Antelope Enterprise Holdings Limited (AEHL) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the China Ceramics Third Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Rudnick you may now began your conference.

Thank you, Melissa. Good morning, ladies and gentlemen and good evening to those of you who are joining us from China. Welcome to China Ceramics third quarter 2014 earnings conference call. With us today are China Ceramics’ Chairman, Chief Executive Officer, Mr. Jia Dong Huang and its Chief Financial Officer, Mr. Edmund Hen. Before I turn the call over to Mr. Huang I remind our listeners that during this call, management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today. I refer to more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as the company’s future performance represent management’s estimates as of today November 13, 2014. China Ceramics assumes no obligation to update these projections in the future as market conditions change. And now it's my pleasure to turn the call over to China Ceramic's Chairman and CEO, Mr. Jia Don Haung, and China Ceramic's CFO, Mr. Edmund Hen. Precept Investor Relations, Sophie Wang will be translating for Mr. Wang. Mr. Wang, you may proceed.

Thank you, David. On behalf of company I would like to welcome everyone to our third quarter 2014 earnings conference call. We achieved solid revenue and profitability in the third quarter due to our strong marketing efforts and success in securing new business among China’s real estate developers. The quarter’s improved profitability with gross profit up 26% from year-ago quarter was driven by higher average selling price as we have substantially regained our pricing power from the business reduction [ph] that occurred in our sector approximately two years ago. However, the increase in our average selling price negatively impacted our sales volume causing a moderate decline in our top line results. During the third quarter we utilized production facilities capable of producing 49 million square meters of ceramic tiles per year out of a total annual production capacity of 72 million square meter. This was a 16% increase of our planned utilization in the third quarter. We hope to bring additional capacity online going forward as our business improves. Haung Dong? For the fourth quarter we look for our customers to continue to adjust our product price and also anticipate a seasonal slowdown in the period ahead consistent with the construction building cycle. We believe that our superior brand name recognition, customer centric focus and market positioning should enable us to sustain our average selling pricing through this and continue to build sales volume in the quarters ahead. Haung Dong? Although there may be occasional volatility associated with China’s real estate sector in the periods ahead, urbanization and demographic trends offer positive long-term fundamentals as we look to gain market share and further our geographic reach. Government policies promoting urbanization and real estate is vital to continued domestic and economic growth to help sustain the macroeconomic conditions under which we operate. We continue to be strategically positioned as producer of high end ceramic sales and we will continue to offer superior product mix to our customers, to try to sustain our competitive advantage. With that I would like to turn over the call to the company’s Chief Financial Officer, Mr. Edmund Hen who will discuss the company’s earnings results in more detail. Thank you.

