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 Second Quarter and First Half 2022 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and discussion we’ll follow at the time. As a reminder, we will recording today's call if you have any objections, you may disconnect at this time. Now I will turn the call over to Thierry Li, Investor Relations Director of CBAK Energy. Mr. Li, please proceed.

Thank you, operator, and hello, everyone. Welcome to CBAK Energy's Second Quarter and First Half 2022 Earnings Conference Call. Joining us today are Mr. Yunfei, our Chief Executive Officer; Mrs. Xiangyu Pei, our Interim Chief Financial Officer; Mr. Wenwu Wang, our Vice President; Mr. Xiujun Tian, our Engineer; and Mrs. Cui, our interpreter. We released results earlier today. The press release is available on the company's IR website, 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. 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 obligations 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 into English. Go ahead, Mr. Li.

[Interpreted] Thank you, and hello, everyone. Thank you for joining our earnings conference call today. Following our great success in the increase of revenues in the first quarter, which had already surpassed in the entire 2021, we have again achieved another remarkable success in this quarter. Our revenues reached $56.4 million in the second quarter and $136.5 million in the first half, which have respectively increased by 8.57x and 7.92x from the same period last year. Specifically, revenues from battery business were about $25.7 million, up by over 3x if compared to the same period in the last year. Such an increase was astonishing. The significant increase in revenues was attributed to the precise understanding of our management team on the new energy industry. In the context that China views carbon utilization as one of its basic development guidelines, and that government put great resources into the new energy industry, it is our decision to expand our current product and capacity for new energy batteries. Understanding the business of new energy vehicles is getting quarter, which leads to the shortage of battery material supply. It is again our decision to acquire Hitran as our battery material unit to support our development. Most of these decisions without understanding on and solid experiences in the industry cannot be precisely made. Besides our record high revenues, I am also happy to extend to all shareholders and investors here, our efforts for development from 3 perspectives from capacity expenditure, from sales performance, and from research and development progress perspectives. First, please allow me to have an introduction on the entire blueprint of our capacity expansion plan. I will introduce the capacity of our battery business. We currently have 2 major production centers, one of which is located in Dalian and the other is in Nanjing. Our Dalian center was put into operation roughly a decade ago and currently has an annual capacity of 1-gigawatt hour. We plan 2 phases in our Nanjing manufacturing center. Phase 1 was put into production in late 2021 with a curing capacity increased from 0.7-gigawatt hour at the very beginning to 1-gigawatt hour at this moment. We anticipate to increase the capacity of Phase 1 to its fully designed capacity, 2-gigawatt hours at the end of this year or early next year. Besides, our total capacity is far from enough given that the market demand continuously grow. Our Phase II project in Nanjing serves much bigger capacity of 18-gigawatt hour. We believe that Phase 2 project will gradually stop operating from late next year, we will deliver 6-gigawatt hour per year until the capacity reached 18-gigawatt hours. Going forward, our 19 plants will mainly produce large synetic batteries that are mostly power batteries for EV and LEDs. Our Dalian facility will continue focusing on its mature 26650 or 26700 batteries that are mainly for energy storage. In this quarter and first half of 2022, we continued our strong momentum in the sales of our battery and battery material products. The demand of our products is far over our current supply. As of August 6th, we have received orders worth of about $55.35 million that have not yet been delivered and will have a great number of orders coming in line. We believe that these orders will strongly enhance our sales performance in the second half of the year. I will also introduce the latest developments on the deals that we have announced before. We have already delivered samples of battery packs worth of about $208,000 to AZAPA and [ Daihub ] and now are producing more samples. We anticipate to receive an order of 5,000 to 10,000 units of data packs from [ Daihub ] next year. In July, we announced a framework operation with Jemmell, which is an LEV manufacturing unit of JP Group, one of China's biggest LEV manufacturers. We have already provided several samples for testing. Once we pass the test, we anticipate to start receiving a great number of orders from Jemmell and JP Group. At this moment, we are also approaching more LEV and EV manufacturers in anticipation to bring much more valuable orders for our shareholders and investors. Going forward, we will continue developing our mature energy storage business on the basis of which without to further expand our revenues from the EV and LED sectors. We view our research and development capability as a key to rapid development, developing new type of batteries that caters for variable market demands will make us easier in our marketing campaigns. In last quarter, we had reported that we were in the process of developing new model 4140 batteries. In this quarter, we are pleased to report that the testing on the prototype of model 4140 bakeries was successful. We are currently preparing for the establishment of its production lines. Larger synergical bakeries such as model 4140 are much more suitable for EV and LEV applications. This battery will surely be used for LEV market development. More excitingly, we recently announced a joint development agreement with one of the top players that is leading in the research and development of sodium-ion batteries. At this stage, we are moving smoothly in the development of sodium-ion batteries. The prototype was out and have passed the test. We expect to see mass production soon in the second half of the year. In these days, there are a number of top Chinese battery manufacturers that are investing in sodium-ion batteries, which will contribute to a huge potential market was of tens of billions of R&Bs. If we are able to take a lead in this area, it will be vitally and strategically important to our future growth. In the second quarter, we have achieved comprehensive progresses in revenues, research, and development, sales and capacity expansion. We are actively investing in the battery material business and the potential sodium-ion battery business in an attempt to obtain greater competitiveness. Despite the inflation of the price of raw materials and resulted in a rising manufacturing cost and led to a slow progress in our profit growth. We believe that the inflation will eventually be effectively controlled as a result of capacity expansion from battery material producers and the introduction of new type of batteries such as sodium-ion batteries. We will definitely see our profits normally grow at that time. Plus, our 19 plant was put into use just at the end of 2021. We are still ramping up its capacity and will not be surprised to see it generate greater profits once it takes reasonable time to reach its full capacity. Strategically, our decision [ acquiring ], which is our battery material business has been proved to be a successful investment. We are still monitoring any valuable targets alongside its supply chain and talking to experienced teams in an attempt to search for valuable and profitable investment opportunities. In the future, we not only wish to grow faster in our principal business, which is battery producing but also anticipate to act as an industrial investor is focused on the new energy sector. With our solid experiences in the industry, we are confident to activate any acquired assets and to make our book look better. Our management team has full confidence about this company's future invests. Now let me turn the call over to our CFO, Xiangyu Pei, who will provide details on our financial performance.

