China 3C Group Reports Second Quarter 2009 Financial Results

HANGZHOU, China, Aug. 17 /PRNewswire-Asia-FirstCall/ -- China 3C Group
("China 3C" or the "Company") (OTC Bulletin Board: CHCG), a retailer and
wholesale distributor of consumer and business products in China, today
announced financial results for the second quarter of 2009.
Net sales for the second quarter of 2009 decreased 34.9% to $51.1 million
compared to $78.5 million for the same period of the prior year. Lower sales
were a result of various factors, including a general slowdown in the retail
markets, weaker demand for consumer and business electronics due to weakened
global financial conditions, as well as the pressure of increased competition
within the markets in which the Company operates. The Company's retail
business generated approximately 69% of its sales while the wholesale business
generated approximately 31% of its sales in the second quarter.
Among the Company's four major operating subsidiaries, the net combined
retail and wholesale revenue contribution of each subsidiary was as follows:
-- WangDa (cell phones) second quarter 2009 revenue decreased 44.5% to
$14.2 million compared to $25.5 million the prior year period. Second
quarter gross profit margin for WangDa was 10.6%.
-- SanHe (appliances) second quarter 2008 revenue decreased 22.8% to $14.4
million compared to $18.6 million in the prior year period. Second
quarter gross profit margin for SanHe was 18.0%.
-- Joy & Harmony (consumer electronics) second quarter 2009 revenue
decreased 30.9% to $12.0 million compared to $17.3 million in the prior
year period. Second quarter gross profit margin for Joy & Harmony was
9.7%.
-- YongXin (communications/office electronic equipment) second quarter
2009 revenue decreased 37.8% to $10.6 million compared to $17.0 million
in the prior year period. Second quarter gross profit margin for
YongXin was 7.2%.

Gross profit for the second quarter of 2009 was $6.0 million compared to
$12.9 million in the same period of the prior year. Second quarter 2009 gross
margin was 11.8% as compared to 16.4% for the three months ended June 30,
2008.
The lower gross profit margin was primarily due to decreased unit sales and
prices of consumer and business electronics in the competitive Chinese market.
While unit sales prices decreased, the Company's purchasing prices from
manufacturers remained flat.
Selling, general and administrative expense for the second quarter of 2009
totaled $4.7 million, or approximately 9.0% of net sales, compared to $3.3
million, or approximately 4.0% of net sales, for the same period of the prior
year. The increase in operating expenses was primarily due to an increase in
base staff salaries, an increase in public expenses and increased management
fees paid to department stores. Other factors include an increase in marketing
expenses and additional expenses incurred to upgrade the sales counters in
retail stores to enhance the Company's business image.
Income from operations for the second quarter of 2009 was $1.3 million, or
2.0% of net sales, compared to income from operations of $9.6 million for the
second quarter of 2008, or 12.0% of net sales.
Net income was $0.9 million, or $0.02 per diluted share, for the second
quarter of 2009, compared to $8.8 million, or $0.14 per diluted share, for the
second quarter of 2008.
The Company's cash position decreased 11% to $25.4 million compared to
$28.7 million at the end of 2009 first quarter. The Company does not
currently have any debt.
Mr. Zhenggang Wang, Chairman and Chief Executive Officer, commented, "Our
business has been impacted by the effect of the global financial crisis on
China which has softened consumer and business electronic equipment demand,
reduced the number of new electronic products offered by manufacturers and led
to a reduction in purchase rebates and discounts we receive from
manufacturers.
Many consumers and small and mid-size businesses have become more cautious
about purchasing office equipment, which has led to slowdowns in our YongXin
and Joy & Harmony segments. Additionally, the competitive environment has
also increased and our WangDa segment underperformed because China's planned
transition to a 3G wireless network has not yet been completed, leading to a
delay in 3G phone purchases and decline in 2G mobile phone products."
The Company had 979 store-in-store locations at the end of the second
quarter of 2009 compared to 1,001 in the prior year period and 990 at the end
of the first quarter of 2009. The Company expects to reduce its total number
of store-in-stores to 950 at the end of the third quarter of 2009 and 900
store-in-stores by year end.
Mr. Wang continued, "Within our store-in-stores, we are taking the
necessary steps to exit from unprofitable locations and have an operational
plan in place to maximize performance. This includes strengthening our
marketing efforts and adding greater product variety to our productive stores
to optimize profitability, adjusting the reward and compensation of our sales
team to be performance-based, providing high-level training and supervision to
the sales people to improve their marketing skills, improving the store layout
to attract more customers and providing better after-sales service and
support.
We remain focused on the build out of direct and franchise stores to
improve our revenue and profit performance. We plan to open 2-4 direct stores
and 4-6 franchise stores in the third quarter of 2009 which will be located in
smaller cities and towns in the Zhejiang province. We anticipate that Jinhua
Baofa, our recently acquired logistics company, will play a significant role
in the build out of these new stores and will allow us to more easily expand
our distribution network and lower our transportation costs as we service
these planned new stores, as well as future stores."
2009 Outlook
For the 2009 third quarter, the Company currently expects sales to be in
the range of $40-$50 million and gross margin to be in the range of 10-11%.
For the full year, the Company expects revenue to total approximately $200
million and gross margin to be in the range of 9-12%.
"We expect the remainder of 2009 to be challenging as many of the same
issues that affected our second quarter results will impact our business in
the second half of the year. We have a solid cash position and no debt, which
allows us the opportunity to make the necessary adjustments to our store-in-
store model and expand our franchise platform. We believe that our franchise
model provides us with many unique advantages compared to our core store-in-
store business. These include improved control of our brand, a flexible store
format and full operational control which allow us to manage our business more
effectively and position our new stores to meaningfully contribute to our
future revenue and profit. We are excited to introduce our products to a new
group of customers and we are hopeful this new business can significantly add
to our future financial performance. We look forward to updating you on our
progress in the coming months ahead," concluded Mr. Wang.
About China 3C Group
China 3C is a leading wholesale distributor and retailer of 3C merchandise:
computers, communication products and consumer electronics. The Company
specializes in wholesale distribution and retail sales of 3C products in
Eastern China, focusing on products that make life more comfortable,
convenient and connected. The Company's goal is to become the number one
retailer of 3C products in China. For more information, visit
http://www.china3cgroup.com .
Forward-looking Statements
Certain statements set forth in this press release constitute "Forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. We have included and from time to time may make in our
public filings, press releases or other public statements, certain forward-
looking statements, including, without limitation, those under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of our Annual Report on Form 10-K. In some cases these
statements are identifiable through the use of words such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "project," "target," "can,"
"could," "may," "should," "will," "would" or words or expressions of similar
meaning. You are cautioned not to place undue reliance on these forward-
looking statements. In addition, our management may make forward-looking
statements to analysts, investors, representatives of the media and others.
These forward-looking statements are not historical facts and represent only
our beliefs regarding future events, many of which, by their nature, are
inherently uncertain and beyond our control. There can be no assurance that
such forward-looking statements will prove to be accurate and China 3C Group
undertakes no obligation to update any forward-looking statements or to
announce revisions to any of the forward-looking statements.

