CBAK Energy Technology, Inc. (CBAT) Q1 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, thank you for standing by, and welcome to CBAK Energy Technology First Quarter 2022 Earnings conference call. Currently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at the time. As a reminder, we are recording today call. [Operator Instructions] 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 first quarter 2022 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer; and Mrs. Xiangyu Pei, our 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. Xiujun Tian, who is our General Engineer; Mr. Wenwu Wang, who is our Vice President and our interpreter Jennifer. 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 into English. Go ahead, Mr. Li. [Foreign Language]

[Foreign Language] [Interpreted] Thank you, and hello, everyone. Thank you for joining our earnings conference call today. We are very excited to kick off 2022 with a strong first quarter. Our net revenue surged more than eight-fold year-over-year to $80.2 million. Of that roughly $50 million was from the battery business and about $65 million was derived from the business of materials for making lithium battery cells, which was brought by the Hitrans merger. Additionally, strong sales of high power lithium batteries led by the rapid growth for its usage in light electric vehicles and continued increased in its uninterruptable supplies also contributed to the growth in revenues. Spectacular performance and results were made even while we were still ramping up production at our Nanjing battery manufacturing plant and thus reflected the immense potential of our battery product ecosystem. Our Nanjing facility has a maximum pan (ph) capacity of 18 gigawatt hour, which is about multiple times as our current capacity, if our Nanjing facility is fully grounded and operated. Along with gradually increasing battery production, we're even more optimistic about the growth and future of our business. Next, let's move on to our recent product developments and production. We continue to develop large cylindrical batteries to target at LEV and passenger grade EV markets. In addition to efforts to continue optimizing the performance of our current cylindrical battery products, we are working to produce a prototype for model 42140 (ph) [indiscernible] battery. At this moment, we have already designed a research and development plans for the model 42140 battery and we expect steady progress as planned. We are also happy to see that market feedback for our product -- basically products has been strong and positive. As of May 9, we have outstanding battery orders worth approximately JPY400 million for about $59 million. With these orders our main factory in Dalian is in full production and we are increasing production at our Nanjing plant. We also announced to receive orders from one of our major clients worth about $30 million, which further suggested that the quality and performance of our products are being widely recognized by key global players. In the second quarter, our main focus will be on maintaining stable revenues from batteries used in uninterruptible supplies and the raw material business. In addition to that, we will also continue expanding the revenue share of large cylindrical batteries by sticking new contracts with LEV and EV manufacturers. Now let's turn to our material business resulted from the acquisition of Hitrans. As expected, the business is a major stream of our current revenues and is benefiting from material price inflation, by leveraging its advanced technology and reliable quality. Hitrans has accumulated a number of strategic customers and is now in full production. In 2022, we will maintain Hitrans material business operations, while strengthening its core value and professional (ph). Hitrans will make further investments into research and development and product innovations to make high nickel, cathode (ph) materials that can improve safety and range for electric vehicles as we seek to make Hitrans to become worlds first-class manufacturer of cathode materials for new energy power lithium batteries. Meanwhile, the material price hikes decreased profits of our downstream battery business. In order to counter this impact, we have actively taken measures in three main aspects. First, we signed long-term supply agreements with some major suppliers to security materials and the device to ensure production. Second, we have expanded into the upstream with our merging of Hitrans, so that we are capable of managing some raw materials or use the material price inflation to offset the decrease in the gross profits of the battery plants. Third, we started to renegotiate prices with our downstream customers and have successfully raised our prices for few of our key customers. The rising material prices added, stood in pressure to cash flow as it takes time to transmit the price increase to downstream customers. However, these are short-term fluctuations, as the raw material manufacturers expand production, the prices of the materials will decrease and gradually return to a reasonable level. With that, we expect gross profit to increase in the future. We aim to lead the lithium-ion production and electric energy solutions while maximizing value for our shareholders with our expansion into the raw material business and swift to response to the market. Going forward, we will also actively surge for quality assets and highly valuable targets along the upstream and downstream of the new energy industry to invest in an attempt to stabilized our supply chain and enhance our investment returns. Now, let me turn the call over to our CFO, Xiangyu Pei, who will provide details on our financial performance.

