Antelope Enterprise Holdings Limited (AEHL) Q3 2016 Earnings Report, Transcript and Summary

Good morning, my name is Harvey Kent and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2016 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. I'd now turn the conference over to David Rudnick, please go ahead.

Thank you, Harvey. Good morning, ladies and gentlemen and good evening to those of you who are joining us from China. Welcome to China Ceramics’ Third Quarter 2016 earnings conference call. With us today are China Ceramics' Chairman and Chief Executive Officer, Mr. Jia Dong Huang; and his Chief Financial Officer, Mr. Edmund Hen. Before I turn the call over to Mr. Huang, may 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. We refer you to a 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 December 19, 2016. China Ceramics assumes no obligation to update these projections in the future as market conditions change. To supplement the financial result presented in accordance with U.S. GAAP management will make reference to earnings before interest, taxes, depreciation and amortization which we will call by its abbreviated name EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income which the company believes provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found in the earnings press release issued earlier today. And now it's my pleasure to turn the call over to China Ceramic's Chairman and CEO, Mr. Jia Don Huang, and China Ceramic's CFO, Mr. Edmund Hen. Ms. Dai will be translating for Mr. Huang.

[Foreign Language] Thank you, David. On behalf of the company, I would like to welcome everyone to our third quarter 2016 earnings conference call. [Foreign Language] We experienced continued sluggish market conditions in the third quarter of 2016 due to the slowing real estate and construction sectors across China. We saw our sales volume decline by 25% for the first nine months of the year as compared to the year-ago period due to a continued contraction in consumer demand. However, we were still able to generate a reasonable level of positive cash flow in the current quarter. [Foreign Language] In order to move inventory, beginning on July 1, we institute a 10% reduction in the prices of slowly moving products which we hope will turn some of the inventory into cash. We are also looking for ways to operate more efficiently and are working with our distributors and suppliers to maintain sustainability in this challenging market environment. [Foreign Language] During the third quarter, we utilized the production facilities capable of producing 38 million square meters of ceramic tiles per year out of the Company’s usable annual production capacity of 62 million square meters. As we have in past quarters, we maintained a reduced utilization of existing plant capacity based on the current market conditions in order to keep our operating costs low and we will bring additional capacity online as the business environment improves. [Foreign Language] For the remainder of 2016 and into the first half of 2017, we anticipate continued challenging market conditions due to there being excess real estate for sale in many of China’s cities and overabundance of building materials inventories. In the long-term, we believe that the current retrenchment [ph] will moderate and reach an inflection point and we will return to a more moderate growth environment as real estate development and construction continues to be important components to China’s economy. We are well positioned to capitalize on opportunities in our sector relative to our competition and believe that we can be adaptive so as to optimize our success during these challenging times. 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 third quarter 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 of 2016. Our revenue for the third quarter end September 30, 2016 was RMB251.2 million or US$38.1 million, as compared to RMB339 million or US$53.3 million in the third quarter of 2015. The year-over-year decrease in revenue was primarily due to a 17.3% decrease in sales volume to 9.1 million square meters of ceramic tiles from 11 million square meters of ceramic tiles in the year ago quarter and 10.7% decrease in average selling price to RMB27.6 per square meters from RMB30.9 per square meter in the year ago quarter. Gross profit for the third quarter end September 30, 2016 was RMB6.7 million or US$1 million, as compared to RMB46.3 million or US$7.3 million in the year ago quarter. The gross profit margin was 2.7% for the third quarter compared to a gross profit margin of 13.7% in the year ago quarter. The reduction in gross margin was primarily driven by, one, the 10.7% decrease in the average selling price of the company’s ceramic tiles, attributable to our having instituted a 10% decrease in the price of slow moving inventory beginning on July 1, 2016 due to challenging market conditions, and to RMB16.8 million write down of inventory in the third quarter of 2016. Other income for the third quarter ended September 30, 2016 was RMB3.6 million or US$0.5 million, as compared to RMB0.2 million or US$0.3 million for the third quarter of 2015. The year-over-year increase