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Stocks In Focus: China Customer Relations Centers, Inc. (NASDAQ: CCRC)

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China Customer Relations Centers, Inc. (NASDAQ: CCRC) (“CCRC” or the “Company”), a leading call center business process outsourcing (“BPO”) service supplier in China, recently declared its financial results for the half year and complete year finished December 31, 2016.

Second Half 2016 Financial Highlights:

Revenues increased by 13.60 percent to $38.30M driven by continued growth of business.

Gross margin increased by 4.10% points to 25.10 percent.

Net income increased by 25.60 percent to $3.70M.

Earnings per share increased by 10.30 percent to $0.200, as compared to $0.180 for the same period of previous year.

Full Year 2016 Financial Highlights:

Revenues increased by 22.50 percent to $72.70M driven by continued growth of business.

Gross margin expanded by 6.00% points to 27.00 percent while operating margin increased by 3.00% points to 11.80 percent, because of enhanced operating efficiency and the non-renewal of less profitable client agreements.

Net income increased by 73.40 percent to $8.30M. Earnings per share increased by 50.00 percent to $0.450.

Mr. Gary Wang, Chairman and CEO of CCRC, remarked, “2016 turned out to be another strong year for CCRC with revenues and net income increasing by 22.50 percent and 73.40 percent, respectively, highlighting continuing momentum in our business. While our relationships with key existing customers, such as the provincial helpers of China Mobile and China Telecom, remained steady and strong in 2016, our growing footprint and rising publicity post our successful IPO in late 2015 allowed us to keep attracting new customers and expand growth momentum in 2016 and into 2017. Looking ahead, we firmly believe that CCRC is poised to capture its fair share of the rapidly evolving Chinese call center BPO market.”

Revenues:

For the 6- months finished December 31, 2016, revenues increased by $4.60M, or 13.60 percent, to $38.30M from $33.70M for the same period last year. This increase was mainly driven by the development of our BPO business with increased sales to our existing BPO customers and sales to new BPO customers.

Cost of revenue:

Cost of revenues consists mainly of salaries, payroll taxes and worker benefits expenses of our client service associates and other operations personnel. Cost of revenues also includes direct communications costs, rent expenditure, information technology costs, and facilities support. Cost of revenues increased by $2.00M, or 7.70 percent, to $28.70M for the six months finished December 31, 2016 from $26.60M for the same period last year. As a% of revenues, cost of revenues was 74.90 percent for the six months finished December 31, 2016, contrast to 79.00 percent for the same period last year.

Gross profit and gross margin:

Gross profit increased by $2.50M, or 35.90 percent, to $9.60M for the six months finished December 31, 2016 from $7.10M for the same period last year. Gross margin increased by 4.10% points to 25.10 percent for the 6- months finished December 31, 2016 from 21.00 percent for the same period last year. The increase in gross margin was mainly because of improvement in overall operating efficiency and the termination of certain less profitable customer contracts.

Selling, general and administrative expense:

Selling, general and administrative expenses increased by $2.40M, or 63.60 percent, to $6.20M for the six months finished December 31, 2016 from $3.80M for the same period last year. The increase in selling, general and administrative expenses was a result of higher payroll and bonus expenses paid to the administrative personnel and the administration team, and increase in our research and growth activities. We anticipate that our administrative expenses, particularly those related to support personnel costs, professional fees, in addition to Sarbanes-Oxley compliance, will continue to boost in 2017 because of becoming a public company.

Operating income and operating margin:

Income from operations increased by $0.10M, or 3.70 percent, to $3.40M for the six months finished December 31, 2016 from $3.30M for the same period last year. The increase in operating income was mainly driven by a boost in revenues as a result of expansion of our BPO business and development in gross margin as a result of development in overall operating efficiency. Operating margin was 8.90 percent for the six months finished December 31, 2016, contrast to 9.70 percent for the same period last year.

Government grants:

We received government grants, which are discretionary and unpredictable in nature, of $0.40M throughout the six months finished December 31, 2016, contrast to $0.60M during the same period of last year. Government grants as a% of net income were 9.60 percent for the six months finished December 31, 2016, contrast to 21.20 percent for the same period of last year.

Income taxes:

Provision for income taxes was $0.40M for the six months finished December 31, 2016, contrast to $0.80M for the same period of last year. We were entitled to a preferential enterprise income tax (“EIT”) rate of 15.00 percent in 2015 and 2016. The standard enterprise income tax rate in China is 25.00 percent.

Net income:

Net income increased by $0.70M, or 25.60 percent, to $3.70M for the six months finished December 31, 2016 from $3.00M for the same period last year. Earnings per basic and diluted share was $0.2 for the six months finished December 31, 2016, contrast to $0.180 for the same period of last year.

Revenues:

For the year of 2016, revenues increased by $13.40M, or 22.50 percent, to $72.70M from $59.40M for 2015. This increase was mainly driven by the growth of our BPO business with increased sales to our existing BPO customers and sales to new BPO customers. Revenues generated from inbound calling, outbound calling and other services accounted for 78.00 percent, 14.00 percent, and 8.00 percent of total revenues in 2016.

The provincial auxiliaries of China Mobile and China Telecom remained the two leading clients and accounted for 34.00 percent and 14.00 percent, respectively, of total revenues in 2016. Top 5 clients accounted for 71.00 percent of revenues in 2016.

