Completed by Fiscal 2015

2018

Hanzhong City Oriental Pearl Garden Completed by Fiscal 2016

2018

Yang County Yangzhou Pearl Garden Phase II Completed by Fiscal 2015

2018

Yang County Yangzhou Pearl Garden               Majority completed in
                                                        2011 and 2012               2018




Under development:                       Estimated Completion time of construction
Yang County Yangzhou Palace               To be completed in the beginning of 2018
Hanzhong City Shijin Project                                  Under planning stage
Hanzhong City Hanfeng Beiyuan        To deliver the road to government in early of
East Road                                                                     2018
Hanzhong City Liangzhou Road and        The projects will be completed in 2018 and
related projects                                                       later years
                                                                                 .
Hanzhong City Beidajie project                                Under planning stage
Yang County East 2nd Ring Road                             To be completed
in 2018



We expect these initiatives will help us during this difficult period and better position us to capitalize on opportunities from a future market upturn.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect our reported
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. We evaluate our estimates on an on-going basis and use
them on historical experience and various other assumptions that are believed to
be reasonable under the circumstances as the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates because of
different assumptions or conditions.



We believe the following critical accounting policies affect our significant
estimates and judgments used in the preparation of our condensed consolidated
financial statements. These policies should be read in conjunction with Note 2
of the notes to unaudited condensed consolidated financial statements.



Revenue recognition


Percentage of Completion method



Real estate sales for the long term real estate projects are recognized under
percentage completion method in accordance with the provisions of ASC 360-20-40D
"Sale of Condominium Units". Revenue and profit from the sales of long term
development properties is recognized by the percentage of completion method on
the sale of individual units when all the following criteria are met:



a. Construction is beyond a preliminary stage. b. The buyer is committed to the extent of being unable to require a refund

except for non-delivery of the unit or interest. c. Sufficient units have already been sold to assure that the entire property

     will not revert to rental property.
d.   Sales prices are collectible.
e.   Aggregate sales proceeds and costs can be reasonably estimated.



If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.


  25





Under the percentage of completion method, revenues from condominium units sold
and related costs are recognized over the course of the construction period,
based on the completion progress of a project. In relation to any project,
revenue is determined by calculating the ratio of incurred costs, including land
use rights costs and construction costs, to total estimated costs and applying
that ratio to the contracted sales amounts. Cost of sales is recognized
by determining the ratio of contracted sales during the period to total
estimated sales value, and applying that ratio to the incurred costs. Current
period amounts are calculated based on the difference between the life-to-date
project totals and the previously recognized amounts.



Revenue recognized to date in excess of amounts received from customers is classified as current assets under cost and earnings in excess of billings. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under billings in excess of cost and earnings.



Any changes in significant judgments and/or estimates used in determining
construction and development revenue could significantly change the timing or
amount of construction and development revenue recognized. Changes in total
estimated project costs or losses, if any, are recognized in the period in
which
they are determined.



Full accrual method



Revenue from the sales of short term development properties, where the
construction period is expected to 18 months or less is recognized by the full
accrual method at the time of the closing of an individual unit sale. This
occurs when title to or possession of the property is transferred to the buyer.
A sale is not considered consummated until (a) the parties are bound by the
terms of a contract, (b) all consideration has been exchanged, (c) any permanent
financing for which the seller is responsible has been arranged, (d) all
conditions precedent to closing have been performed, (e) the seller does not
have substantial continuing involvement with the property, and (f) the usual
risks and rewards of ownership have been transferred to the buyer. Further, the
buyer's initial and continuing investment is adequate to demonstrate a
commitment to pay for the property.



 The Company provides "mortgage loan guarantees" only with respect to buyers who
make down-payments of 20%-50% of the total purchase price of the property. The
period of the mortgage loan guarantee begins on the date the bank approves the
buyer's mortgage and we receives the loan proceeds in our bank account and ends
on the date the "Certificate of Ownership" evidencing that title to the property
has been transferred to the buyer. The procedures to obtain the Certificate of
Ownership take six to twelve months (the "Mortgage Loan Guarantee Period"). If,
after investigation of the buyer's income and other relevant factors, the bank
decides not to grant the mortgage loan, our mortgage-loan based sales contract
terminates and there will be no guarantee obligation. If, during the Mortgage
Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment
for three consecutive months, we are required to return the loan proceeds back
to the bank, although we have the right to keep the customer's deposit and
resell the property to a third party. Once the Certificate of Property has been
issued by the relevant government authority, our loan guarantee terminates. If
the buyer then defaults on his or her mortgage loan, the bank has the right to
take the property back and sell it and use the proceeds to pay off the loan. The
Company is not liable for any shortfall that the bank may incur in this event.
To date, no buyer has defaulted on his or her mortgage payments during the
Mortgage Loan Guarantee Period and the Company has not returned any loan
proceeds pursuant to its mortgage loan guarantees.



For municipal road construction projects, fees are generally recognized by the full accrual method at the time of the projects are completed.


Use of estimates



The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes, and disclosure of
contingent liabilities at the date of the consolidated financial statements.
Estimates are used for, but not limited to, the assumptions and estimates used
by management in recognizing development revenue under the percentage of
completion method, the useful lives of property and equipment, provision
necessary for contingent liabilities, fair values, revenue recognition, income
taxes, budgeted costs, share-based compensation and other similar charges.
Management believes that the estimates utilized in preparing its consolidated
financial statements are reasonable and prudent. Actual results could differ
from these estimates.



