CBAK Energy Technology, Inc. (CBAT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by and welcome to CBAK Energy Technology's Third Quarter 2021 Earnings Conference Call. As a reminder, we are recording today's call. [Operator Instructions] Now I'd like to turn the call over to Mr. Thierry Li, Investor Relations Director of CBAK Energy. Mr. Li, please proceed.

Thank you, operator, and hello everyone. Welcome to CBAK Energy's third quarter 2021 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer; and Mrs. Xiangyu Pei, the Interim Chief Financial Officer. We released results earlier today. The press release is available on the company's IR website at ir.cbak.com.cn as well as from Newswire services. A replay of this call will also be available in a few hours on our IR website. On the call with me today are Mr. Yunfei Li, Mrs. Xiangyu Pei; Mr. Wenwu Wang, Vice President of CBAK Energy; Mr. Xiujun Tian, our General Engineer; our interpreter [ Mrs. Yang ]. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company doesn't assume any obligation to update any forward-looking statements except as required under applicable laws. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars. With that, let me now turn the call over to our CEO, Mr. Yunfei Li. Mr. Li will speak in Chinese and I will translate his comments in English. Go ahead, Mr. Li.

[Foreign Language]

[Interpreted] Thank you, Thierry, and hello, everyone. Thank you for joining our earnings conference call today.

[Foreign Language]

[Interpreted] I'm very pleased with our rapid revenue growth from high-power lithium batteries which saw a 51% year-over-year growth to reach USD 9.6 million and is a testament to the excellent quality and performance of our battery products. I'm also happy to report that the new installations in Dalian and Nanjing plants are all on track and progressing according to schedule despite the global energy shortage and the new round of commodity price hikes. We believe our production expansion will yield positive business outcomes and amplify our ability to supply as we continue to build sales momentum in line with the global demand for clean energy-based products. In the third quarter, we also made a strategic decision to accelerate the new product line installation in Dalian, which was necessary as demand was exceeding our supply. This timely response increased the confidence our customers have in us and help us secure more orders. As is our priority to meet the vigorous and various demand for our existing battery products and our ongoing innovation, we further expanded our research and development, while broadening our product offerings. Overall, we believe our operations and growth strategies are well executed and ensures our position for capturing tremendous opportunities in the battery storage market.

[Foreign Language]

[Interpreted] I would now like to share with you some recent advancements we have made in innovating and expanding our product portfolio following our dedicated efforts in research and development.

[Foreign Language]

[Interpreted] In August, our special 26650 lithium-ion battery designed especially for ultra-low temperatures with safer performance certification from the world's leading testing inspection and certification company SGS. Our subsidiary Dalian CBAK Power Battery is the world's first company to receive certification for this unique battery. We believe this is a remarkable step forward that validates the operational efficiency of our special 26650 battery and our technological leadership in the industry. Our customers have been testing our samples and we have seen growing demand for this product that is suited for use in extremely low temperatures such as in China's northern region harsh weather conditions, as well as for the aviation and aerospace industries. We expect the special 26650 battery among our product portfolio to generate superior performance and results.

[Foreign Language]

[Interpreted] In the third quarter we replaced the expansion of module 26650 batteries with the newly added production line of module 26700 batteries to upgrade original product. As of the end of September, we completed a shakedown test for the model 26700 batteries which have garnered positive responses from 2-wheel electric vehicle producers supported by new equipment and improved production process. This new battery has a bigger unit capacity than model 26650 battery, but at a significantly lower cost. The new battery will be ready for commercial production by the end of the year.

[Foreign Language]

[Interpreted] Meanwhile, we also completed a shakedown test for the model 32140 battery that targets the LEV and EV market with our stellar price to performance ratios and ability to address diversified client needs. We expect our product offerings to resonate across a growing customer group making us become a major battery supplier for top LEV manufacturers.

[Foreign Language]

[Interpreted] Our developments in the latter 2 new batteries also reflect that our capacity expansion is being carried out as planned. We are extremely pleased with the progress we're making in building new production capacity. Our expansion is a strategy meticulously prepared for further growth that will extend far into the future. Once completed its output along with our existing capacity will better support us to cater to the increasing demand for our innovative and reliable battery products.