Okay. Thank you. Thank you, Mr. Li and thank you, everyone for joining our call today. I will now go over our key financial results for the first quarter of 2022. For the full details of our financial results, please refer to our earnings press release. Our significant revenue expansion validates the effectiveness of our growth strategy. The raw material price hikes remained as short-term headwinds to the battery business, but we have taken action in order to mitigate its impact. Additionally, we expanded our investments into our infrastructure with primary focus on sales and marketing as well as research and development for our next phase of growth. Moving on to our results. In the first quarter, net revenues stood at 752% to $80.2 million from the same period of 2021, primarily due to additional revenues from this in battery materials brought by the acquisition of Hitrans and the strong sales of high power lithium batteries. Cost of revenues was $74.9 million in the first quarter, up 888% from the previous year. Gross profit was $5.3 million, an increase of 189% from the prior year. Gross margin was 6.6% in the first quarter, compared with 19.5% in the same period of 2021, as raw material costs rose. As noted earlier, within the long-term contracts with certain suppliers expanded into raw material business and the bigger renegotiation with our clients to tackle the price hikes. And we expected the prices of raw materials to decrease while new capacity is being added by the industry. And this was the quarter, our operating expenses rose 256% to $6.7 million, primarily due to growing headcount and the acquisition of Hitrans. Within that our research and development expenses increased to 585% to $3.3 million. Sales and marketing expenses increased 290% to $0.8 million. And the general and administration expenses increased 69% to $2.2 million. Even with these increases, our operating expenses were held only 8.3% relative to other revenues, compared with 19.8% in the same period of 2021. Our change in fair value of warrants was $1.6 million in the first quarter compared to $28.4 million in the prior year. Thus net income attributed to shareholders of CBAK Energy was $0.4 million during the period, compared to $29.6 million in the same period of 2021. As of March 31, 2022, our cash and cash equivalent reached $5.6 million compared to $7.4 million as of the end of 2021. Looking ahead, we will remain committed to our long-term growth strategies for our development in the industry. That concludes our prepared remarks. Let's now open the call for question. Operator, please ahead. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] [Foreign Language] First question, we have Laura (ph) from Stone Street Group. Please go ahead.

[Foreign Language] [Interpreted] Before the company has once released your progress about production of the model 464 series and nowadays the markets are all very interested in the development progress of 46800 battery, could you give us more update on the development of 46800? Thank you.

[Foreign Language] [Interpreted] Okay. So yes, we did released our announcements on the development of 46800 and as well as the investment of R&D on this battery model 46800 and at presence, we have already finished the development of the prototype and we can buy that, this development, this prototype can be well satisfied the original design requirements and we're going to continue to proceed steadily in our development -- in our further developments.

[Foreign Language] [Interpreted] Okay. So my second question concerning the company’s development plan and customer development progress in the Nanjing plants. I would like to know more about the production situation in the Nanjing plants? And in the coming three to four quarters, what will be the major products to be produced in Nanjing plant? And also, could you share with us some updates in the development of the customers, targeting at the products that will be produced in Nanjing?