CHINA 3C GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2009 and 2008 (UNAUDITED)

2009 2008
Net sales $51,125,936 $78,515,392
Cost of sales 45,105,462 65,639,675
Gross profit 6,020,474 12,875,717
Selling, general and administrative
expenses 4,749,219 3,326,044
Income from operations 1,271,255 9,549,673

Other (income) expense

Interest income (24,964) (29,472)

Gain on disposal -- (2,161)

Other income (14,659) (324,743)

Other expense 4,630 --

Total other (income) expense (34,993) (356,376)

Income before income taxes 1,306,248 9,906,049
Provision for income taxes 392,167 2,354,054

Net income 914,081 7,551,995
Foreign currency translation adjustments 7,923 1,222,591
Comprehensive income $922,004 $8,774,586

Net income available to common
shareholders per share:
Basic $0.02 $0.14
Diluted $0.02 $0.14

Weighted average shares outstanding:
Basic 53,931,327 52,673,938
Diluted 53,931,327 53,073,938

CHINA 3C GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2009 2008
(Unaudited) (Audited)
ASSETS

Current assets:
Cash and cash equivalents $25,448,256 $32,157,831
Accounts receivable, net 24,481,068 23,724,587
Inventories 9,377,825 8,971,352
Advances to suppliers 2,337,541 2,491,518
Prepaid expenses and other current
assets 27,161 87,773
Total current assets 61,671,851 67,433,061
Property, plant and equipment, net 55,513 64,100
Goodwill 20,348,278 20,348,278
Deposit for acquisition of
subsidiary 14,609,631 7,318,501
Refundable deposits 26,796 32,076
Total assets $96,712,069 $95,196,016

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses $4,457,112 $5,417,327
Income tax payable 391,887 2,140,624
Total liabilities 4,848,999 7,557,951

Stockholders' equity
Common stock, $0.001 par value,
100,000,000 million shares
authorized, 53,931,327 and 52,673,938
issued and outstanding as of
June 30, 2009 and December 31, 2008,
respectively 53,931 52,674
Additional paid-in capital 19,464,519 19,465,776
Subscription receivable (50,000) (50,000)
Statutory reserve 11,109,379 11,109,379
Other comprehensive income 5,143,453 5,272,104
Retained earnings 56,141,788 51,788,132
Total stockholders' equity 91,863,070 87,638,065
Total liabilities and
stockholders' equity $96,712,069 $95,196,016

CHINA 3C GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE, 2009 and 2008 (UNAUDITED)

2009 2008

CASH FLOW FROM OPERATING ACTIVITIES
Net income $4,353,656 $13,325,040
Adjustments to reconcile net income
to net cash provided by (used in )
operating activities:
Depreciation 13,300 20,069
Gain on asset disposition -- (2,161)
Provision for bad debts 3,305 17,445
Stock based compensation -- 226,293
(Increase) / decrease in assets:
Accounts receivable (801,418) (11,039,822)
Other receivable 25,731 --
Inventories (423,551) (6,265,805)
Prepaid expenses and other
current assets 34,775 9,291
Refundable deposits 5,208 (4,078)
Advance to suppliers 149,424 94,151
(Increase) / decrease in current
liabilities:
Accounts payable and
accrued expenses (893,234) 2,101,789
Income tax payable (1,745,979) (255,625)
Net cash provided by (used in)
operating activities 721,217 (1,773,413)

CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,196) (10,650)
Proceeds from asset sales -- 2,447
Deposit for acquisition of subsidiary (7,291,130) --
Net cash used in investing
activities (7,295,326) (8,203)

Effect of exchange rate changes
on cash and cash equivalents (135,466) 2,822,640

Net increase (decrease) in cash (6,709,575) 1,041,024
Cash, beginning of period 32,157,831 24,952,614
Cash, end of period $25,448,256 $25,993,638

SOURCE China 3C Group

Jason Yuan, Vice President, China 3C Group, ir@china3cgroup.com; or Bill Zima,
ICR, Inc., +1-203-682-8200