[Foreign Language]

[Interpreted] Next, I would like to bring update of our progress in acquiring a majority of equity interest in Zhejiang Meidu Hitrans Lithium Battery Technology Corporation, who is a leading developer and manufacturer of ternary precursors and cathode materials in China and is also one of CBAK Energy's key suppliers. We are currently in the process of this asset transfer who require court proceedings. This process is taking longer than expected, but we are still making efforts to complete all the proceedings and close the transaction. Upon the conviction of this transaction, we believe this strategic consolidation for a stable supply of raw materials will not only benefit us in the short term against the backdrop of rising commodity prices, but also bring long-term value for our business growth strategies and fuel our endeavors in building an innovative ecosystem base solution for power storage and electric vehicles.

[Foreign Language]

[Interpreted] To summarize, we see an ever increasing demand driving the battery industry with society's technological advancements by leveraging our innovative and expanding product portfolio capacity ramp up and strategic consolidation. We are well-positioned to grasp the growth of -- to grasp the growth potential of this vast market, which will be even greater once the global economy recovers. It's time for us to cement our technology strength and expand manufacturing capacity this year and the next. With these ongoing innovations and preparations, we remain confident for our future development, while maintaining our commitment to always generate value for our shareholders.

[Foreign Language]

[Interpreted] Now let me turn the call over to our Interim CFO, Xiangyu Pei, who will provide details on our financial performance. Go ahead, Mrs. Pei.

Thank you. Thank you, Mr. Yunfei Li and thank you everyone for joining our call today. I will now go over our key financial results for the third quarter of 2021. For the full details of our financial results please refer to our earnings press release. In the third quarter, our financial performance for battery sales remained strong reflecting robust demand for our industry-leading and dependable products. Net revenues were USD 9.6 million in the third quarter and excluding revenues from raw material trades, approximately USD 9.6 million was from high-power lithium battery business, a 51% year-over-year growth from high-power lithium battery revenues in the same period of 2020. We didn't incur new raw material transactions during this period. Before our move to buy a majority of active interest in Hitrans transactions, such as trading raw materials for batteries were only made when suitable opportunities arose, which did not occur in the third quarter of this year. However, once we completed the acquisition of the equity interest in Hitrans and the consolidated its financial accounts, we expect to see more opportunities than revenues from raw materials. Additionally, as Mr. Li had mentioned, the new production line installation in our Dalian plants had a temporary adverse impact on existing products in line while our production in the future will be supported by both our existing and newly established production capacity. Cost of revenues fell 9% to USD 8.4 million as we strove to control cost to control the increase in raw material prices. Our previous efforts to lock in the supply of such raw materials helped us to avoid a bigger blow from commodity price hikes. Meanwhile, along with other peers, we have released the battery process to offset the impact from growing material prices, which our customers have accepted as the increase in battery prices is within a reasonable range. Our gross profit was USD 1.1 million in the third quarter down 17% from a year earlier. Gross margin was 12%, a decrease of 1 percentage points from the previous year. The utilization of the price of raw materials resulted in the increase in costs. Total operating expenses rose 339% year-over-year to USD 4.3 million. Most of the increase in all operating expenses categories were due to growing head count and the research and development expenses associated with our Nanjing production facility, as well as the expiration of the Chinese government's COVID-19 relief policy that had reduced the social insurance contributions during the pandemic. Of that research and the development expenses were USD 1.8 million, up 307% year-over-year. Sales and marketing expenses increased 223% to USD 0.5 million. General and administrative expenses rose 191% to USD 2.2 million. As we managed and improved the customer relationship and the quality of our customers, we recover the USD 0.2 million of doubtful accounts compared to a recovery of USD 0.4 million a year earlier. Our change in fair value of warrants was USD 23 million in the third quarter compared to nil in the prior year. Thus, they were able to generate net income of USD 20 million during the period compared to net income of $41,715 in the same period of 2020. As of September 30, 2021, our cash and cash equivalent reached USD 2 million compared to USD 33.3 million as of June 30, 2021. With our solid financial position, we are fully capable of enhancing and expanding our product offerings with increased production capacity setting us on track for further growth and success into the future. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

[Operator Instructions] The first question comes from the line of Laura Liu from Stone Street Group.

So I have a couple of questions about the company strategy and also the structures. So my first question is about the revenue strategy on raw materials and like core customers and why was the sales suspended?

[Foreign Language]

[Interpreted] The revenue related to the raw material sales reported in the same period of last year came from our raw material futures trading. At that time, based on our industry experience, we thought that some raw materials were at a low price. So we did some transactions and we did generate profits. However, this part of revenue does not belong to reoccurring revenue. It just came from an action that we took in response to the fluctuation of the market price. In this quarter, this year as there was no futures trade in raw materials, so this part of revenue didn't exist. However, a few months ago, our company announced that we are in the process of acquiring Hitrans, a raw material manufacturer committed to R&D production and sales of ternary -- cathode materials and ternary precursors. Therefore, after the completion of the acquisition, our revenue from the raw material will have a substantial increase and became a reoccurring revenue of our company. In the future, this part of revenue will come from the production and sales of raw materials rather than the futures trade reported last year. That's it for the translation.