  26





Real estate property development completed and under development



Real estate property consists of finished residential unit sites, commercial
offices and residential unit sites under development. The Company leases the
land for the residential unit sites under land use right leases with various
terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development
completed and real estate property under development are stated at the lower of
cost or fair value.


Expenditures for land development, including cost of land use rights, deed tax,
pre-development costs, and engineering costs, exclusive of depreciation, are
capitalized and allocated to development projects by the specific identification
method. Costs are allocated to specific units within a project based on the
ratio of the sales area of units to the estimated total sales area of the
project (or phase of the project) multiplied by the total cost of the project
(or phase of the project).


Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.



Real estate property development completed and real estate property under
development are reclassified on the balance sheet into current and non-current
portions based on the estimated date of construction completion and sales. The
real estate property development completed classification is based on the
estimated date that each property is expected to be sold within the Company's
normal operating cycle of the business and the Company's sales plan. Real estate
property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business.
Otherwise, it is classified as a non-current asset. Real estate property under
development is classified as a current asset, if the property is reasonably
expected to be completed within the Company's normal operating cycle of the
business. Otherwise, it is classified as a non-current asset. The majority of
real estate projects the Company has completed in the past were multi-layer or
sub-high-rise real estate projects. The Company considers its normal operating
cycle is 12 months.



Real estate property development completed and under development are subject to
valuation adjustments when the carrying amount exceeds fair value. An impairment
loss is recognized only if the carrying amount of the assets is not recoverable
and exceeds fair value. The carrying amount is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to be generated by the assets.

  27






RESULTS OF OPERATIONS


Three Months Ended March 31, 2018 compared to Three Months Ended March 31, 2017



Revenues



The following is a breakdown of revenue:


                                                                For Three Months Ended
                                                                       March 31,
                                                                 2018             2017
Revenue recognized under full accrual method                 $ 11,121,635     $ 11,113,794
Revenue recognized under percentage of completion method       10,784,732  
             -
Total                                                        $ 21,906,367     $ 11,113,794



Revenues recognized from completed projects

The following table summarizes our revenue generated by different projects:


                                For Three Months Ended March 31,
                              2018                            2017                          Variance
                     Revenue            %            Revenue            %             Amount            %

Mingzhu Garden
(Mingzhu Nanyuan
& Mingzhu
Beiyuan) Phase I
and II             $  7,489,298           67.3 %   $  4,821,688           43.4 %   $  2,667,610           55.3 %
Oriental Pearl
Garden                3,613,825           32.5 %      6,186,456           55.7 %     (2,572,631 )        (41.6 )%
Yangzhou Pearl
Garden Phase I
and II                   18,512            0.2 %        105,650            1.0 %        (87,138 )        (82.5 )%

Total Real
Estate Sales
before Sales Tax     11,121,635            100 %     11,113,794            100 %          7,841            0.1 %
Sales Tax               (65,064 )                      (353,436 )                       288,372          (81.6 )%
Revenue net of
sales tax          $ 11,056,571                    $ 10,760,358                    $    296,213            2.8 %



Our revenues are derived from the sale of residential buildings, commercial
store-fronts and parking spaces in projects that we have developed. Our Mingzhu
Garden Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and
Oriental Garden Phase I have all been completed in prior years, the related
revenues have been included in revenue recognized from completed projects in
prior years. For these completed real estate properties, only limited models are
available for customer selection. Comparing to the second quarter of fiscal
2017, revenues before sales tax was consistent at $11.1 million for the second
quarter of fiscal 2018.  The total GFA sold during three months ended March 31,
2018 was 19,587 square meters, slightly decrease from the 21,589 square meters
sold in the same period of last year. The decrease in GFA was offset by the
increase in ASP of Hanzhong real estate market.



In May of 2016, the Business Tax has been incorporated into Value Added Tax in
China, which means there will be no more Business Tax and accordingly some
business operations previously taxed in the name of Business Tax will be taxed
in the manner of VAT thereafter. The Company is subject to 5% of VAT for all its
exiting real estate project based on the local tax authority's practice. As our
revenue is reported net of VAT, the Company does not expect the overall gross
margin for the existing real estate properties will be significantly affected by
the change from business tax to VAT. The sales tax for the three months ended
March 31, 2018 was $0.07 million, while there was $0.4 million sales tax charge
for the three months ended March 31, 2017.



  28





Revenue recognized from projects under development



                                                                 For the 

three months ended March 31, 2018

                                                                                                            Accumulated
                                                                                           Revenue             Revenue
                                                                                         Recognized          recognized
                                                      Average          Qualified            under               under
                                                   Percentage of        Contract        Percentage of       Percentage of
                                   Total GFA       Completion(1)        Sales(2)         Completion          completion
Real estate properties under
development located in Hanzhong
Yangzhou Palace                       297,450                  88 %   $ 37,190,682     $    10,784,732     $    32,727,800




We started to recognize revenue under the percentage of completion method for
Yangzhou Palace real estate property since second quarter of fiscal 2017. As of
March 31, 2018, total GFA sold under qualified contract sales as of March 31,
2018 was 75,214 square meters (September 30, 2017 - 36,133). The average unit
price under contract sales was $494 per square meters.