in other income was primarily due to RMB3.5 million or US$0.5 million [Audio Gap] of rental income received by the company received by leasing out of one of the production lines from its Hengdali facility pursuant to an eight-year leased contract. Profits from operations loss -- operation before taxes for the third quarter of 2016 was RMB0.9 million or US$0.1 million, as compared to RMB36.6 million or US$5.8 million in the year ago quarter. The year-over-year decrease was the result of the decrease in gross profits in the current period offset somewhat by other Income, which consists primarily of RMB3.5 million in the rental income derived from the company leasing out one of the production lines from this Hengdali facility, offset somewhat by other income. Net profit for the third quarter end September 30, 2016 was RMB1.2 million or US$0.2 million as compared to RMB26.9 million or US$4.2 million of net profit for the third quarter end September 30, 2015. Earnings per share for the third quarter of 2016 on a basic and fully diluted basis were RMB0.44 or US$0.06 and RMB0.42 or US$ 0.06, respectively. As compared to basic and fully diluted earnings per share of RMB10.52 or US$1.68 in the third quarter of 2015, as adjusted for the 1-for-8 reverse split in June 2016. EBITDA for the third quarter of 2016 was RMB12.1 million or US$1.8 million as compared to RMB54.8 million or US$8.6 million for the third quarter ended September 30th, 2015. For the first nine months of 2016, revenue was RMB591.8 million or US$90 million, as compared to RMB808.8 million or US$127.3 million for the nine months ended September 30, 2015. Gross profit for the first nine months of 2016 was RMB57 million or US$8.7 million, as compared to RMB95.9 million or US$15.1 million in the nine months ended September 30, 2015. The gross margin was 9.6% as compared to 11.9% in the same period of 2015. Net profit for the nine months ended September 30, 2016 was RMB30.7 million or US$4.7 million, as compared to RMB48.9 million or US$7.7 million for the same period of 2015. Earnings per basic and fully diluted share were RMB11.18 or US$1.7 and RMB10.58 or US$1.61, respectively, for the nine months ended September 30, 2016, as compared to earnings per basic and fully diluted share of RMB19.14 or US$3.04 in the same period of 2015. As adjusted for the 1-for-8 reverse stock split in June 2016. Turning to our balance sheet, as of September 30, 2016 we have cash and bank balances of RMB25.6 million or US$3.8 million as compared to RMB0.5 million or US$0.08 million as of fiscal year-end 2015. Our short-term bank borrowings was nil as of September 30, 2016, as compared to RMB40.1 million or US$6.2 million as of December 31, 2015. As of September 30, 2016, inventory turn was 144 days as compared to 131 days as of December 31, 2015. The increase in inventory turnover days was primarily due to the 25% decrease in sales volume in the first nine months of 2016 to 19.8 million square meters of ceramic tiles, as compared to 26.4 million square meters of ceramic tiles in the first nine months of 2015. The Company believes that the currently challenging economic environment has caused a lower inventory turnover than normal and the Company will make a continuous effort to deplete the slow-moving stocks. Trade receivables turnover was 239 days as of September 30, 2016, compared with 163 days of December 31, 2015. The increase in trade receivables turnover days was primarily due to the difficult economic environment which has prompted us to offer extended credit terms to certain customers resulting in a higher trade receivables turnover figure than normal. The Company believes that it has sound relationships with its customers and that it will not experience difficulties associated with collections from these accounts, has a plant capacity and capital expenditures update. In March 2016 the Company entered into an eight-year contract to lease out one of the production lines from its Hengdali facility. The production line has the capacity to produce approximately 10 million square meters of ceramic tiles annually. The terms of the contract is from March 1, 2016 to February 29, 2024, and the contract stipulates for the receipt of rental income of RMB 15.0 million per year, including 6% value added tax. The Company believes that it is prudent to generate income from its unused production capacity from a third party rather than let it remain idle. Therefore, for the term of the eight-year lease, the Company may only produce up to 20 million square meters of ceramic tiles from its Hengdali facility, and its maximum annual production capacity has been effectively reduced from 72 million square meters of ceramic tiles to 62 million square meters of ceramic tiles attributable to the lease. For the third quarter of 2016, we utilized plant capacity capable of producing 38 million square meters of ceramic tiles annually out of a total annual production capacity of 72 million square meters. Our Hengda facility has an annual production capacity of 42 million square meters of ceramic tiles and we utilized annual capacity capable of producing 19 million square meters of ceramic tiles. Our Hengdali facility has an