The Daily China Business Stock for 06/01/2008 is RCH
We specialize in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects. We provide timely, high quality, reliable, fully integrated and cost-effective service solutions to our clients using specialized technical expertise in the design, engineering, fabrication and construction of structural exterior cladding systems. We compete on the strength of our reputation, track record, strong relationships with government and commercial clients and our ability to give expression to the vision of leading architects. By focusing on innovation while outsourcing commoditized manufacturing work, we believe we are able to add artistic and technological value to projects at cost-effective price points.
In November 2007, we acquired Techwell Engineering Ltd. and its wholly owned subsidiaries, Techwell Building Systems (Shenzhen) Ltd. and Techwell International Ltd. in Macau for approximately $11.7 million. We believe this acquisition is a natural step in the expansion of our overseas business development. We believe Techwellâ€™s experienced management teams will provide the operating platform for us to enter into other international markets.
Market Opportunities in China and Internationally
The continuing expansion of the Chinese economy has spurred the substantial growth of Chinaâ€™s construction industry, especially in the commercial and public works sectors. As architectural designs for these buildings have become more complex, challenging and modern in scope, there has been an increased need for technology driven companies providing high-end specialty curtain wall systems. As Chinaâ€™s economy continues to develop, it is expected that increased construction will be required to accommodate growth in education, culture, social welfare and business. Libraries, museums, exhibition halls, stadiums, planetariums and science centers are among the types of structures increasingly needed in China today. In addition, governmental agencies and international regulators are becoming more environmentally conscious in the enactment of regulations governing new construction. Rising fuel costs and environmental concerns have resulted in regulation designed to ensure that new commercial and public works buildings have a low environmental impact. Technologies such as solar lighting, advanced shading systems and circulating sea water systems are constantly improving the ability of structures to interact with the environment by taking advantage of natural conditions, thus meeting the dual goals of reducing energy costs and lessening environmental impact.
A global market opportunity for our products and services also exists, namely in Hong Kong, Macau, Australia, Dubai (UAE), Doha (Qatar), and North America. Hong Kong has recently undergone an economic recovery, and the government has indicated that it expects to increase its expenditures for infrastructure projects over the next few years. Macauâ€™s economy continues to be strong, particularly in the gaming and tourism sector, and the Macau government has increased its investment in infrastructure. In Australia, we are nearing completion of a small engineering project, and we are seeking to obtain several additional projects in Australia and countries in Southeast Asia. The construction markets in Dubai, UAE and Doha, Qatar are experiencing significant growth, and, in 2007, we agreed upon the terms for a number of projects in Dubai and Doha. We are also in discussions on several projects in Central Asia and Eastern Europe, and have started to explore the North American market, where we believe there is a significant potential for growth due to an increasing popularity of curtain walls.
Products and Services
We specialize in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects. We provide timely, high quality, reliable, fully integrated and cost-effective service solutions to our clients using specialized technical expertise in the design, engineering, fabrication and construction of structural exterior cladding systems. We design and develop systems to offer custom-designed solutions for developers of commercial and public works projects with special architectural features. In terms of project management, we exercises overall project planning and control over key areas of activities such as design and engineering, procurement, production scheduling, quality control and site installation. Our comprehensive package of services allows us to offer customized engineering solutions at an affordable cost to meet the requirements of our clients.
For the year ended December 31, 2007, approximately 98% of our sales came from new construction projects starting in 2007 and for the year ended December 31, 2006, approximately 95% of our sales came from new construction projects starting in 2006. The remainder is comprised primarily of projects where we add new glass skins to old buildings. A number of these projects have been done in Hong Kong, where the goal was to preserve the original style and features of the structure while applying a new skin, which would protect the building and add new energy-saving and aesthetic features.
Concept and Project Management
Initially, we work with the architect to develop, clarify and enhance the overall creative vision for the project. In the design of a curtain wall system, architects are freely able to choose different structure systems to meet the requirements of various architectural models. All contracts awarded are assigned a project number, which is used to track each component and man-hour associated with the project through the entire construction process. All project drawings, specifications and completion schedules on a project are reviewed by our senior management team, and all projects are assigned to one or more project managers, who assume primary responsibility for all aspects of the project. Reporting to the project manager are construction supervisors, safety and administration staff, quality control staff and project engineering staff. Each of these project team members coordinates with internal functional departments and outside suppliers as appropriate. Often a project manager assigned to a given project will have significant experience in similar projects. A project manager generally will be responsible for a number projects in various stages of completion at any given time, depending on the scope, complexity, and geographic location of such projects. Each project is divided into critical sequences that follow the anticipated curtain wall construction path. Each sequence follows a timeline, the status of which is continually monitored. Project managers coordinate and manage design changes or other changes in scheduled completion deadlines in an effort to minimize overall project delays.
Specific technical parameters of the concept are established as new design elements are created and combined with existing technologies. During the design phase, our engineers and technicians review preliminary and completed designs and make recommendations regarding types of connections, possible savings on fabrication techniques, and methods of installation. Operating state-of-the art computer-aided design (CAD) stations, these individuals provide customized design solutions in the form of structural calculations, drawings, fabrication and installation details, together with technical advice and consultancy on specifications, feasibility studies and material procurement. At the implementation stage of the project, detailed fabrications/shop-drawing s are produced, discussed and agreed with the project architect/manager. These form the blueprint for project execution and scheduling. Every order is scheduled for production through CAD and computer-aided manufacturing (CAM) systems with progress tracked at each stage of the project process. Quality control and assurance programs are a combination of our specifications with quality inspectors working at all production stages.
We maintain significant in-house structural engineering and detailing capabilities that enable us to implement and coordinate with our shop and field personnel original project specifications and changes to building and structural designs sought by our clients. These resources help influence critical determinations as to the most cost-effective systems, designs, connections, and installation procedures for a particular project. Our engineers work on-site with suppliers to machine our patented curtain wall elements and to procure the appropriate raw materials. Our detailers prepare detail shop drawings of the dimensions, positions, locations, and connections, and the fabrication and installation sequences, of each component utilized in a project, and continually update these drawings to accommodate design and other changes. Our automated detailing systems produce updated detail drawings electronically, which can be delivered to our domestic and foreign field locations. Detailers coordinate directly with customers and our suppliers and installation teams to determine and plan the order of fabrication and installation of a project and associated personnel and equipment requirements.