                                                                        For 

the three months ended March 31, 2017

                                                                                                                     Accumulated
                                                                                                 Revenue                Revenue
                                                                                               Recognized             recognized
                                                         Average            Qualified             under                  under
                                                      Percentage of         Contract          Percentage of          Percentage of
                                      Total GFA       Completion(1)         Sales(2)           Completion             completion
Real estate properties under
development located in Hanzhong
Oriental Garden Phase I                      N/A                 N/A %     $       N/A       $           N/A       $             N/A



(1) Percentage of completion is calculated by dividing total costs incurred

         by total estimated costs for the relevant buildings in the each real
         estate building , estimated as of the time of preparation of our
         financial statements as of and for the year indicated.



(2) Qualified contract sales only include all contract sales with customer

deposits balance as of March 31, 2018 and 2017 equal or greater than 30%

         of contract sales amount and related individual of buildings were sold
         over 20%.




Cost of Sales



The following table sets forth a breakdown of our cost of sales:


                             For Three Months Ended March 31,
                             2018                        2017                     Variance
                        Cost           %           Cost           %          Amount           %

Land use rights $ 1,596,433 8.8 % $ 639,721 7.7 % $ 956,712 149.6 % Construction cost 16,522,257 91.2 % 7,624,900 92.3 %

 8,897,357       117.0 %
Total cost          $ 18,118,690        100 %   $ 8,254,621        100 %   $ 9,864,069       119.5 %




Our cost of sales consists of costs associated with land use rights and
construction costs. Cost of sales are capitalized and allocated to development
projects using the specific identification method. Costs are allocated to
specific units within a project based on the ratio of the sales area of units to
the estimated total sales area of the project (or phase of the project) times
the total cost of the project (or phase of the project).



  29






Cost of sales was approximately $18.1 million for the three months ended March
31, 2018 compared to $8.3 million for the three months ended March 31, 2017. The
$9.9 million increase in cost of sales was mainly attributable to the increase
in total GFA sold in Yang County Palace project during the quarter ended March
31, 2018 which led to increased revenue and cost of sales during this quarter.



Land use rights cost: The cost of land use rights includes the land premium we
pay to acquire land use rights for our property development sites, plus taxes.
Our land use rights cost varies for different projects according to the size and
location of the site and the minimum land premium set for the site, all of which
are influenced by government policies, as well as prevailing market conditions.
Costs for land use rights for the three months ended March 31, 2018 were $1.6
million, as compared to $0.6 million for the three months ended March 31, 2017,
representing an increase of $1.0 million from the same quarter last year. The
increase was consistent with the fact that more GFA sold in Yangzhou Palace
project during this quarter comparing to the same period of last year.



Construction cost: We outsource the construction of all of our projects to third
party contractors, whom we select through a competitive tender process. Our
construction contracts provide a fixed payment which covers substantially all
labor, materials and equipment costs, subject to adjustments for some types of
excess, such as design changes during construction or changes in
government-suggested steel prices. Our construction costs consist primarily of
the payments to our third-party contractors, which are paid over the
construction period based on specified milestones. In addition, we purchase and
supply a limited range of fittings and equipment, including elevators, window
frames and door frames. Our construction costs for the three months ending March
31, 2018 were approximately $16.5 million as compared to approximately $7.6
million for the three months ended March 31, 2017, representing an increase of
$8.9 million. The increase in construction cost was due to increase in units
sold during the quarter ended March 31, 2018.



The total cost of sales as a percentage of real estate sales before sales tax
for the three months ended March 31, 2018 was 82.7%, increased from 74.3% for
the three months ended March 31, 2017, because the Company promoted sales in
Oriental Garden project during the second quarter of fiscal 2018, which resulted
in lower revenue.



  30






Gross Profit



Gross profit was approximately $3.7 million for the three months ended March 31,
2018 as compared to approximately $2.5 million for the three months ended March
31, 2017, representing an increase of 48.6%. The overall gross profit as a
percentage of real estate sales before sales tax decreased to 17.0% during the
three months ended March 31, 2018 from 22.5% for the same quarter last year,
mainly due to lower gross margin in the Oriental Garden project. The Company had
promotion sales in Oriental Garden project with ASP of $446 per square meter
during the second quarter of fiscal 2018 comparing to average ASP of $553 per
square meter, which lower the overall gross margin during the quarter. On the
other side, during the second quarter of fiscal 2018, 12% of Mingzhu Garden's
revenue were from sales of commercial units with over 79% gross margin and
resulted in higher gross margin of 40.3% in the Mingzhu Garden project. During
the same period of last year, 100% of revenue from Mingzhu Garden were from
sales of residential units.