annual production capacity of 30 million square meters of which we are leasing 10 million square meters of production capacity to a third party and we utilized annual capacity capable of producing 19 million square meters of ceramic tiles. In terms of our CapEx, we review the level of capital expenditures throughout the year and make adjustments subject to market conditions. Although business conditions are subject to change, we anticipate a modest level of capital expenditure for the remainder of 2016 other than those associated with minimal upgrades, small repairs and the maintenance of the equipment. Looking ahead to 2017, we also anticipate a low level capital expenditure given our generally upgraded plant and equipment and currency challenging market conditions. Moving on to our business outlook. In the third quarter of 2016, we experienced a contraction in our sales volume compared to the third quarter of 2015, due to the effects of a continued slowdown in China’s construction real estate sectors. In the third quarter of 2016, the company’s sales volume was 9.1 million square meters of ceramic tiles, a decrease of 17.3% as compared to sales volume of 11 million square meters of ceramic tiles in the year ago quarter. For the first nine months of 2016, sales volume was 19.8 million square meters of ceramic tiles, a decrease of 25% as compared to sales volume of 26.4 million square meters for the first nine months of 2015. The current quarter’s period over year-ago period decline in sales volume was the fourth in a row, and it was the sixth quarter out of the last seven quarters of period over year-ago period declines. In addition, the challenging market environment has induces us to institute a 10% reduction in the price of slow moving inventory on July 1, 2016. This was primarily the cause of a 10.7% decrease in the average selling price for all our products in the current quarter to RMB27.6 per square meter of ceramic tile as compared to RMB30.9 per square meter of ceramic tile in the year-ago quarter. This was the first decline in our average selling price following 11 quarters of period over year-ago period increases. It was also the biggest such decline in three years which was also due to an inventory retrenchment [ph] at that time. We attribute the current quarter’s decrease in both sales volume and the resulting selling price to continued difficult macroeconomic and real estate conditions in China. We expect the currency challenging market conditions to continue for the remainder of this year and into next year as the pace of property construction has slowed substantially, especially for moderately priced residential units which are the core of our business. A further decline in new building projects is likely to occur as the Chinese government is intent upon restricting property-related investments to cool high property prices which has risen dramatically in China’s largest cities as well as reign in the borrowing [ph] that has occurred among property developers and the overweighting of mortgages in the banking sector. However, additional land could be made available for development to rebalance supply and demand and to turn down an increase in property prices in China’s major cities. Although a period of retrenchment has emerged in our sector, we believe that the building materials sector is sustainable in the long-term since the economic fundamentals for property development and construction are underpinned by the Chinese government’s policy of urbanization. Overall, we expect lower growth in residential building as compared to what has occurred historically, especially in smaller cities which still have a large inventory of unsold properties. We typically receive the order from customers two months in advance of production on a rolling basis. We enter into a dealership agreements with customers, and a sales or purchase contract each time a customer places an order. As of September 30, 2016, our backlog was approximately RMB96.0 million or US$14.4 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 RMB159 million or US$25 million as of September 30, 2015, a year-over-year decrease of 39.6%. Under normal circumstances, our backlog is an indicator of revenues that might be expected in the next quarter, though it is subject to change as a result of unforeseen business conditions and events including credit payment terms. In our view, we are reasonably well positioned to weather the current headwinds caused by a downturn in China's construction industry due to our prominent name recognition, expertise, product customization, and ability to operate in a lean and efficient manner with best-in-class manufacturing facilities. We foresee a possible boost in the Chinese government's infrastructure spending on affordable and senior housing which could generate opportunities for our company. We will continue to be opportunistic and adaptive to the market environment and will seek to pursue new business opportunities in an attempt to countervail currently challenging market conditions. At this point, we will like to open up the call to any questions pertaining to the third quarter 2016 financial and operating performance. Operator?