Although we are responsible for hiring suppliers and manufacturers, we subcontract the manufacture of parts made from glass, metal and other materials used in our exterior cladding systems. Once parts have been manufactured by subcontracted factories, we will occasionally process them further. This processing takes place in our facilities in Beijing, Shunde and Zhuhai and usually entails procedures such as adding metal frames to or drilling holes in glass panes, or cutting and bending steel rods into customized shapes. All of our products are fabricated in accordance with applicable industry and specific customer standards and specifications. We have developed project-specific and company-wide quality assurance and quality control programs, and utilize sophisticated systems to inspect all fabricated components. We prepare load lists that identify the sequence and date that each individual component is required on a project, a procedure that reduces the handling of and the need to store materials in the field. After the completion of processing to customer specifications, finished pieces are loaded for shipment to the construction site.
We have 76 full-time project managers/supervisors and 332 part-time on-site workers who are engaged on our projects. Our installation teams consist of highly trained, skilled and experienced field operatives with established lines of communication between the work site, the technical design department and the factory, ensuring that clients are provided with optimum and cost-effective practical solutions. Site installation is managed through our trained project management staff, and each project has a dedicated project team. On site there are a number of our supervisors who are each responsible for a different section of the curtain wall project. Each supervisor typically manages 30 to 50 of our workers. A small project may have just one work team while a very large project may have five or more. Because the workers are all trained by us and are familiar with the workflow process, they can work on any project in any location. Our project supervisors are often internally developed from our pool of workers. Occasionally, we will hire additional contract labor for specific sections of a very large project or if there are several projects being installed simultaneously, but these extra workers only supplement our core project team. The installation team coordinates its site delivery program with the main contract schedule to meet completion deadlines. The installation process typically consists of pre-assembly of metal and glass component parts at the project site, the lifting of components by crane to the appropriate location at the site and the final assembly of major components.
Our quality control and assurance department is comprised of trained technicians who are responsible for the quality assurance, including quality control of in-process fabrication and site installation by a detailed inspection as well as continued maintenance after project completion. We have adopted important safety policies that are administered and enforced by our senior management and provide training on safety procedures and techniques to our shop and field personnel.
To reach the goal of being a preferred choice for Chinese and international government, developer, contractor and architectural clients, we are focusing on:
Emphasizing innovative services. We focus our design, engineering and installation expertise on distinct product segments requiring unique or innovative techniques as we have extensive experience in providing services requiring complex design, engineering and installation techniques and other unusual project needs.
Providing full service solutions. We believe that a key factor in our success has been our ability to provide, through our in-house personnel, valuable input and assistance to our customers with respect to overall project design, engineering fabrication, and installation sequences and other critical project decisions.
Leveraging our brand and reputation. We believe that the strength of our brand is increasing in China and internationally as we build on our large range of projects and our offering of comparative cost advantages and supply-chain management for some of the most complex exterior cladding systems in the world
Expanding our coverage in China. We believe that we have long-standing relationships with Chinaâ€™s top construction officials and leading Chinese and international architects, having completed high profile projects in China, including the National Grand Theater in Beijing, the Shanghai South Railway Station, the Shenzhen International Airport and the National Palace Museum in Beijing. We plan to continue to meet the needs of government and private sector customers in the larger cities as well as expand to medium-sized second and third tier cities in China.
Expanding our coverage internationally. We believe that international expansion of our business is attractive because it may provide us with higher margins as compared to similar projects in China, and we hope to increase our revenues from international projects as a percentage of our total revenue. We have launched initiatives to expand sales in Hong Kong, Macau, Australia, Southeast Asia, Dubai (UAE), Doha (Qatar), other Middle Eastern countries, Central Asia, Eastern Europe and North America.
Our exterior cladding systems products are highly engineered specialty wall systems consisting primarily of a series of glass panels set in metal frames, stone panels, or metal panels, as well as roofing systems and related products. A curtain wall is fixed to the commercial building by mechanical connection, either in a primarily inoperable mode or adjustable with special settings with spring or press systems. Glass panels are connected to the metal support system by metal clamps and fixing bolts. The support system of fixing bolts could be a steel, aluminum and or glass structure, with glass flank or spidery tension rod or cable.
We offer a variety of support systems:
Glass Fin Support System. The facial glass mixing with the glass fin provides facade with maximum transparence, which eliminates the differential expansion among glass metal structures.
Metal Structure Support System. This system utilizes both steel post and steel truss of aluminum post in a metal structure. One of our most popular support systems, its flexibility can fully meet the criteria of demanding modern architecture. At the same time, the combination of transparent glass and steady metal structure completely realizes a harmony between beauty and force, elegance and strength.
Spidery Tension Rod/Cable Support System. This system utilizes a stainless steel tension rod connector for connecting the tension rod or the tension cable to the steel structure in order to form a stable spidery structure for glass curtain wall supporting. A response to the challenge of modern architecture, architects are able to create a smooth and transparent facade.
We use a variety of clamping devices to integrate the glass frame to the support system. Metal â€śspiderâ€ť clamps are cast from stainless or high-strength carbonic steel in and provide the features of high strength, simple installment and easy maintenance. Our metal clamps integrate the facial glass with the structure, enhancing the hardness of an entity. Transferable cabling structure makes the curtain wall stretch higher, meeting designersâ€™ requirements for the larger size of vertical space. The combination of steel and glass embodies the feature of stability, lightness and transparency, expressing the majesty and originality of a building.
Our fixing bolts are made of stainless steel and are used for holding the glass glazing. These specifically designed bolts transfer the wind loads, deflection stress and the weight of glass itself to the metal support system, which helps reduce the strain on the glass and ensure structural integrity. These bolts are offered in both countersink and flat head. Countersink head fixing bolts they provide a smooth surface when fit flush in the outward surfaces of the glass. They are typically utilized in single and double glazed glass structures. The cylindrical head of our flat head fixing bolts protrude from the surface of glass, which provides more strength against wind force and shear force and can use to fix laminated and insolated glass.