The following table sets forth the gross margin of each of our projects:


                                                                  For Three Months Ended March 31,
                                                             2018                                  2017
                                               Gross Profit       Gross Margin       Gross Profit       Gross Margin

Mingzhu Garden (Mingzhu Nanyuan & Mingzhu
Beiyuan) Phase I and II                        $   3,015,391               40.3 %    $   1,193,369               24.8 %
Oriental Garden                                     (171,281 )             (4.7 )%       1,661,381               26.9 %
Yangzhou Pearl Garden Phase I and II                   3,270              
17.7 %            4,423                4.2 %
Yangzhou Palace                                      940,297                8.7 %                -                  -
Sales Tax                                            (65,064 )                            (353,436 )
Total Gross Profit                                 3,722,613               17.0 %        2,505,737               22.5 %
Total Real Estate Sales before Sales Tax       $  21,906,367               
         $  11,113,794




Operating Expenses



Total operating expenses decreased by 34.5% to $0.8 million for the three months
ended March 31, 2018 from $1.3 million for the three months ended March 31, 2017
as a result of a decrease of general administrative expense of 0.5 million,
offset by an increase in selling expense of $0.05 million. Our general and
administrative expense decreased by 43.1% from the same period of last year,
because the Company incurred a $0.6 million of repair and maintenance expense in
the same period of last year for a completed project and did not incur similar
charge in the second quarter of fiscal 2018. Our total operating expenses
accounted for 3.8% and 11.5% of our real estate sales before sales taxes for the
three months ended March 31, 2018 and 2017, respectively.



                                                     For Three Months Ended
                                                            March 31,
                                                       2018            2017

Selling expenses                                   $    185,593     $   131,851
General and administrative expenses                     654,778       

1,150,833

Total operating expenses                           $    840,371     $ 

1,282,684

Percentage of Real Estate Sales before Sales Tax            3.8 %         
11.5 %




  31






Income Taxes



U.S. Taxes



China HGS is a Florida corporation. However, all of our operations are conducted
solely by our subsidiaries in the PRC. No income is earned in the United States
and we do not repatriate any earnings outside the PRC. As a result, we did not
generate any U.S. taxable income for the three months ended March 31, 2018
and
2017.



PRC Taxes



The Company's VIE are governed by the Income Tax Law of the People's Republic of
China concerning the privately run enterprises, which are generally subject to
income tax at a statutory rate of 25% on income reported in the statutory
financial statements after appropriate tax adjustments. However, prior to
October 1, 2017, as approved by the local tax authority of Hanzhong City, the
Company's CIT was assessed annually at a pre-determined fixed rate as an
incentive to stimulate the local economy and encourage entrepreneurship. The
local income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on
revenue. Starting from October 1, 2017, the Company is subject to income tax
rate of 25% on taxable income in fiscal 2018 and afterwards. The change in the
income tax policy could negatively affect the Company's net income. For the
three months ended March 31, 2018 and 2017, the Company's income taxes were
$717,008 and $276,524, respectively. Although the possibility exists for
reinterpretation of the application of the tax regulations by higher tax
authorities in the PRC for the Company's tax filling prior to October 1, 2017,
potentially overturning the decision made by the local tax authority, the
Company has not experienced any reevaluation of the income taxes for prior
years. The PRC tax rules are different from the local tax rules and the Company
is required to comply with local tax rules. The difference between the two tax
rules will not be a liability of the Company. There will be no further tax
payments for the difference.



On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed
into law making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a U.S. corporate tax rate decrease from 35% to
21% effective for tax years beginning after December 31, 2017, the transition of
U.S international taxation from a worldwide tax system to a territorial system,
and a one-time transition tax on the mandatory deemed repatriation of cumulative
foreign earnings as of December 31, 2017. The Company has determined that the
Company's VIE in PRC does not qualify as a reportable controlled foreign
corporation ("CFC") in accordance with its understanding of the Act and guidance
available as of the date of this filing and as a result the Company assessed
there was no significant income tax impact during the period in which the
legislation was enacted.



On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued
to address the application of US GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income
tax effects of the Act. In accordance with SAB 118, the Company has determined
that the Company's VIE in PRC does not qualify as a reportable CFC, therefore it
is not necessary to record any income tax provision in connection with the
transition tax on the mandatory deemed repatriation of foreign earnings at
December 31, 2017. Any subsequent adjustment to these amounts will be recorded
to current tax expense in fiscal 2018 when the analysis is complete.



Net Income



We reported net income of $2.0 for the three months ended March 31, 2018, as
compared to net income of $0.8 million for the three months ended March 31,
2017. The increase of approximately $1.2 million in our net income was primarily
due to higher sales and decreased general and administrative expense as
discussed above under Revenues and Gross Profit.



Other Comprehensive Income



We operate primarily in the PRC and the functional currency of our operating
subsidiary is the Chinese Renminbi ("RMB").  RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through
authorized institutions. No representation is made that RMB amounts could have
been, or could be, converted into USD at the rates used in translation.



Translation adjustments resulting from this process amounted to $6.3 million and
$1.4 million for the three months ended March 31, 2018 and 2017, respectively,
due to the significant depreciation of USD. The balance sheet amounts with the
exception of equity at March 31, 2018 were translated at 6.2726 RMB to 1.00 USD
as compared to 6.8832 RMB to 1.00 USD at September 30, 2017, RMB has depreciated
8.9% against the U.S. dollar from September 30, 2017 to March 31, 2018. The
equity accounts were stated at their historical rate. The average translation
rates applied to the income statements accounts for the periods ended March 31,
2018 and 2017 were 6.4823 RMB and 6.8584 RMB, respectively. RMB has depreciated
5.5% against the U.S. dollar from March 31, 2017 to March 31, 2018. As a result,
our financial statements reported more translation gain in 2018.



