China Architectural Engineering Inc. (CAEI) posted a net loss of 16 cents per share for the third quarter, compared to a net profit of 18 cents in the prior-year period. The net loss in the quarter can be attributed to lower contract revenue, adjustment to estimated gross revenue of the Dubai Metro project, and increase in raw material and overhead costs. Full loss provision of the project in Doha, and losses from the discontinued construction works in the closed Shenzhen office also contributed to the earnings disappointment in the quarter.
Quarterly revenues of $25.6 million were down 54% year over year primarily due to the Dubai Metro dispute. The company said that its dispute with the master contractor of the Metro Red Line Project in Dubai, led to an adjustment to estimated gross revenue of the project, and resulted in lower recognized revenue in the quarter from that project. Also, the company’s refocus on the domestic market and near completion of major international projects were partly responsible for the year over year decline in revenue.
The first phase of the Dubai Metro was officially opened in early September. Through its subsidiary Techwell Engineering Limited, CAEI had completed a majority of the construction by the end of the second quarter. However, with less than 5% of the contract remaining to be completed, Techwell was removed by the project’s master contractor, who also called for and received payment of $2.1 million in performance bonds and $7.3 million in advance payment bonds that were issued on Techwell’s behalf for the project.
The master contractor believes that it had paid in excess of the construction work performed. CAEI believes that it has fulfilled the requirements of the contract and has a reasonable opportunity to collect the amounts due to Techwell from the master contractor. The dispute resolution remains uncertain.
The company noted that demand in China has strengthened while overseas demand remains challenging. CAEI said that it will concentrate its resources in the domestic market for the remainder of 2009 and beyond. Over the next few years, the company expects to benefit from the stimulus package of $586 billion announced by the Chinese government.
Historically, CAEI has been a large recipient of government projects. Given the company’s research and development capabilities and strong relationship with the Chinese government, we believe the company will benefit significantly from the government’s investment in infrastructure.
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