We offer a variety of glass panels allowing a diverse selection of styles to meet the architectural demands of our clients:
Insulating Glass . Increases a windowâ€™s thermal performance and sound insulation; constructed with two or more pieces of glass separated by a desiccant-filled spacer and sealed with an organic sealant. The desiccant absorbs the insulating glass unitâ€™s internal moisture.
Laminated Glass . Consists of two or more pieces of glass fused with a vinyl or urethane interlayer and is used primarily for skylight, security and hurricane-resistant application.
Energy- Efficient Coated Glass. Provides solar control, both minimizing heat gain and controlling thermal transfer, by adding coatings to glass. In addition, coatings add color and varying levels of reflectively.
Spandrel Glass. The use of full coverage paint on insulated glass or polyester opacifier film backing on high performance coated glass for the non-vision areas of the building.
Stone or metal may also be used as paneling.
Our work is performed under cost-plus-fee contracts and fixed-price contracts. The length of our contracts varies but typically has duration of one to two years.
Approximately 90% of our sales are from fixed price contracts. The remaining 10% of our sales are from cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price. Approximately 70% of contracts are modified after they begin, usually to accommodate requests from clients to increase project size and scope. In cases where fixed-price contracts are modified, the fixed price is renegotiated and adjusted upwards accordingly. A disadvantage of fixed-price contracts is that we realize a profit only if we control our costs and prevent cost over-runs on the contracts, which can oftentimes be out of our control, such as cost of materials. An advantage of these contracts is that we can adjust the material and technology that we use in the project, as long as we satisfy the requirements of our customer, and there is a potential to benefit from lower costs of materials.
Under cost-plus-fee contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all our costs. An advantage of cost-plus-fee contracts is that the cost of materials generally has no effect on our profit, since we are reimbursed for costs. A disadvantage is that the profit resulting from any cost savings on the materials goes to the contractor and not us.
During 2007, we completed 26 projects, including the National Grand Theater in Beijing, the Grand Theater and the Qintai Cultural & Art Center in Wuhan.
Sales and Marketing
Sales managers lead our sales and marketing efforts through our domestic headquarters in Zhuhai, China, and our regional sales offices in 12 cities. Outside of China, we have sales managers in Hong Kong, Sydney (Australia), Dubai (the United Arab Emirates), Doha (Qatar), and New York (the United States). Each sales manager is responsible primarily for our estimates, sales, and marketing efforts in defined geographic areas. In addition, we employ full-time project estimators and chief estimators. Our sales representatives attempt to maintain relationships with governments, developers, general contractors, architects, engineers, and other potential sources of business to determine potential new projects under consideration. Our sales efforts are further supported by our executive officers and engineering personnel, who have substantial experience in the design, engineering, fabrication, and installation of high-end specialty curtain walls.
We compete for new project opportunities through our relationships and interaction with our active and prospective customer base, which we believe provides us with valuable current market information and sales opportunities. In addition, we are often contacted by governmental agencies in connection with public construction projects, and by large private-sector project owners and general contractors and engineering firms in connection with new building projects both in China and other countries, sometimes at the recommendation of architects and engineers we have worked with in the past.
Upon selection of projects to bid or price, our estimating division reviews and prepares projected costs of shop, field, detail drawing preparation, raw materials, and other costs. On bid projects, a formal bid is prepared detailing the specific services and materials we plans to provide, payment terms and project completion timelines. Upon acceptance, our bid proposal is finalized in a definitive contract. We experience an average accounts settlement period ranging from three months to as high as one year from the time we provide services to the time we receive payment from our customers. In contrast, we typically need to place certain deposit with our suppliers on a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. We are typically paid by the contractor the entire amount due to us for our services and products once the entire project is completed, which could be significantly after we complete the curtain wall portion of the project. National policy requires the contractor to pay 85% of our total contract value to us before the project is completed, and the remainder may be paid when the contractor completes the entire project. In addition, current national policy in China dictates that for government projects sub-contractors will be paid directly from the government budget offices, not through general contractors and/or developers. Because our payment cycle is considerably shorter than our receivable cycle, we may experience working capital shortages. We have used bank loans, cash provided by operations and other financings to fund our operations.
Our three largest projects are the Grand Theater and the Qintai Cultural & Art Center in Wuhan, the Guangzhou Opera House and the Dalian Star Development Project, all of which accounted for approximately 14%,7% and 5% of our sales, respectively, for the year ended December 31, 2007.
Management believes that we have developed a reputation for innovative technology and quality in the specialty high-end curtain wall industry. Marketing efforts are geared towards advancing us as a brand of choice for building the worldâ€™s most modern and challenging projects.
The focus of our marketing plan is print advertising, participation in tradeshows, exhibitions, lecture and technology briefings to architects and property owners. With a targeted approach, our print advertisements appear regularly in popular consumer and industry publications and trade journals. To better showcase our diverse products to potential customers, we regularly exhibit at leading trade shows and exhibitions. Our dynamic, state-of-the-art trade show exhibits are developed internally to showcase our latest product offerings.
We procure high quality glass panes, metal support beams, and other curtain wall components from a number of regional and international suppliers, depending on the requirements of the contract. Once the suppliers are chosen, our engineers work with them to configure their production processes to manufacture anything from a standard glass pane to a patented fixing bolt or connector. All manufacturing is monitored and approved by our quality control and engineering departments.
Component Processing and Delivery
Once the curtain wall components are produced, they are either shipped directly to the site or sent to one of our facilities for further processing. Such processing typically involves drilling holes in glass panes, affixing metal frame pieces to glass panes, and cutting steel rods and bending them into customized shapes. The project manager and project engineer jointly approve all factory purchases.