  32





Six Months Ended March 31, 2018 compared to Six Months Ended March 31, 2017



Revenues



The following is a breakdown of revenue:


                                                                 For Six Months Ended
                                                                       March 31,
                                                                 2018             2017
Revenue recognized under full accrual method                 $ 18,862,557     $ 20,011,648
Revenue recognized under percentage of completion method       17,391,381  
             -
Total                                                        $ 36,353,938     $ 20,011,648



Revenues recognized under full accrual method

The following table summarizes our revenue generated by different projects:


                                          For Six Months Ended March 31,
                                        2018                          2017                        Variance
                                Revenue           %           Revenue           %            Amount           %

Mingzhu Garden (Mingzhu
Nanyuan & Mingzhu Beiyuan)
Phase I and Phase II          $ 11,544,848         60.9 %   $  8,359,383         41.8 %   $  3,185,465         38.1 %
Yangzhou Pearl Garden Phase
I and Phase II                      18,512          0.1 %        141,547          0.7 %       (123,035 )      (86.9 )%
Oriental Garden                  7,399,197         39.0 %     11,510,718   

57.5 % (4,111,521 ) (35.7 )%

Total Real Estate Sales
before Sales Tax                18,962,557          100 %     20,011,648          100 %     (1,049,091 )       (5.2 )%
Sales Tax                          (90,280 )                    (466,038 )                     375,758        (80.6 )%
Revenue net of sales tax      $ 18,872,277                  $ 19,545,610   
              $   (673,333 )       (3.4 )%



Our revenues are derived from the sale of residential buildings, commercial
front-stores and parking space in projects that we have developed. Our Mingzhu
Garden Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and
Oriental Garden Phase I have all been completed in prior years, the related
revenues have been included in revenue recognized from completed projects, which
resulted in higher revenue reported for the six months ended March 31, 2018 as
compared to the same comparative period of 2017. Our sales of completed real
estate projects decreased by approximately $3.4% from the sales of $20 million
in the same period of last year to approximately $18.9 million for the six
months ended March 31, 2018. The total GFA sold during the six months ended
March 31, 2018 was 34,342 square meters, decreased by 13.2% from GFA of 39,565
square meters sold in the same period of last year. But, the impact from
decreased GFA sold during the first half of fiscal 2018 was offset by increasing
real estate price in Hanzhong market. For the completed real estate properties,
we only limited models are available for customer selection. In order to promote
the sales of the remaining units, we lowered our selling price during the six
months ended March 31, 2018, which led to more GFA sold during the six months
ended March 31, 2018 than in the same period of 2017.



  33





In May of 2016, the Business Tax has been incorporated into Value Added Tax in
China, which means there will be no more Business Tax and accordingly some
business operations previously taxed in the name of Business Tax will be taxed
in the manner of VAT thereafter. The Company is subject to 5% of VAT for all its
exiting real estate project based on the local tax authority's practice. As our
revenue is reported net of VAT, the Company does not expect the overall gross
margin for the existing real estate properties will be significantly affected by
the change from business tax to VAT. The sales tax for the six months ended
March 31, 2018 was $0.09 million, while there was $0.5 million sales tax charge
for the six months ended March 31, 2017.



Revenue recognized under percentage completion method



                                                                  For the 

six months ended March 31, 2018

                                                                                                            Accumulated
                                                                                           Revenue             Revenue
                                                                                         Recognized          recognized
                                                      Average          Qualified            under               under
                                                   Percentage of        Contract        Percentage of       Percentage of
                                   Total GFA       Completion(1)        Sales(2)         Completion          completion
Real estate properties under
development located in Hanzhong
Yangzhou Palace                       297,450                  88 %   $ 37,190,682     $    17,391,381     $    32,727,800




We started to recognize revenue under the percentage of completion method for
Yangzhou Palace real estate property since second quarter of fiscal 2017. As of
March 31, 2018, total GFA sold under qualified contract sales as of March 31,
2018 was 75,214 square meters (September 30, 2017 - 36,133). The average unit
price under contract sales was $494 per square meters.



                                                                                 For the six months ended March 31, 2017

                                                                                                                                  Accumulated
                                                                                                              Revenue                Revenue
                                                             Average                                        Recognized          Recognized under
                                                          Percentage of             Qualified            under Percentage         Percentage of
                                        Total GFA         Completion(1)         Contract Sales(2)          of Completion           Completion
Real estate properties under
development located in Hanzhong
Oriental Garden                                  N/A                 N/A %     $               N/A       $             N/A      $             N/A



(1) Percentage of completion is calculated by dividing total costs incurred

         by total estimated costs for the relevant buildings in the each real
         estate building , estimated as of the time of preparation of our
         financial statements as of and for the year indicated.



(2) Qualified contract sales only include all contract sales with customer

deposits balance as of March 31, 2018 and 2017 equal or greater than 30%

         of contract sales amount and related individual of buildings were sold
         over 20%.