Thank you, Mr. Li. Thank you, everyone, for joining our call today. I will now go over our key financial results for the second quarter and the first half of 2022. For the details of our financial results, please refer to our earnings press release. The strong sales in our battery and battery material products are fully elected in the astonishing increase of revenues. Here the raw material price, HEC is still a short-term setback to the battery business, which limits the growth of the profit, we take actions in order to mitigate this impact. As always, we continue with our investments into our new facility to enhance our [ battery capacity ] for growing orders. We only increased the [ meaning ] our investments in research and development and sales marketing effort. Moving on to our results. In the second quarter, our net revenues surged by 857% to $56.5 million from the same period of 2021, primarily due to growing sales in our battery products and backroom materials. Specifically, net revenues from our battery business grew by about 330% from the same period of 2021. In the first half of 2022, net revenue still demonstrate a great growth momentum, which increased by 792% to $136.5 million from the first half of 2021. Revenues in the battery sector grew in the first half of 2022 by approximately 176% from [ half ] of 2021. Cost of revenues was $50.8 million in the second quarter and $125.7 in the first half, up 561%, and by 916% respectively from the same period in the prior year. Gross profit was $5.5 million in the second quarter and $10.9 million in the first half representing an increase of 404% and 207%, respectively from the prior year. Gross margin was 9.5% in the second quarter and 8% in the first half compared with 18.6% and 19% respectively in the same period of 2021 as raw material cost grow. As noted earlier, we signed the long-term contract with this [ suspended ] into raw material business and began renegotiations with our clients to tackle the [ first half ], and we expect the price of raw materials to decrease while new capacity is being added by the industry. Our operating expenses rose by 41% to $5.4 million in the second quarter and by 110% to $12 million in the first half, primarily due to growth in headcount. The first half, primarily due to growth in headcount in our new 19 facility and the acquisition of our battery materials business. Within that, our research and development expenses increased by 120% to $2.3 million in the second quarter and by 267% to $5.6 million in the first half. Sale some marketing expenses increased by [ 9% ] to 0.7 million in the second quarter and by 103% to $1.7 million in the first half. And general and the [ manuscrion ] expenses increased by 5% to $2.5 million in the second quarter and by 8% to $47 million. Even with this increase, our operating expenses were held only 9.6% relative to our revenues in the second quarter and 8.8% in the first half compared with 64.9% and 37.2% in the same period of 2021. Our change is that our value of volume was $2.1 million in the second quarter, down the $3.8 million in the first half compared to $5.8 million and $34.2 million in the prior year. Thus, net income attributed to shareholders of [ Vedang ] was $0.8 million during the second quarter and $1.3 million in the first half compared to $2.7 million and $32.3 million in the same period of 2021. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions].

This is [indiscernible]. I just want to check whether you can hear me.

Yes, we can hear you.

Sorry for the interruption.

[Operator Instructions]. There are no questions at the moment.

Operator, we have an investor saying that he pressed to 11 and cannot be put on the line.

We have a question now. The question is from Laura Liu.

[Interpreted] Okay. So the first question is concerning sodium-ion batteries. The company announced the plan to develop sodium-ion batteries. And as Li just mentioned, it is expected to be ready for net production soon. Will sodium-ion batteries become the company's main business in the future? And what is its strategic significance to the company? And what are the advantages of sodium-ion battery over lithium-ion battery?