Our manufacturing production facilities are designed and maintained with a view towards conforming to good practice standards. To comply with the strict requirements of our customer base, we have implemented a quality assurance plan setting forth our quality assurance procedures. Our quality control department is responsible for maintaining quality standards throughout the production process. Quality control executes the following functions:
setting internal controls and regulations for semi-finished and finished products;
implementing sampling systems and sample files;
maintaining quality of equipment and instruments;
auditing production records to ensure delivery of quality products;
articulating the responsibilities of quality control staff; and
on-site evaluation of supplier quality control systems.
We have received the following certifications in recognition of our production and quality assurance program:
ISO 9001 - International Quality System Certification, valid from February 2005 to April 2008;
ISO 14001 - International Environmental System Certification, valid from April 2005 to April 2008; and
ISO 18001 - International Safety System Certification, valid from June 2005 to June 2008.
We are finalizing approvals for the renewal for another three years for the above three certifications.
Research and Development
Companies such as us are under pressure from customers to respond more quickly with new designs and product innovations to support rapidly changing consumer tastes and regulatory requirements. We believe that the engineering and technical expertise of our management and key personnel, together with our emphasis on continuing research and development in support of our high-end curtain wall technologies, allows us to efficiently and timely identify and bring new, innovative products to market for our customers using the latest technologies, materials and processes. We believe that continued research and development activities are critical to maintaining our offering of technologically-advanced products to serve a broader array of our customers.
For example, in an effort to add value and create new markets, we are working to develop high performance systems that reduce the need for air conditioning in the summer and heat in the winter. Our products under development are designed to both reduce the direct light and heat coming into the building and, through the use of photovoltaic cells, to harness the energy collected from the sun and further reduce external energy costs by generating power for use in other areas of the building. Other features are designed to add a level of programmed intelligence, automatically adjusting louvers/blinds and other faĂ§ade controls to achieve predetermined levels for user comfort. These efforts are made to meet the demand for self-sustaining buildings and clean, renewable power in response to climbing energy prices and declining energy reserves.
Our research and development strategy relies primarily on internal innovation and development, supplemented with collaboration with academic and research institutions. For example, in 2001, we were appointed by the Chinese Ministry of Construction to lead the committee tasked with establishing national standards for the fixing bolt glass curtain wall technology industry. Luo Ken Yi, our Chief Executive Officer and Chief Operating Officer, was the Editor-in-Chief for the new standard code. Also, in recognition of our contributions to the curtain wall industry, Luo Ken Yi and two other of our engineers were appointed to senior posts at the Architectural Glass and Metal Structure Institute of Qinghua University in Beijing, one of the most prestigious research institutions in China, which we helped to create in 1999. We were able to incorporate many of the academic research results by the Institute into our projects, including the National Grand Theater in Beijing and the Hangzhou Grand Theater, both completed recently.
We actively track research developmental trends and government regulations, and continually seek to both improve and perfect existing products and develop new ones in accelerated product development cycles. In addition, we seek to recruit and retain qualified Chinese and foreign technical personnel. As of December 31, 2007, we employed 85 designers and engineers and additional 65 research and development personnel.
We currently own sixty-two patents, of which forty-nine are approved, four are pending approval and nine are in the application stage. Of the forty-nine approved, forty-seven are in China and two are in the US, Europe, Japan and Hong Kong.
We expended $111,129, $50,117, and $58,865 on research and development activities for each of the years ended December 31, 2007, 2006 and 2005, respectively. These amounts exclude design and construction of customized molds used to manufacture the pieces used for a particular project, as well as sample and testing costs.
MANAGEMENT DISCUSSION FROM LATEST 10K
We were incorporated in the state of Delaware on March 16, 2004. We were originally organized as a â€śblank checkâ€ť shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On October 17, 2006, we closed a share exchange transaction described below, pursuant to which we (i) became the 100% parent of Full Art International, Ltd., a Hong Kong Company (â€śFull Artâ€ť), which has four subsidiaries, including its wholly-owned subsidiary, Zhuhai King Glass Engineering Co., Ltd., a company formed under the laws of the Peopleâ€™s Republic of China (â€śPRCâ€ť or â€śChinaâ€ť), (ii) assumed the operations of Full Art and its subsidiaries and (iii) changed our name from SRKP 1, Inc. to China Architectural Engineering, Inc. Full Art was incorporated in Hong Kong on July 30, 1992 under the Companies Ordinance of Hong Kong.
We specialize in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects. We have completed over one hundred projects throughout China, Hong Kong, Macau, Australia and Southeast Asia, including the National Grand Theater in Beijing, the Meridian Gate Exhibition Hall of the Palace Museum in Beijingâ€™s Forbidden City (winner of the 2005 UNESCO Jury Commendation for Innovation of Asia Pacific Heritage Award), the Beijing Botanical Garden Conservatory (winner of the the Zhan Tian You award in 2003), the Shenzhen Airport Terminal Building, the Shanghai South Railway Station and the Vietnam National Conference Center.. We compete on the strength of our reputation, track record, strong relationships with government and commercial clients and our ability to give expression to the vision of leading architects. By focusing on innovation while outsourcing commoditized manufacturing work, we are able to add artistic and technological value to projects at cost-effective price points.
Our work is performed under cost-plus-fee contracts and fixed-price contracts. The length of our contracts varies but typically has a duration of approximately one to two years. Approximately 90% of our sales are from-fixed price contracts. The remaining 10% of our sales are from cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price. Consequently, we realize a profit on fixed-price contracts only if we control our costs and prevent cost over-runs on the contracts. Approximately 70% of contracts are modified after they begin, usually to accommodate requests from clients to increase project size and scope. In cases where fixed-price contracts are modified, the fixed price is renegotiated and adjusted upwards accordingly. Under cost-plus-fee contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all our costs.
April 2007 Issuance of Bonds and Bond Warrants
On April 12, 2007, we completed a financing transaction with ABN AMRO Bank N.V. (â€śABN AMROâ€ť) issuing (i) $10,000,000 Variable Rate Convertible Bonds due in 2012 (the â€śBondsâ€ť) and (ii) 800,000 warrants to purchase an aggregate of 800,000 shares of our common stock, subject to adjustments for stock splits or reorganizations as set forth in the warrant, that expire in 2010 (the â€śBond Warrantsâ€ť).