  34






Cost of Sales



The following table sets forth a breakdown of our cost of sales:


                              For Six Months Ended March  31,
                             2017                        2016                       Variance
                        Cost           %            Cost           %           Amount           %

Land use rights $ 2,643,315 8.8 % $ 992,772 6.5 % $ 1,650,545 166.3 % Construction cost 27,475,916 91.2 % 14,322,884 93.5 %

  13,153,033        91.8 %
Total cost          $ 30,119,231        100 %   $ 15,315,656        100 %   $ 14,803,575        96.7 %




Our cost of sales consists of costs associated with land use rights and
construction costs. Cost of sales are capitalized and allocated to development
projects using the specific identification method. Costs are allocated to
specific units within a project based on the ratio of the sales area of units to
the estimated total sales area of the project (or phase of the project) times
the total cost of the project (or phase of the project).



Cost of sales was approximately $30.1 million for the six months ended March 31,
2018 compared to $15.3 million for the six months ended March 31, 2017. The
$14.8 million increase in cost of sales was mainly attributable to the increase
in total GFA sold from Yang Palace project during the six months ended March 31,
2018 which led to increased revenue and cost of sales during this period.



Land use rights cost: The cost of land use rights includes the land premium we
pay to acquire land use rights for our property development sites, plus taxes.
Our land use rights cost varies for different projects according to the size and
location of the site and the minimum land premium set for the site, all of which
are influenced by government policies, as well as prevailing market conditions.
Costs for land use rights for the six months ended March 31, 2018 were
approximately $2.6 million, as compared to $1.0 million for the six months ended
March 31, 2017, representing an increase of $1.6 million from the same period
last year. The increase was consistent with the fact that more GFA sold in
Yangzhou Palace project during six months ended March 31, 2018 comparing to
the
same period of last year.


Construction cost: We outsource the construction of all of our projects to third
party contractors, whom we select through a competitive tender process. Our
construction contracts provide a fixed payment which covers substantially all
labor, materials and equipment costs, subject to adjustments for some types of
excess, such as design changes during construction or changes in
government-suggested steel prices. Our construction costs consist primarily of
the payments to our third-party contractors, which are paid over the
construction period based on specified milestones. In addition, we purchase and
supply a limited range of fittings and equipment, including elevators, window
frames and door frames. Our construction costs for the six months ending March
31, 2018 were approximately 27.5 million as compared to approximately $14.3
million for the six months ended March 31, 2017, representing an increase of
$13.2 million. The increase in construction cost was due to increase in units
sold during the six months ended March 31, 2018.



The total cost of sales as a percentage of real estate sales before sales tax
for the six months ended March 31, 2018 were 82.8%, increased from 76.5% for the
six months ended March 31, 2017, which was lower revenue in the Oriental Garden
project.



Gross Profit


Gross profit was approximately $6.1 million for the six months ended March 31,
2018 as compared to approximately $4.2 million for the six months ended March
31, 2017, representing an increase of $1.9 million, which was mainly
attributable to more sales in Yangzhou Palace project. The overall gross profit
as a percentage of real estate sales before sales tax decreased to 16.9% during
the six months ended March 31, 2018 from 21.1% for the same period last year,
because the Company promoted sales in Yangzhou Palace project and Oriental
Garden project during the first half of fiscal 2018, the lower selling price
resulted in lower gross margin of 5.5% and 8.8% in the first half of fiscal
2018, respectively. For the Mingzhu Garden project, the Company sold commercial
units with over 79% gross margin during the first half of fiscal 2018, but most
of sales in the same period of last year were only residential units, which
resulted in higher gross margin of 37.3%, comparing to gross margin of 22.8% in
the same period of last year.



  35





The following table sets forth the gross margin of each of our projects:



                                                               For Six Months Ended March 31,
                                                           2018                              2017
                                                                 Percentage         Gross         Percentage
                                               Gross Profit      of Revenue         Profit        of Revenue

Mingzhu Garden (Mingzhu Nanyuan & Mingzhu
Beiyuan)                                       $   4,303,873            37.3 %   $  1,908,078            22.8 %
Oriental Garden                                      404,410             5.5 %      2,794,649            24.3 %
Yangzhou Pearl Garden                                  3,270            17.7 %         (6,735 )          (4.8 )%
Yangzhou Palace                                    1,523,154             8.8 %              -               -
Sales Tax                                            (90,280 )                       (466,038 )
Total Gross Profit                                 6,144,427            16.9 %      4,229,954            21.1 %
Total Real Estate Sales before Sales Tax       $  36,353,938               
     $ 20,011,648




Operating Expenses



Total operating expenses decreased by 20.4% to approximately $1.5 million for
the six months ended March 31, 2018 from $1.9 million for the six months ended
March 31, 2017 as a result of a decrease in general administrative expense of
$0.6 million , offset by an increase in selling expense of $0.2 million



The increase in selling expenses for six months ended March 31, 2018 was
primarily attributed to increase of commission paid to salesforce and marketing
activities. The decrease in general administration expense for the six months
ended March 31, 2018 was attributed to the Company incurred additional $0.6
million repairing and maintenance expense on the completed projects during six
months ended March 31, 2017 and the Company did not have similar expense during
the first half of fiscal 2018.



                                                      For Six Months Ended
                                                            March 31,
                                                      2018            2017

Selling expenses                                   $   502,335     $   278,085
General and administrative expenses                  1,012,207       

1,623,563

Total operating expenses                           $ 1,514,542     $ 

1,901,648

Percentage of Real Estate Sales before Sales Tax           4.2 %          
9.5 %




Income Taxes



U.S. Taxes



China HGS is a Florida corporation. However, all of our operations are conducted
solely by our subsidiaries in the PRC. No income is earned in the United States
and we do not repatriate any earnings outside the PRC. As a result, we did not
generate any U.S. taxable income for the six months ended March 31, 2018 and
2017.