[Interpreted] Okay. Yes. So we believe that sodium-ion battery is a very good supplement for lithium-ion battery. But we have to say that at present, lithium-ion battery enjoys quite a lot of advantages. For example, it has higher energy density and performance is stable and there is a complete supply chain surrounding lithium-ion battery. So it is still our NAND business currently. However, we also noticed that since 2020, the price of lithium has been increasing and the market demand for lithium battery has been grown dramatically, and all these factors will lead to a structural shortage of lithium-ion battery. And as we know, for sodium-ion battery, it enjoys a large amount of storage and reserves and the price is relatively low. And so we -- for our company, we have already fenced the prototype investment and prototype production is also stable, and the performance is satisfactory. We have overcome various difficulties in terms of the production technology and the performance turned out to be satisfactory. So we believe that sodium-ion battery will become a very good supplement for our product portfolio, and it will also become a very good dragging force for us to cover the niche markets and improve the competitiveness of our company. So we believe sodium-ion battery is of great strategic significance to the company. That’s it for the answer. Thank you for the question.

[Interpreted] Okay. So the second question is concerning the revenue of the company. We can see that the company's revenue has witnessed great increase again. But still, we cannot see breakthrough in the profit growth. What is the main reason behind it? And will the company take any measures to boost profit growth?

[Interpreted] Yes, we can see that in the second season, our profits cannot achieve proportional increase with the revenue, and there are reasons behind it. And the main reason is the price hike of raw materials and the increase of the raw material price leads to and growth of our manufacturing cost, and this will also have an implication in our profit growth. But we have to see that our production capacity expansion in Nanjing and Dalian has gone smoothly. And we believe that with the capacity reached a full production in the second half of the year and as the decrease of the raw material. We believe that our profits will return to a normal level soon.

[Interpreted] Okay. We can see that the plant capacity for the second phase development of Nanjing manufacturing center is huge with nearly 18x the capacity of the existing plant in Dalian, how does the company plan to allocate this capacity, and what other types of batteries such as sodium-ion batteries will be developed in this plant in the future?

[Interpreted] So yes, I'm going to answer this question. For the second phase, development plan, as you can see, the plant production, the plant capacity is very big. However, we are going to tap this potential year by year gradually. And in August this year, we're going to kick off the establishment of the production line, and end of space will only finish 1/3 of our total exact capacity. And therefore, the rest of them, we are going to finish them in the coming 3 to 5 years. So we will gradually finish our construction and then we work put into operation step-by-step. And for the expansion of new energy market, we can see it enjoys very good momentum. And our capacity expansion is well matched with our own capacity and also the market demand. At present, we can see that the supply in this area is a fourth short of demand, and we can also see a tendency for the major economies. Most of them have already set the goal to stop the production of fueled car by the year 2030. So we believe that in the future, new energy vehicles will occupy a huge proportion of the market. And secondly, not only our company expands our production -- is going to expand our production dramatically. Actually, for other leading companies, they also have the plan to roll out and ramp up their production. For some of them, they even have the plan to build factory with over 100 or even thousands of gigawatt hours. So this is a huge market. This will be a huge market. And Thirdly, look at the market of energy store reach, it is also a huge market as well. And for the global market, it has been developed. It has been witnessing great development, especially the grid size energy storage. The market need is almost as big as the need of new energy vehicle. So if you ask me how are we going to relocate our capacity, I can say that for 50% of our capacity, it will be allocated through new energy vehicle and then 30% for energy storage, and another 20% for new power products or other related products. And what I can be sure is that sodium-ion battery will take up some proportion in our production. That's it for the answer. Thank you for the question.

[Interpreted] Yes, we are delighted to see that the company has reached an agreement for cooperation with Jemmell and JP Group. Can you give us some brief introduction about these companies? And could you make an estimate of the possible order volume to be brought by this cooperation? And is the company still talking to other large group customers about other cooperations?

[Interpreted] Okay. I'm going to give you a brief introduction about Jemmell. For our cooperation with Jemmell, we have already passed the testing of the battery pack. And then it is expected that we're going to receive small lot order in September. And after the delivery of these orders, we expect the volume of the orders to further expand. And then what about JP Group? Well, JP Group is a very -- is a powerful company in China. And Jemmell is a subsidiary under it responsible for assembly and packing. And then for JP Group, its main product is electric 3-wheelers and traditional 3-wheelers, and it is the largest manufacturer in electric revelance and traditional 3-wheelers in the world. Every year, the shipment of this company is $1.50 million and the sales also ranked #1 in the world. For Jemmell, it has the production quality for complete vehicles, and it has its own plant to make the production and it also produced -- it also have the channels of production and sales for 4-wheelers. So in the future, the possible cooperation between us and JP Group is high-speed [ AOO-rade EV ] and low-speed for wheelers. And it is estimated to with 5,000 vehicles per month under our corporation and the value of the OSA will reach JPY 100 million. And when you ask me whether we are talking to other large groups, well, the answer is positive. Yes, for sure, we are approaching more customers, our clients at the present. But due to the current state, it is not convenient for us to tell you exactly who they are. But what I can tell you is that some of the clients that we approach is even bigger than JP Group. And we will tell you more information when it is appropriate.

Thank you for your question. [Operator Instructions] There are no further questions at the moment. I will hand the conference back to Mr. Yunfei Li for closing remarks.

[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. You may disconnect from the call.

This concludes the conference for today. Thank you for participating.