The Bonds were subscribed at a price equal to 97% of their principal amount, which is the issue price of 100% less a 3% commission to ABN AMRO . The Bonds were issued pursuant to, and are subject to the terms and conditions of, a trust deed dated April 12, 2007 between us and The Bank of New York, London Branch, as amended on August 29, 2007 (the â€śTrust Deedâ€ť). The Bonds are also subject to a paying and conversion agency agreement dated April 12, 2007 between us, The Bank of New York, and The Bank of New York, London Branch. T he terms and conditions of the Bonds, as set forth in the Trust Deed include, among other thing, the following terms:
Interest Rate. The Bonds bear cash interest from April 12, 2007 at the rate of 6% per annum for the first year after April 12, 2007 and 3% per annum thereafter, of the principal amount of the Bonds.
Conversion. Each Bond is convertible at the option of the holder at any time on and after September 28, 2008, through March 28, 2012, into shares of our common stock at an initial conversion price equal $3.50 per share, the price per share at which shares were sold in our initial public offering of common stock on AMEX. The conversion price is subject to adjustment in certain events, including our issuance of additional shares of common stock or rights to purchase common stock at a per share or per share exercise or conversion price, respectively, at less than the applicable per share conversion price of the Bonds. If for the period of 20 consecutive trading days immediately prior to April 12, 2009 or February 18, 2012, the conversion price for the Bonds is higher than the average closing price for the shares, then the conversion price will be reset to such average closing price; provided that, the conversion price will not be reset lower than 70% of the then existing conversion price. In addition, the Trust Deed provides that the conversion price of the Bonds cannot be adjusted to lower than $0.25 per share of common stock (as adjusted for stock splits, stock dividends, spin-offs, rights offerings, recapitalizations and similar events).
Mandatory Redemptions. If on or before April 12, 2008, either (i) our common stock (including the shares of common stock issuable upon conversion of the Bonds and exercise of the Bond Warrants) are not listed on AMEX or (ii) the Bonds, the Bond Warrants, and shares underlying the Bonds and the Bond Warrants are not registered with the Securities and Exchange Commission (the â€śSECâ€ť), then holders of the Bonds can require us to redeem the Bonds at 106.09% of the principal amount. In addition, at any time after April 12, 2010, holders of the Bonds can require us to redeem the Bonds at 126.51% of the principal amount. We are required to redeem any outstanding Bonds at 150.87% of its principal amount on April 4, 2012.
On April 12, 2007, we entered into a warrant instrument with ABN AMRO pursuant to which ABN AMRO purchased the Bond Warrants from us (the â€śWarrant Instrumentâ€ť). The Bond Warrants, which are represented by a global certificate, are also subject to a warrant agency agreement by and among us, The Bank of New York and The Bank of New York, London Branch dated April 12, 2007 (the â€śWarrant Agency Agreementâ€ť). Pursuant to the terms and conditions of the Warrant Instrument and the Warrant Agency Agreement, the Bond Warrants become exercisable on October 12, 2008 and terminate on April 12, 2010. The Bond Warrants are exercisable at a per share exercise price of $0.01. We have agreed to list the shares of common stock underlying the Bond Warrants on AMEX, or any alternative stock exchange by April 12, 2008.
On April 12, 2007 we also entered into a registration rights agreement with ABN AMRO pursuant to which we agreed to include the Bonds, the Bond Warrants, and the shares of common stock underlying the Bonds and the Bond Warrants in a pre-effective amendment to the registration statement filed with the SEC and declared effective on September 27, 2007 (the â€śInitial Registration Statementâ€ť). Subsequently, we verbally agreed with ABN AMRO not to include its securities in the Initial Registration Statement and to register them in a separate registration statement of which this prospectus is a part.
October 2007 Initial Public Offering
On October 3, 2007, we completed an initial public offering consisting of 847,550 shares of our common stock. Our sale of common stock, which was sold indirectly by us to the public at a price of $3.50 per share, resulted in net proceeds of approximately $2.2 million. These proceeds were net of underwriting discounts and commissions, fees for legal and auditing services, and other offering costs. Upon the closing of the initial public offering, we sold to the underwriter warrants to purchase up to 73,700 shares of our common stock. The warrants are exercisable at a per share price of $4.20 and will expire if unexercised after five years from the date of issuance.
November 2007 Acquisition of Techwell
On November 6, 2007, we, through Full Art, acquired all of the issued and outstanding shares (the â€śTechwell Sharesâ€ť) in the capital of Techwell Engineering Limited (which has two subsidiaries), a limited liability company incorporated in Hong Kong (â€śTechwellâ€ť) pursuant to a Stock Purchase Agreement (the â€śAgreementâ€ť) dated November 6, 2007, entered into by and among Mr. Ng, Chi Sum and Miss Yam, Mei Ling (the â€śShareholdersâ€ť), the Company and Full Art (the â€śTechwell Acquisitionâ€ť), to consummate the acquisition transaction. Pursuant to the terms of the Stock Purchase Agreement, the Shareholders agreed to sell and transfer all of the Techwell Shares to Full Art for a purchase consideration of US$11,654,566 payable in cash and shares of common stock of our company. Thirty percent of the stock consideration paid to the Shareholders will be held in a third-party escrow account for up to two years to cover potential indemnification obligations of the Shareholders. Techwell is engaged in the business of manufacturing and constructing external building facades, including roofing systems for buildings and curtain wall systems and accessories.
Critical Accounting Policies, Estimates and Assumptions
Managementâ€™s discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The most significant estimates and assumptions include valuation of inventories, provisions for income taxes, allowance for doubtful accounts, and the recoverability of the long-lived assets. Actual results could differ from these estimates. Periodically, we review all significant estimates and assumptions affecting the financial statements and record the effect of any necessary adjustments.