PRC Taxes



The Company's VIE are governed by the Income Tax Law of the People's Republic of
China concerning the privately run enterprises, which are generally subject to
income tax at a statutory rate of 25% on income reported in the statutory
financial statements after appropriate tax adjustments



  36






However, prior to October 1, 2017, as approved by the local tax authority of
Hanzhong City, the Company's CIT was assessed annually at a pre-determined fixed
rate as an incentive to stimulate the local economy and encourage
entrepreneurship. The local income tax rate in Hanzhong is 2.5% and in Yang
County is 1.25% on revenue. Starting from October 1, 2017, the Company is
subject to income tax rate of 25% on taxable income in fiscal 2018 and
afterwards. The change in the income tax policy could negatively affect the
Company's net income. For the six months ended March 31, 2018 and 2017, the
Company's income taxes were approximately $1.1 million and $0.5 million,
respectively. Although the possibility exists for reinterpretation of the
application of the tax regulations by higher tax authorities in the PRC for the
Company's tax filling prior to October 1, 2017, potentially overturning the
decision made by the local tax authority, the Company has not experienced any
reevaluation of the income taxes for prior years. The PRC tax rules are
different from the local tax rules and the Company is required to comply with
local tax rules. The difference between the two tax rules will not be a
liability of the Company. There will be no further tax payments for the
difference.



On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed
into law making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a U.S. corporate tax rate decrease
from 35% to 21% effective for tax years beginning after December 31, 2017, the
transition of U.S international taxation from a worldwide tax system to a
territorial system, and a one-time transition tax on the mandatory deemed
repatriation of cumulative foreign earnings as of December 31, 2017. The Company
has determined that the Company's VIE in PRC does not qualify as a reportable
controlled foreign corporation ("CFC") in accordance with its understanding of
the Act and guidance available as of the date of this filing and as a result the
Company assessed there was no significant income tax impact during the period in
which the legislation was enacted.



On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued
to address the application of US GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income
tax effects of the Act. In accordance with SAB 118, the Company has determined
that the Company's VIE in PRC does not qualify as a reportable CFC, therefore it
is not necessary to record any income tax provision in connection with the
transition tax on the mandatory deemed repatriation of foreign earnings at
December 31, 2017. Any subsequent adjustment to these amounts will be recorded
to current tax expense in fiscal 2018 when the analysis is complete.



Net Income



We reported net income of approximately $3.2 million for the six months ended
March 31, 2018, as compared to net income of approximately $1.6 million for the
six months ended March 31, 2017. The increase of $1.6 million in our net income
was primarily due to more revenue and less operating expense as discussed above
under Revenues and Gross Profit.



Other Comprehensive Income (Loss)



We operate primarily in the PRC and the functional currency of our operating
subsidiary is the Chinese Renminbi ("RMB").   RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through
authorized institutions. No representation is made that RMB amounts could have
been, or could be, converted into USD at the rates used in translation.



Translation adjustments resulting from this process amounted to $10.1 and
negative $4.9 million for the six months ended March 31, 2018 and 2017,
respectively, due to the significant depreciation of USD. The balance sheet
amounts with the exception of equity at March 31, 2018 were translated at 6.2726
RMB to 1.00 USD as compared to 6. 8832 RMB to 1.00 USD at September 30, 2017,
RMB has depreciated 8.9% against the U.S. dollar from September 30, 2017 to
March 31, 2018. The equity accounts were stated at their historical rate. The
average translation rates applied to the income statements accounts for the
periods ended March 31, 2018 and 2017 were 6.4823 RMB and 6.8584 RMB,
respectively. RMB has depreciated 5.5% against the U.S. dollar from March 31,
2017 to March 31, 2018. As a result, our financial statements reported more
translation gain in 2018.



  37





Liquidity and Capital Resources

Current Assets and Liabilities



Our principal need for liquidity and capital resources is to maintain working
capital sufficient to support our operations and to make capital expenditures to
finance the growth of our business. Historically we mainly financed our
operations primarily through cash flows from operations and borrowings from
our
principal shareholder.



As of March 31, 2018, the Company had approximately $45.6 million in working
capital, a decrease of $29.6 million as compared to $75.2 million as of
September 30, 2017 primarily due to the investment in long term of real estate
under development projects. Our total cash and restricted cash balance were
approximately $7.7 million and $4.7 million as of March 31, 2018 and September
30, 2017, respectively. Since most of our current real estate development is
completed, we are expecting to collect the full purchase price from our existing
customers in the coming months. We expect our cash collection will improve
during remaining half of our fiscal 2018. In addition, on June 26, 2015 and
March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong
Urban Construction Investment Development Co., Ltd, a state owned Company, to
borrow up to $123.6 million (RMB 775 million) long term loan at 4.245% interest
to develop Liangzhou Road Project. As of March 31, 2018, the Company borrowed
$102.5 million (September 30, 2017 - $97.5 million) from this credit line. The
loan is guaranteed by Hanzhong City Hantai District Municipal Government and
pledged by the Company's Yang County Palace project with carrying value of $77.2
million as of March 31, 2018 (September 30, 2017 - $87.1 million). On January 8,
2016, the Company signed a loan agreement with Hanzhong Municipal Housing
Provident Fund Management Center to borrow up to $12.8 million (RMB 80 millioin)
related to Oriental Garden project. The loan carries interest at is 3.575% and
is due in January 2019. As of September 30, 2017, the Company received all the
proceeds from Housing Fund, The repayment is required based on certain sales
milestones or a fixed repayment schedule starting in July 2018.