Thank you, Mr. Huang. I will now move on to a more detailed discussion of our financial results for the third quarter end September 30, 2014. Our revenue for the third quarter ended September 30, 2014 was RMB320.1 million or US$52.2 million, an decrease of 6% from RMB340.7 million or US$55.3 million in the third quarter of 2013. The year-over-year decrease in revenue was primarily due to a 14.4% decrease in sales volume to 10.7 million square meters from the year ago quarter, which was offset by a 9.9% increase in average selling price or ASP. Our ASP as of the third quarter is RMB29.9 or US$4.87 as compared to RMB 27.2 or US$4.41 as of the third quarter 2013. Gross profit for the third quarter of 2014 was RMB41.8 million or US$6.8 million, an increase of 25.5% from RMB33.3 million or US$5.74 million in the third quarter 2013. The year-over-year increase in gross profit was driven by a 9.9% increase in the ASP as we raised our selling price on all of our products beginning on July 1, 2014. Profits before taxes for the third quarter of 2014 was RMB44.1 million or US$7.2 million as compared to RMB6 million or US$1 million in the third quarter of 2013. The year-over-year increase was primarily the result of the increase in ASP as well as the decrease in other expenses of RMB19 million relative to the third quarter of 2013 and there was a loss on the disposal of equipment of RMB18.9 million attributable to the replacement and upgrading of plant production equipment at the company’s Hengda facility. Net profit for the third quarter of 2014 was RMB35.7 million or US$ 5.8 million as compared to RMB4.4 million or US$0.7 million for the same period of 2013. Earnings per fully diluted share were RMB 1.75 or US$0.28 for the third quarter of 2014 as compared to RMB0.21 or US$0.03 in the third quarter of 2013. For the nine months ended December 30, 2014 revenue was RMB797.5 million or US$129.9 million, an increase of 11.9% as compared to the nine months ended September 30, 2013. Gross profit was RMB75.3 million or US$12.3 million, up 24.3% from the same period of 2013. Gross margin for the nine months ended September 30, 2014 was 9.4% compared to 8.5% for the same period of 2013. The realized and unrealized fair value loss on derivative financial instruments was RMB59.5 million or US$9.7 compared to a realized and unrealized fair value gain of RMB0.2 million for the same period of 2013. Our net loss for the nine months ended September 30, 2014 was RMB35.1 million or US$5.7 million, compared to a net profit of RMB8.6 million or US$1.4 million for the same period of 2013. The loss per fully diluted share for the nine months ended September 30, 2014 was RMB1.72 or US$0.28 as compared to earnings per fully diluted share of RMB0.42 or US$0.07 for the first nine months of 2013. Turning to our balance sheet, as of September 30, 2014 we had cash and bank balances of RMB63.4 million or US$10.3 million compared to RMB28.8 million or US$4.7 million as of September 31, 2013. The increase in cash and bank balances was the result of cash generated of RMB46.1 million or US$7.5 million. As of the end of the third quarter our debt was RMB84.3 million or US$13.7 million as compared to debt of RMB99.7 million or US$14.3 million as of the year end fiscal 2013. As of September 30, 2014 we had an inventory churn of 127 days compared to 124 days as of December 31, 2013. Trade receivables turnover was 186 days as of September 30, 2014 compared to 185 days as of September 31, 2013. The company typically offers a credit period of 90 days to our customers and have extended the credit period to 150 days to address the funding pressure among some distributors attributable to the challenging market conditions in China's real estate industry in the second quarter of 2012. Moving on to our business outlook, as our CEO Mr. Huang has said although we are likely to experience occasional volatility in the period ahead, we believe that the macroeconomic environment will continue to be relatively stable for the remainder of 2014, given that business typically is low due to the seasonality of the building cycle. In terms of the next quarter our backlog was RMB171.7 million or US$28 million which represents approximately the next two months of revenue as of the end of the third quarter. This compares to a backlog of approximately RMB155 million or US$25.3 million as of September 30, 2013, a year-over-year increase of 10.8%. Despite favorable year-to-year comparisons to-date we note that residential real estate prices have flattened out in recent months, reflecting a decrease in housing demand and units of housing properties being sold. This could lead to a contraction of the construction industry which could adversely impact our sales volume in the period ahead. To boost demand, the Chinese government has eased property market controls, accelerated infrastructure construction and relaxed reserve requirements for small banks in order to increase lending. Local governments have also eased access to capital, curbed restrictions on home purchases and introduced tax incentives. In the company’s view these measures tend to support China’s property development and construction markets. We believe that the real estate sector continues to be important in China’s economy and that the Chinese government will continue to promote policies to promote urbanization and boost domestic economic growth. The Chinese government has recently reiterated its position that the greatest potential for expanding domestic demand and sustaining economic growth [indiscernible] urbanization. Since urbanization leads to new property development and housing construction, government policies and current urbanization trends augur positive long-term fundamentals which could beneficially impact company’s business. The company is currently utilizing plant facility capable of producing 49 million square meters of ceramic tiles annually out of a total annual production capacity of 72 million square meters that is available to the company. We will bring this unused production capacity online as customer demand dictates and when there are further signs of an improvement in China’s real estate and construction sector. The company views the 9.9% increase in the average selling price of its ceramic tiles in the third quarter as positive and indicative of a return to the better operating climate relative to the retrenchment that occurred in this sector in late 2012. The company has now regained almost all of its pricing power as the average selling price of RMB29.9 or US$4.87 per square meters of the company’s ceramic tiles has helped the ceramic price of the current quarter is now 22.5% higher than the low of RMB24.4 experienced in the first quarter of 2013. Although the company has been able to steadily increase its average selling price over the last six quarters we believe that some of its customers are still adjusting to our price increases but enhanced marketing will help to produce wider customer acceptance of this new pricing point. This could result in better sales of its ceramic tiles in the periods ahead so as to better utilize the full extent of the company production capacity. Before we move to Q&A we would like to discuss an issue that we also addressed on our last earnings call as well as in the current quarter and the second quarter earnings press releases. This concerns the foreign currency agreement that the company entered into during the second quarter of 2013 and the first quarter of 2014 which were for the investment purposes. During 2013 and up to February 12, 2014 the RMB have been [indiscernible] when compared to the US dollar. At the end of 2013 we actually have a net cash gain of US$0.5 million. However the renminbi started to depreciate against the dollar on February 12, 2014 and the company eventually incurred realized and unrealized losses amounting to US$11.6 million in connection with this agreement through June 30, 2014. On July 30 -- 31, 2014 our largest shareholder and an affiliate of our CEO entered into three party agreement with the financial institution that originated the foreign currency transition agreement and with the company. Under this agreement, our largest shareholder assumed this agreement that all assets, mainly these deposit placed with the financial institution and all existing and future liability arising under this agreements and the company was relieved that from the liability arising under this foreign currency transition agreements. As a result the company will not be required to fund any losses related to this agreement and will neither suffer any future liabilities arising under these agreements nor enjoy any benefits arising those agreements. As a result, and affiliates of our CEO, released us from liability of RMB87.8 million which were extinguished on our books in the third quarter of 2014. RMB15.1 million in deposits held at financial institutions was transferred by the company to an affiliate of our CEO and additional trading capital was increased about approximately RMB72.7 million. Our CEO has now taken on the risk of this agreement so as to protect the company from any future losses. And we will not be required to fund any further losses related to this agreement. As of the current quarter the foreign currency transaction has been resolved. I would like to emphasize that the company has no intention of entering into similar foreign exchange agreement in the future. Now we have addressed this important issue. I would like to mention that we have Mr. Liu Jianwai our Audit Committee Chairman on the call for further clarification should he need pertaining to this topic. At this point we would like to open up the call to any questions pertaining to the third quarter financials and operating performance.