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
Revenue and Cost Recognition â€“ Revenues from fixed-price and modified fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to the estimated total cost for each contract. The revenue earned in a period is based on the ratio of costs incurred to the total estimated costs required by the contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Total estimated gross profit on a contract, being the difference between total estimated contract revenue and total estimated contract cost, is determined before the amount earned on the contract for a period can be recognized. The measurement of the extent of progress toward completion are used to determine the amount of gross profit earned to date; the earned revenue to date is the sum of the total cost incurred on the contract and the amount of gross profit earned.
Earned revenue, cost of earned revenue, and gross profit are determined as follows:
i. Earned Revenue is the amount of gross profit earned on a contract for a period plus the costs incurred on the contract during the period.
ii. Cost of Earned Revenue is the cost incurred during the period, excluding the cost of materials not unique to a contract that have not been used for the contract.
iii. Gross Profit earned on a contract are computed by multiplying the total estimated gross profit on the contract by the percentage of completion. The excess of that amount over the amount of gross profit reported in prior periods is the earned gross profit that should be recognized in the income statement for the current period.
Selling, General, And Administrative Costs â€“ Selling, general, and administrative costs are charged to expense as incurred. Allowances for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated.
Contract Receivable â€“ Contract receivable represents billings to customers on the percentage of work completed and recognized to date based on contract price. An allowance is provided for doubtful collections which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. We record an allowance for doubtful collections for our outstanding contract receivable at the end of the period in accordance with generally accepted accounting principles in the Untied States, and we consider that allowance to be reasonable at December 31, 2007, 2006, and 2005.
Comprehensive Income â€“ Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. Our current components of other comprehensive income are the foreign currency translation adjustment.
Income Taxes â€“ We use the accrual method of accounting to determine and report its taxable income and use the flow through method to account for tax credits, which are reflected as a reduction of income taxes for the year in which they are available. We have implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes . Income tax liabilities computed according to the United States, Peopleâ€™s Republic of China (PRC), Hong Kong SAR, Macau SAR and Australia tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before we are able to realize that tax benefit, or that future realization is uncertain.
Accounting for the Impairment of Long-Lived Assets â€“ The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the reporting periods, there was no impairment loss.
Goodwill and Intangible Assets - In accordance with Statement of Financial Accounting Standard 142 (â€śFAS 142â€ť), â€śGoodwill and Other Intangible Assets.â€ť the Company does not amortize goodwill or intangible assets with indefinite lives. For goodwill and other intangible assets, impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate goodwill carrying values exceed estimated reporting unit fair values. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Based on the impairment tests performed, there was no impairment of goodwill or other intangible assets in fiscal 2007, 2006 and 2005.
Foreign Currency Translation â€“ The consolidated financial statements are presented in United States dollars. Our functional currencies as well as the functional currencies of our subsidiaries are Renminbi (RMB), Hong Kong Dollar (HKD), Macau Pacata (MOP) & Australian Dollars (AUD). The consolidated financial statements are translated into United States dollars from RMB, HKD, MOP and AUD at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Statutory Reserves â€“ Surplus reserves for foreign investment enterprises are referring to the amount appropriated from the net income in accordance with PRC laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations.
Results of Operations
Years Ended December 31, 2007 and 2006
Contract revenues earned for the year ended December 31, 2007 were $86.6 million, an increase of $23.3 million, or 37%, from the contract revenues earned of $63.3 million for the comparable period in 2006. The primary reason for the increase in contract revenues earned was an increase in the number of projects for the year ended December 31, 2007. In addition, we also experienced a general increase in the amount of revenue generated per project for the year ended December 31, 2007 as compared to the same period in 2006.
Cost of contract revenues earned for the year ended December 31, 2007 was $64.4 million, an increase of $17.6 million, or 38%, from $46.8 million for the comparable period in 2006. Cost of contract revenues earned consists of raw materials, labor and other operating costs related to contract performance. The increase in costs of contract revenues earned was primarily due to the increased number of projects for the year ended December 31, 2007.
Gross profit for the year ended December 31, 2007 was $22.3 million, an increase of $5.7 million, or 34%, from $16.6 million for the comparable period of 2006. Our gross margin for the year ended December 31, 2007 was 25.7% as compared with 26.1% for the year ended December 31, 2006. The decrease was primarily a result of moderately higher raw material and labor costs.
Selling, general and administrative expenses were $5.5 million for the year ended December 31, 2007, a decrease of approximately $0.5 million, or 8%, from $6.0 million for the comparable period in 2006. The decrease was primarily due to higher expenses in 2006 related to organizational restructuring prior to our IPO in 2007 and operational expansion. There were nil non-recurring general and administrative expenses in fiscal 2007 as compared to $3.8 million in fiscal 2006 due to a one-time brokerage and consulting fees related to our Share Exchange and private placement that occurred in fiscal 2006.
Interest expenses and finance expenses were approximately $2.4 million for the year ended December 31, 2007, an increase of approximately $2.4 million, from $nil for the comparable period in 2006. The increase was due to our issuance of $10,000,000 Variable Rate Convertible Bonds due in 2012 (the â€śBondsâ€ť) at a discount and 800,000 warrants to purchase an aggregate of 800,000 shares of our common stock in April 2007, which incurred $589,729 accretion of interest discount for warrants, $634,540 for accretion of interest discount for beneficial conversion feature, $438,332 accretion of redemption premium, $43,835 for amortization on bond discount to interest expense and $438,332 for interest payable.
Income tax was $2.4 million for the year ended December 31, 2007 at an effective tax rate of 16.8%, compared with $1.3 million for the year ended December 31, 2006 at an effective tax rate of 17.7%. The primary reason for the increase was due to the increase in income before taxes and the different amounts of income being recognized in the PRC, Hong Kong, Macau & Australia under different tax rates on corporate profits derived from subsidiaries in each location. Our four PRC subsidiaries are generally subject to a PRC income tax rate of 33%; however, in accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is currently 15%. In addition, our four Hong Kong subsidiaries are subject to a Hong Kong profits tax rate of 17.5%. Our Macau subsidiary is subject to a Macau profit tax rate of 12%. Our Australia subsidiary is subject to an Australian corporate income tax rate of 30%. We expect our effective tax rates to increase in future periods as a result of new tax laws passed in the PRC.