In December 2016, the Company signed a loan agreement with Hantai District Urban
Construction Investment Development Co., Ltd, a state owned Company, to borrow
up to $19.0 million (RMB 119 million) for the development of Hanzhong City
Liangzhou Road project. The loan carries interest at a fixed interest of 1.2%
and is due on June 20, 2031. As of March 31, 2018, the Company pledged the
assets of Liangzhou Road and related projects with carrying value of $141.2
million (September 30, 2017 - $133.9 million) as collateral for the loan. Our
major shareholder pledged their assets for the loan. The Housing Fund has rights
to monitor the project's future cash flow. Additionally, in September 2017, the
Urban Development Center Co., Ltd. approved a construction loan for the Company
in the amount of $ $27.9 million with an annual interest rate of 1.2% per year
in connection with the Liangzhou Road and related Project. The Company is
required to repay the loan from December 2027 through May 2031. The amount of
this loan is available to be drawn down as soon as the land use rights of the
Liangzhou Road is approved and the construction starts, which is expected to
begin in the Spring of 2018.



With respect to capital funding requirements, the Company budgeted our capital
spending based on ongoing assessments of needs to maintain adequate cash. Due to
the long term relationship with our construction suppliers, we were able to
effectively manage cash spending on construction. Also, our principal
shareholder, Mr. Xiaojun Zhu has been providing and will continue to provide his
personal funds, if necessary, to support the Company on an as needed basis. In
addition, the Company's cash flows from pre-sales and current sales should
provide financial support for our current developments and operations. The
Company believes it has sufficient working capital for the next twelve months.



In order to fully implement our business plan and sustain continued growth, we
may also need to raise capital from outside investors. Our expectation,
therefore, is that we will seek to access the capital markets in both the U.S.
and China to obtain the funds as needed. At the present time, however, we do not
have commitments of funds from any third party.



Cash Flow


Comparison of cash flows results is summarized as follows:

                                                             Six months ended
                                                                March 31,
                                                          2018             2017

Net cash provided by (used in) operating activities $ 3,628,694 $ (30,893,196 ) Net cash used in investing activities

                     (398,269 )        

-

Net cash (used in) provided by financing activities     (1,210,990 )      26,966,287
Effect of change of foreign exchange rate on cash          195,515         
(183,938 )
Net cash increase (decrease)  in cash                    2,214,950         (4110,848 )
Cash, beginning of period                                2,109,043         6,401,237
Cash, end of period                                   $  4,323,993     $   2,290,389




  38






Operating Activities


Net cash provided by operating activities during the six months ended March 31,
2018 was $3.6 million, consisting of net income of approximately $3.2 million,
noncash adjustments of $0.9 million and net changes in our operating assets and
liabilities, which mainly included a reduction of $14.3 million in real estate
property completed due to our increased sales during the first half of fiscal
2018, offset by the increase in spending on real estate property under
development of $6.5 million, paying off the accounts payable of $5.9 million and
increase in cost and earnings in excess of billings of $1.5 million due to more
sales during the first half of fiscal 2018.



Net cash used in operating activities during the six months ended March 31, 2017
was $30.9 million, consisting of net income of approximately $1.6 million,
noncash adjustments of $60,637 and net changes in our operating assets and
liabilities, which mainly included the increase in spending on real estate
property under development of $46.8 million, paying off the accounts payable of
$5 million, and decrease of cost and earnings in excess of billings of $0.8
million, offset by a decrease in real estate property development completed by
$15.3 million due to current sales a net increase of customer deposits received
of $3.9 million, an increase of tax payables of $0.6 million.



Investing activities


Net cash used in investing activities during six months ended March 31, 2018 and 2017 was $0.4 million and Nil, respectively, due to purchases of office equipment during the period.


Financing Activities


Net cash flows used in financing activities amounted to approximately $1.2 million for the six months ended March 31, 2018, which mainly included repayment of other loan of $0.9 million and repayment shareholder loan of $0.3 million.

Net cash flows provided by financing activities amounted to approximately $27.0 million for the six months ended March 31, 2017, which mainly included an increase of $26.5 million new loans from banks or financial institutions.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


Inflation


Inflation has not had a material impact on our business and we do not expect inflation to have a material impact on our business in the near future.

© Edgar Online, source Glimpses

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Chart CHINA HGS REAL ESTATE INC
Duration : Period :
China Hgs Real Estate  Inc Technical Analysis Chart | HGSH | US16948W1009 | 4-Traders
Technical analysis trends CHINA HGS REAL ESTATE INC
Short TermMid-TermLong Term
TrendsNeutralNeutralNeutral
Managers
NameTitle
Xiao Jun Zhu Chairman, President & Chief Executive Officer
Shen Wei Chief Financial & Accounting Officer
Yuan Kai Wen Independent Director
Sheng Hui Luo Director
Qiang Chen Independent Director
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