Any other questions?

The next question is about the EV companies like manufacturing plants. So some companies, they have manufacturing plants. What do you think of the market opportunity over there and like who are the major customers in the EV market?

[Foreign Language]

[Interpreted] So we believe that the EV market has been -- has really entered -- the market are entered sufficient stage, and we can see that EV has become more and more popular among the consumers. As a result, the EV market will assure in a robust growth era. That is why many battery companies have dedicated more inputs to stepping up production capacity. And we were all aware of this opportunity. As a matter of fact, we began to formulate our strategy as early as the second half of 2020. We pay more attention to the AOO and AO small passenger car market, which has a strong growth momentum in the past 2 years. Recently, the monthly sales amount of mini models have ranked the first in sales with a monthly sales amount of over 30,000. We also see producers of such models as our target customers. Lately, we organized some meetings for business cooperation with quite a few manufacturers of this kind, and they also expressed their interest in cooperation with us. Our goal is to ramp up our production capacity for mini models as a start, and then begin to scale up and expand to more high-end models. And for our large cylindrical batteries, we will target at this kind of high-end market. That's it for the translation.

So my last question is about the structure and also the risk. So is the company operating under the VIE structure? And how about the auditors slide, like is the auditor PCAOB certified? And if there is any delisting risks.

[Foreign Language]

[Interpreted] CBAK is not adopting VIE. Our listed entities in the United States directly control the entities in Hong Kong and Hong Kong company directly holds subsidiaries operating in China. It is essentially different from the structure of the traditional Internet companies who indirectly control the operation subject through operation agreements. The risks with us is much, much more smaller than for the investors. Our auditor CZB is registered in PCAOB and HKICPA. And it is a legal accounting firm. There is list of possibility that our company will be delisted due to noncompliance issues and what the investors should pay more attention to is the risk host by stock price fluctuations. That's it for the translation.

Our next question comes from the line of Ranbir Makh from MSBM Wealth.

I wanted to know, so a lot of people have taken control and supplying the EV market. But there's no news of what CBAK is doing itself. So there's a lot of talk, but there's nothing on your website or what your plans are going forward. From the last update it seemed as if there was going to be quite a few bits going forward, but nothing announced. Could you state why?

[Foreign Language]

[Interpreted] So as mentioned, we have started our strategy rollout as early as the second half of last year. And we started the installation of the production line in Nanjing and it is exact for the production of the large cylindrical batteries, which can be used for some vehicles such as Tesla. And then at that time what we planned to focus on is the LEV markets and AOO passenger vehicles. However, this year we found that the market has become more hot and then we also find that quite a lot of car manufacturers are in shortage of the supply of batteries. That is why we make timely adjustments and we are excited to shift our focus to EV. So EV will be the focus and the priority of our current stage and will also be the priority of our future development. I am responsible for the technician part. If I see this question from the perspective of technician or technology, I have to say that the development period for a product in car manufacturer used to be very long, as long as let's say 3 years. However, with the development of industrial technology this development period has been shortened. However, it still need to more than 1 year to do the R&D and product design. And the advantage with us is that we get involved in the design phase when the co-manufacturers has started to design their product and our involvement plays a very positive role in this period or in this whole process. And in China, we have already developed some substantial partners, such as the Jianghuai Automotive and Chery Automotive. When I talk about substantial cooperation, it means the selection of the products models and then the R&D of the products. I can tell you that the production under our partnership is already in the phase of trial of pilot production. And I cannot release the exact model here in front of you, but I can tell you that it is in the 46th series of our products. And if we have a look at the overseas market, some showing co-manufacturers also showed a interest in our products such as some German companies, they are also very interested in this product. So based on the achievement that we've made in the previous period, we can say we are really confident in our future performance. We believe that we can have a remarkable performance in the EV market in future.

So you've had interest, but is there any significance of signing of any of these deals with...

[Foreign Language]

[Interpreted] So we are at the stage of technical discussion. And then as for informal agreements, you need to refer to the announcement that we will probably -- are published on our website or some of official channels.

Seeing no more questions in the queue, let me turn the call back to Mr. Yunfei Li for closing remarks.

[Foreign Language]

[Interpreted] Thank you, operator, and thank you all for participating in today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Thank you all again. This concludes the call. You may now disconnect.