Net income for the year ended December 31, 2007 was $12.03 million, an increase of $5.88 million, or 96%, from $6.15 million for the comparable period in 2006.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Three Months Ended March 31, 2008 and 2007
Contract revenues earned for the three months ended March 31, 2008 were $25.3 million, an increase of $10.9 million, or 76%, from the contract revenues earned of $14.4 million for the comparable period in 2007. The primary reason for the increase in contract revenues earned was due to new large overseas projects outside of China for the three months ended March 31, 2008.
Cost of contract revenues earned for the three months ended March 31, 2008 was $16.9 million, an increase of $5.4 million, or 47%, from $11.5 million for the comparable period in 2007. Cost of contract revenues earned consists of the raw materials, labor and other operating costs related to manufacturing. The increase in costs of contract revenues earned was primarily due to the increase in contract revenue and increase in the cost of raw materials and other costs for the three months ended March 31, 2008.
Gross profit for the three months ended March 31, 2008 was $8.4 million, an increase of $5.5 million, or 190%, from $2.9 million for the comparable period of 2007. Our gross margin for the three months ended March 31, 2008 was 33.3% as compared with 20.1% for the three months ended March 31, 2007. The increase in gross margin was primarily a result of higher gross margins obtained from new overseas projects.
Selling, general and administrative expenses were approximately $3.0 million for the three months ended March 31, 2008, an increase of approximately $2.1 million, or 243%, from $0.9 million for the comparable period in 2007. The increase was due to the growth in staff, office rental and other start-up costs associated with the expansion of our overseas operations during the three months ended March 31, 2008.
Interest expenses were approximately $334,000 for the three months ended March 31, 2008, an increase of approximately $330,000, from approximately $4,000 for the comparable period in 2007. The increase was mainly due to cash interest expense and non-cash amortization expense associated with the $10 million bonds and warrants that we issued in April 2007.
Income tax was approximately $47,000 for the three months ended March 31, 2008 at an effective tax rate of 0.9%, compared with $327,000 taxes for the same period of 2007 at an effective tax rate of 16.2%. The primary reason for the decrease was due to zero corporate income tax rate associated with revenues from the Dubai project, our largest ongoing project during the first quarter of 2008.
Net income for the three months ended March 31, 2008 was $5.2 million, an increase of $3.5 million, or 205%, from $1.7 million for the comparable period in 2007.
Liquidity and Capital Resources
At March 31, 2008, we had cash and cash equivalents of $5.95 million. Prior to October 17, 2006, we have historically financed our business operations through short-term bank loans, cash provided by operations, and credit provided by suppliers. More recently, we have raised capital through debt and equity offerings.
On April 15, 2008, we completed a financing transaction pursuant to which we issued the 2008 Bonds in the principal amount of $20.0 million. The 2008 Bonds bear cash interest at the rate of 12% per annum. Interest is payable semi-annually in arrears on April 15 and October 15 of each year (each an â€śInterest Payment Dateâ€ť) commencing October 15, 2008. On any Interest Payment Date on or after April 15, 2010, the holders of the Bonds can require us to redeem the Bonds at 116.61% of the principal amount. We are required to redeem any outstanding Bonds at 116.61% of its principal amount on April 15, 2011. If we are required to repurchase all or a portion of the Bonds and do not have sufficient cash to make the repurchase, we may be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price. We also issued 300,000 warrants in connection with the 2008 Bonds on April 15, 2008 to purchase an aggregate of 300,000 shares of our common stock, subject to adjustments for stock splits or reorganizations as set forth in the warrant instrument.
In October 2006, we opened a line of credit facility with the Zhuhai branch of Bank of East Asia for up to a maximum of RMB20,000,000. The credit facility does not require renewal until October 2011. In order to facilitate the extension of the credit facility, we agreed to deposit the equivalent amount in HKD on fixed deposit terms into the Hong Kong branch of Bank of East Asia. This facility is subject to a current interest rate of 5.508% and interest rate adjusts every 6 months. The amount outstanding as of March 31, 2008 was $569,622.
Our subsidiary, Zhuhai King Glass Engineering Co., Limited, borrowed from Bank of East Asia with a condominium as collateral. This facility, which is due October 25, 2011, is subject to a current interest rate of 5.832% and interest rate adjusts every 6 months. The amount outstanding as of March 31, 2008 was $167,062.
Full Art International Limited incurred an automobile capital lease obligations due November 12, 2009 that had an outstanding amount of $320,152 as of March 31, 2008.
We also opened a line of credit and a trust receipts line with the Hong Kong Branch of Dah Sing Bank. The credit facilities are set to expire on November 28 and November 25, 2008, respectively, which had approximately $476,859 and $1,281,114, respectively, outstanding as of March 31, 2008.
On February 19, 2008, we and Techwell Engineering Limited were granted a bonding facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was $10,000,000, at a tenor of up to one year with 2% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. ABN AMRO required guarantees as follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King Glass Engineering Co. Limited and (ii) share charge over the shares of us for a minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May 2, 2008, the facility was increased to $12,000,000 with additional cash collateral of $2,000,000. This facility is now fully utilized.
We also lease certain administrative and production facilities from third parties. Accordingly, for the three months ended March 31, 2008 and 2007, we incurred rental expenses of $294,114 and $96,562, respectively.
Net cash used in operating activities for the three months ended March 31, 2008 was approximately $1.44 million, as compared to $0.23 million used in the same period in 2007. The change is primarily the result of growth in net income, add-back of non-cash warrant expense and non-cash amortization expense on the $10,000,000 April 2007 convertible bonds, an increase in receivables due to a relatively long collection period typical of the architecture industry in China, and an increase in payables for the three months ended March 31, 2008.
Net cash used by investing activities was approximately $0.4 million for the three months ended March 31, 2008 compared to approximately $0.3 million used for the three months ended March 31, 2007. The change was mainly a result of an increase of fixed assets purchased during the three months ended March 31, 2008.