[Operator Instructions]. Your first question comes from Howard Flinker with Flinker & Company Howard Flinker - Flinker & Company: I have heard that a number of competitors are closing up, is that true?

Yes, they have stopped their production line number of them. Howard Flinker - Flinker & Company: And I understand it’s a rather large number, is that correct too?

Yes, a large number of our competitors have closed their production lines. Howard Flinker - Flinker & Company: Okay, now they have inventory they'll have to sell, but even comparing it to you, you have about four months of inventory. They are not as well financed. So let’s say they have three months of inventory and let’s make six to eight months of inventory or six to eight months to sell. So sometime by the middle of next year all their remaining inventory will be gone and so will they, is that probably a good guess?

You have a very good estimate, we also hope this is the truth. Howard Flinker - Flinker & Company: Okay, of course just an estimate. Second, is your depreciation and amortization for the year going to about $11 million?

Yes, this is approximate figure. Howard Flinker - Flinker & Company: Yeah, and your capital expenditures for next year will be how much?

We do not provide a forecast for the fiscal capital expenditure at this moment, but you will have some insight in the year end reporting. Howard Flinker - Flinker & Company: But in the last nine months your capital expenditures have been zero, correct?

Yes, correct. Howard Flinker - Flinker & Company: So they should be small next year because you have plenty of capacity, is that also correct?

Yeah, we have plenty of our capacity, of course in a logical way we would like to use our current capacity before tremendous expansion on the capital expenditure. Howard Flinker - Flinker & Company: So almost of your depreciation and amortization will go into cash or in inventory or current assets but not fixed plant, it will be in nearly free cash, is that correct?

This is very good estimation on that. Howard Flinker - Flinker & Company: Okay and your current run rate it looks like your stock is going to be selling around 1.5 or 2 times earnings and about one times cash flow, because next year you could easily earn between $7 million and $10 million after tax, is that a decent range?

Well it all depends on the economic climate. Sure, if the economic climate is still getting upward, so this maybe the truth but it is very difficult to say at this moment. Howard Flinker - Flinker & Company: Of course, you are also going to gaining business from the competitors who are in the middle of closing up, you are going to have a pretty good year next year.

Yeah, thank you. We hope we can do that. Howard Flinker - Flinker & Company: One last question, how is your boy?

Yeah, just born two months, very good health. Howard Flinker - Flinker & Company: Two months or two weeks?

Yeah, two weeks. Yes, thank you. Howard Flinker - Flinker & Company: Yes, is he all right. Is he on the conference call?

Yeah. Howard Flinker - Flinker & Company: Is he going to participate in the conference call in the fourth quarter or not?

He is sleeping so… Howard Flinker - Flinker & Company: You don’t think so.

Yeah, I don’t think so. Howard Flinker - Flinker & Company: Those are my only questions, thank you.

[Operator Instructions]. There are no further questions as this time. I am sorry we do have a question from Duane Robert with SH Fund [ph].

Hi, good morning.

Hi, good morning.

I missed a little bit of the very beginning of the call and then the other participant just asked a question prompt or something. Could you give me a little bit of indication of the housing, what the housing climate is, what the housing climate is like there, number one and then number two with the closing down of your competitors obviously that gives you an advantage but you got to wade through this inventory. My second question is it because of the housing climate that these competitors of yours had to close down?

Yeah, while we feel that the housing climate is still very [indiscernible] right now in China and a lot of policies are loosened from the bank and they encourage their people to buy their second house. It seems that everyone is doing that but the thing is the housing pricing is just keeping stable momentum at this moment and I think most of people are still under observation for the whole market. So I think we have little bit decline at this moment. And for your second question it is true that some of our competitor has closed down their production line and selling their inventory at this moment. And obvious thing is it also takes some time for us to observe the market, especially the construction rate for the buildings and I think we will have a better picture after the Chinese New Year. So at the moment it is very difficult to tell what is the climate in three or six months later.

Do you have any indications of any type of -- do you anticipate any government stimulus packages or some financing that would try to stimulate the housing market there?

Yeah Central Bank is pushing up their lending to their second home buyers so in some Tier 2 or Tier 3 cities, we do not see the government have any significant quality to pull out to the market for the housing. So I think we still need some time to observe on this matter.

Okay, so my last question is do you think that the first, maybe the first, according to the numbers of the previous person asked a question, do you think that the first six months of 2015 will probably be a little challenging and maybe the second half of 2015 probably should be a little bit better once you get through this inventory issues from your old competitors?

In the historical momentum from the companies, actually the first quarter is always the slowest season for us. So we do expect the second half will be better than the first half of 2015 in terms of the historical traction and also for the first half of next year we’re seeing the whole housing climate is still under observing from the buyers.

Okay, thank you very much.

Thank you.

[Operator Instructions]. There are no further questions. This does conclude today’s conference call. You may now disconnect.