Cost of revenue:

Cost of revenues consists mainly of salaries, payroll taxes and worker benefits expenses of our client service associates and other operations personnel. Cost of revenues also includes direct communications costs, rent expense, information technology costs, and facilities support. Cost of revenues increased by $6.20M, or 13.20 percent, to $53.10M for the year of 2016 from $46.90M for 2015. As a% of revenues, cost of revenues was 73.00 percent for the year of 2016, contrast to 79.00 percent for 2015.

Gross profit and gross margin:

Gross profit increased by $7.20M, or 57.60 percent, to $19.60M for the year of 2016 from $12.50M for 2015. Gross margin increased by 6.00% points to 27.00 percent for the year of 2016 from 21.00 percent for 2015. The increase in gross margin was mainly because of improvement in overall operating efficiency and the termination of certain less profitable businesses.

Selling, general and administrative expense:

Selling, general and administrative operating cost increased by $3.80M, or 52.70 percent, to $11.10M for the year of 2016 from $7.30M for 2015. The increase in selling, general and administrative operating cost was a result of higher payroll and bonus costs paid to the administrative personnel and the administration squad and increase in our research and growth activities. We anticipate that our administrative expenses, particularly those related to support personnel costs, professional fees, in addition to Sarbanes-Oxley compliance, will carry on to boost in 2017 because of becoming a public company. We hope to incur extra expenses of between $0.50M and $1.00M per year that we did not experience as a private company.

Operating income and operating margin:

Income from operations increased by $3.40M, or 64.40 percent, to $8.60M for the year of 2016 from $5.20M for 2015. Operating margin was 11.80 percent for the year of 2016, contrast to 8.80 percent for 2015. The increase in operating income and operating margin was mainly driven by a boost in revenues as a result of growth of our BPO business and enhancement in gross margin as a result of development in overall operating efficiency.

Government grants:

We received government grants, which are discretionary and unpredictable in nature, of $0.80M throughout 2016, contrast to $1.00M during 2015. Government grants as a% of net income were 9.70 percent for the year of 2016, contrast to 21.50 percent for 2015.

Income taxes:

Provision for income taxes was $1.40M for the year of 2016, a boost of $0.20M, or 13.60 percent, from $1.30M for 2015. We were entitled to a preferential enterprise income tax (“EIT”) rate of 15.00 percent in 2015 and 2016. The standard enterprise income tax rate in China is 25.00 percent.

Net income:

Net income increased by $3.50M, or 73.40 percent, to $8.30M for the year of 2016 from $4.80M for 2015. The rise in net income was a result of our increased revenues and higher gross margin, offset by increased selling, general and administrative expenses and diminished government grants in 2016. Earnings per basic and diluted share was $0.450 for the year of 2016, contrast to $0.3 for 2015.

Financial Conditions;

As of December 31, 2016, the Company had cash of $15.90M, contrast to $13.60M at December 31, 2015. Total working capital was $22.70M as of December 31, 2016, contrast to $16.10M at the end of 2015.

Net cash offered by operating activities was $5.70M for the year of 2016, contrast to $6.00M for 2015. Net cash used in investing activities was $1.00M for the year of 2016, contrast to $2.00M for 2015. Net cash utilized in financing activities was $1.50M for the year of 2016, contrast to net cash offered by financing activities of $4.80M for 2015.

Recent Developments:

On December 15, 2016, The Company held its 2016 yearly discussion of investors at its headquarters in Taian City, Shandong Province.  The Company’s shareholders: 1) ratified the appointment of MaloneBailey, LLC as its independent registered public accounting firm for the fiscal year of 2016; and 2) elected Jie Xu and Tianjun Zhang as Class I Directors, Weixin Wang and Owens Meng as Class II Directors, and Gary Wang, David Wang and Guoan Xu as Class III Directors.

On November 12, 2016, the Company reached a Share Subscription contract to obtain a minority equity interest in Beijing Ling Ban Future Technology Co. Ltd. (“Ling Ban”) for a cash consideration of RMB 18.00M. In Addition To, the Company and Ling Ban agreed to establish a new joint venture, Beijing Ling Ban Intelligent Online Services Co., Ltd. (“Ling Ban Online”), with the Company contributing an extra RMB 12.00M in cash in exchange for a minority equity interest in Ling Ban Online. Ling Ban is an rising startup concentrating on automatic speech recognition-related technology growth and applications.

In July 2016, Hebei Taiying Communication BPO Co., Ltd. (“HTCC,”), its parent company Shandong Taiying Technology Co., Ltd. (“Taiying”), and Beijing Jiate Information Technology Co., Ltd. (“Jiate”) reached an investment contract, following which Jiate will contribute RMB4,900,000.00 (about $706,000.00) into HTCC in order to obtain a 49.00 percent equity interest in HTCC. Based on the contract, all the groups agreed to complete the registration process with local administrative department within one month after the agreement was signed and Jiate is entitled to HTCC’s earnings after injecting the first portion of investment in the amount of RMB2,450,000.00 (about $356,000.00) before February 1, 2017. The registration process was accomplished on July 11, 2016 and HTCC received the capital contribution of $356,000.00 on January 31, 2017.