Net cash provided by financing activities was $1.9 million for the three months ended March 31, 2008 compared to $0.9 million provided for the three months ended March 31, 2007. The increase was primarily due to short-term bank borrowing, long-term bank borrowing and shareholder loans.
At March 31, 2008, we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business. We intend to expend a significant amount of capital to purchase materials and serve as deposits for performance bonds for new projects that we have obtained. Additional capital for this objective may be required that is in excess of our liquidity, requiring us to raise additional capital through an equity offering or secured or unsecured debt financing. The availability of additional capital resources will depend on prevailing market conditions, interest rates, and our existing financial position and results of operations.
Xinyue Jasmine Geffner
As our operator indicated, my name is Xinyue Jasmine Geffner, and I am the CFO for China Architectural Engineering, Inc. Also with me today is Ken Luo, China Architectural Engineeringâ€™s Chairman and Chief Executive Officer in addition to several members of our senior management team both here in China as well as from the US. I will shortly be presenting China Architectural Engineeringâ€™s first quarter 2008 financial results and after that we will take your questions.
But first, I would like to provide you with a cautionary safe harbor note regarding forward-looking statement which is as follows. Forward-looking statements in addition to historical information, the statements made during todayâ€™s conference call and webcast may include forward-looking statements that may involve risks and uncertainties and actual results could differ materially from the expectations contained in the forward-looking statements as a result of several factors including regulatory approval requirements and competitive conditions. This and other factors that may cause differences in actual results are discussed in greater detail in the companyâ€™s reports and other filings with the Securities & Exchange Commission.
Now, here are China Architectural Engineeringâ€™s latest results. Revenues in the first quarter ended March 31, 2008 totaled $25.35 million up 76% from $14.43 million in the first quarter of 2007. We attribute this increase primarily to a sharp rise as part of our international expansion strategy. Net income for the first quarter of 2008 was $5.17 million or $0.09 per fully diluted share up 205% or 200% on a per share basis from $1.7 million or $0.03 per fully diluted share in the first quarter of 2007. As you can see from this top and bottom line numbers we not only continued to increase sales but also became significantly more profitable over the past quarter as compared to the same period in 2007. A big reason for this is the growth in projects outside of China which tend to have higher margins than our traditional Chinese contracts.
In the first quarter of 2008 our gross profit was $8.45 million or 33% of sales compared to $2.9 million or 20% of sales in the first quarter of 2007. On the [inaudible] our investments in to our international expansion strategy led to a sharp jump in sales, general and administrative expenses to $3 million in the latest quarter from just under $875,000 a year earlier. This anticipated increase in SG&A is a reflection of new staffing, offices and other costs related to establishing operations in international markets such as Dubai in the United States. But, even with this added expenses our operating profit more than doubled year-over-year from $5.45 million in the first quarter of 2008 up from $2.02 million in the first quarter of 2007. That is an increase o over 169%.
Interest expense was higher in the first quarter of 2008, $334,000 compared to just over $4,000 in the first quarter of 2007. But, it was partially offset by $111,000 in non-operating income versus year-over-year earlier and a substantially lower tax burden. Income taxes were just over $47,000 in the first quarter of 2008 an effective rate of nine tenths of 1% compared to $327,000 and an effective rate of 16.2% in the first quarter of 2007. Now, the difference in taxation was mainly due to a deal [inaudible] corporate income tax rate associated with our work in Dubai.
On the balance sheet we reported cash and cash equivalents of $5.95 million on March 31, 2008 an increase from $4.04 million on December 31, 2007. Long term debt in the form of bank loans, convertible bonds totaled $7.85 million up from $3.91 million at the end of 2007. I would like to make a few comments about these numbers.
It is clear, first of all, that China Architectural Engineering has just achieved another record quarterly in nearly all of our financial metrics including revenues, earnings and earnings per share. We are especially pleased that we have not sacrificed profitability to achieve our recent growth in revenue. Our growth expansion is not cost free of course, it increases SG&A expenses as we can see in todayâ€™s report and we required financing that will obviously add to our interest expenses in the coming quarters. But, the high growth margins we can achieve from projects outside of China more than make up for any added costs so far and we continue this trend to continue.
In addition, our global strategy should make revenue and earnings increasingly predictable and less prone to the ups and downs to any particularly national market. We expect China to remain a crucial market for us but we also recognize that a significant amount of our historical revenue has been derived from one customer, the government. And that future decisions on contract awards and amounts are subject to political as well as economic uncertainties. Our move in to multiple markets is already given us a broader growth platform of public and private customers. We also have a strong position in now in the Persian Gulf region, arguably the worldâ€™s largest construction market and also now in the worldâ€™s largest national economy, the United States.
As we reported recently, China Architectural Engineering has just been awarded its first US contract worth $11.6 million to supply the curtain wall system for a luxury condominium project in Manhattan designed by Jean Nouvel, winner of this yearâ€™s Pritzker Award. This is our second project with Mr. Nouvel and it specifies to the high regard in which our elegant and efficient design and engineering are held by the worldâ€™s top architects.
We have also just received a $15 million contract connected to the Silicone Valley commercial development in the Chinese City of Guangzhou. So, you can see that our China business is not slacking off by any means. Earlier in March of this year, we announced the award of contracts worth $50 million to build the external enclosures for stations of the Dubai Metro Systemâ€™s new Red Line. At about the same time we also announced the award of a $3.8 million contract connected with the renovation of the National Museum and Beijing, another project that attests to our reputation as well as adding to our revenue and profits growth.
As I mentioned earlier, we are making use of external as well as internally generated cash flows to fund our expansion plans. Going forward, our external debt [inaudible] in the form of high interest expense however, enables us to secure more of high margin projects that are spurring our revenue and profits growth. We continue to have a solid cash position and we believe our debt load is reasonable in relation to our revenue and operating profits.
In summary, I would like to reiterate that China Architectural Engineering has never been in a stronger position before in its history and that we look forward to keeping you, our shareholders, updated on our progress as we continue to successfully execute on our business plan.