[Operator Instructions]. Your first question comes from Howard Flinker with Flinker & Co.

Hello Mr. Huang, I am happy to have met you a few days week ago. Edmund I have a, I think I have a typo in the quarterly report. I am turning the page here. On the income statement, you have -- it’s probably a tax credit and it look like a tax deduction. They forget to put the brackets around the credit. Where I can’t find it, but I will see here. On page 6. When you have the English revenue -- I mean the American, the English revenue and the Chinese renminbi in the column that says U.S. dollars we have a 129 million pretax and then 45 million added to that to get to 174. I think you meant the reversal rather than expense. It looks like an expense. Do you see what I am saying?

Which line -- you mean the backlog?

The 45 -- was the 45,000 -- yeah 45,000 USD. There is 129 which is pretax profit and then there is 45 and then 174. And the 45 is an addition to the 129, but it looks like a normal subtraction so you might want to check the typing on that.

Yeah, I would check on that.

Okay. Somebody asked me to ask you, I think it’s academic. If somebody came along with a bid for the whole company at a few times the current stock price, I don’t know three or four times. Would you listen? Even though we know cash is much higher than that? It’s not my question, I know the answer, but I’d promised I’d ask the question.

What do you mean, given the stock prices now is three or four times higher than current price?

Yeah.

Yeah, so what is your question?

The question is, if somebody came along for a bid for the whole company at that price?

Yeah.

Would you and Jia Dong Huang listen?

Will I and Jia Dong Huang will, sell the company?

Yes.

This is -- there is no straight answer for this question. So probably we need to discuss with the board member on this matter.

Yeah, that’s only a theoretical question, I don’t think he was -- he had the money available to do it. But he realized that the balance sheet is worth much more than the stock price and he thought, how much do I think its worth? So I said I think I know, because I met them a few weeks ago in Hengdali, but I had promised, I would ask the question. [Foreign Language] I hope to meet you again. Thanks.

[Operator Instructions] Your next question comes from James Kahn, Private Investor.

Good morning. I have a few short questions. One is, there is a cost to be publicly traded on the New York Stock Exchange or NASDAQ. And it’s fairly considerable cost for a tiny companies. I’m wondering, given that as we just discussed that the liquidation value of your company is multiples in excess of the share price.

Yeah.

So the markets are not being -- the U.S. markets are not being kind to your company, what is your justification, why these stay traded on the U.S. markets? You could take the company private or liquidate. So what’s your reasoning for being willing to pay that annual cost?

Yeah, this is a good question. The board member and also Mr. Huang was do think that is better to keep the listing status, on the first hand and also to do business in China by naming at listed company that we will have such certain advantage to do business in China. And we also think, we are also working hard to tell all the investor that we will one day have a chance to have a very good return to them on this stock price. Now, so at this movement, we are still happy to keep this listing status in U.S.

I understand. Okay. Thank you. So one follow-up question. An admirable attribute of Chinese culture in general is to think very long term and Americans are famous for sometimes being very short term oriented. So given that you have said that in the near future there will be continued pressure on your business, but you’ve also just said that you think in the more distinct future things will do very well and given what Americans do every year at this time is they dump their loosing stocks, so that they can get a deduction and offset to their gains and not have to pay tax. So we have now two [ph] things before December 31 and given the report you just gave, the irrational price of your stock might come even more irrational. If CCCL sells off sharply as a result of your earnings report, is there a price at which you the company, or you as individuals might start to buy it to take advantage of this people, who are dumping it without regard to price or value just to get the tax loss?

I think your question does not apply to the Chinese people or the company.

No. It’s not like -- but you could advantage of the America. I mean, suppose they drive the stock down $1 a share, $0.50 a share, as a result of this.

Yes.

Would you buy?

Also this is now very strict. I cannot answer you directly on this matter. We also need to think the higher questions. But we will think about your question on this matter.

Okay. Thank you very much.

Thank you.

[Operator Instructions]. At this time, there are no further questions. At this time, there are no further questions. You may continue with your presentation or closing remarks.

Thank you.

Thank you, everyone. On behalf of the entire China Ceramics’ management team, we want to thank all of you for your interest and participation on this call. This concludes China Ceramics’ third quarter 2016 earnings conference call. Thank you all very much.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.