[Foreign Language] [Interpreted] Okay. So if we talk about production capacity of Nanjing, we are happy to see that the production capacity have been increasing since the beginning of the year and now we have been exploring and developing the market and we can see -- according to the market demand and we are happy to see that we -- as orders have been coming to us. And we believe that from the end of the second quarter or the beginning of the third quarter, there will be more and more orders will be expected to arrive and then we have the products. We always develop our product according to the market demand. And at present, we mainly focus on departing products for two-wheelers and three-wheelers and the main business will be focused on the swapping of batteries and leasing. And in this sector of business, we have already -- we almost reached a deal with big clients and we expect the clients to place the order at the end of June, and total sales amount brought by this order is expected to be about $1 million to $1.5 million. So it was a big order. And when it comes to energy storage, the market have been paying close attention to our business in this regard and several customers have already started their shakedown test with us and even a small bunch of them have already started the small lots production already and it is expected that in the third quarter, we are going to receive orders -- bigger orders and the quantity, the sales quantity will keep increasing after that. And if we have a look at the future, we plan to develop our products focusing on low-speed vehicle, or AAO great passenger vehicle, folks (ph) vehicle -- folk-led as well as some vehicles were the logistics. We estimate that we're going to have two to three projects introduced for these areas of business and they will fulfill our two new production lines in the fourth quarter. And then secondly, we also try to develop more customers so that after 18-gigawatt production capacity is when ready, then we can have enough customers or enough orders from big customers. We believe that our efforts that we have been making will lay a solid foundation for securing more orders from bigger customers. And then so -- in for the rest -- for the rest of this year or let's say in the coming three quarters, our sales target is to reach $300 million. That's it. Thank you.

[Foreign Language] [Interpreted] Okay. My last question is concerning that the serious situation brought by the COVID pandemic. On the one hand, we can see there has been tight in the supply chain. And secondly, we also noticed that in China due to the surge of pandemic quite a lot of cities are undergoing lockdown at the moment. So we would like to know what kind of impact will it bring to the performance of the company in the second quarter as whereas the rest of the year?

[Foreign Language] [Interpreted] So we admit that the pandemic has brought some uncertainties to the running of the factory. However, as we know, since the outbreak of COVID-19, at the beginning of 2020, our three plants locating in Dalian Nanjing and Shaoxing respectively hasn't been affected by the COVID-19 lockdown. Although, in the future, we cannot exclude the possibility of under lockdown due to the pandemic. However, we have to say, so far so good, but we are happy -- we also feel lucky that our three plants are scarcely located. The plants are located in three excellent places. So if in the future, if one day the lockdown is happening in one of the city, then we can have the confidence to take active measures to mitigate the impact.

[Foreign Language] [Interpreted] That’s it for my question.

[Foreign Language] [Interpreted] Thank you, Laura.

Thank you. Next question is Howard (ph) from Linden. Please go ahead.

[Foreign Language] [Interpreted] Okay. After the acquisition of Hitrans, does the company have other plans to acquire or merge other battery plants upstream or downstream? And if yes, could you also share with us, what's the motive behind it or it is out -- what kind of strategic sectors that you're considering doing this kind of acquisitions?

[Foreign Language] [Interpreted] Okay. So, yes, thank you for your question. We have to say that our recognition of Hitrans is a successful acquisition and it is our hope that we can have more cooperation with companies like Hitrans in terms of equity or in terms of strategic cooperation. We have interest in this kind of cooperation because of two perspectives. The first one is, financial investment. The second one is the development of the core business of our company. If we have looked at the financial -- the perspective of financial investments, as we know, nowadays a larger number of countries in the world, including China are advocating the development of green and clean energy as whereas low carbon development. So we believe that new renewable energy and clean energy will be a pillar industry and a promising industry in the future. So it is very important for us strategically to integrate the resources upstream and downstream of new renewable energy, especially in terms of lithium battery. We believe that it will boost great potential in the future. So from the perspective of financial investments, we believe that this will be -- will give us a bright future. And we have a look at the second perspective, that is the development or the sharpening of our competitive edge, as we know, CBAK is a high-end shader (ph) in – of lithium battery and based on our 20 years’ experience, we are fully aware that the quality of raw material of the lithium battery as well as the stability of production capacity is crucial for the development of the company. That is why we attached great importance (ph) in later region the resources upstream and downstream, so as to ensure the quality of our products. In particular, the raw material part of our products as well as the stability of the supply chain, so as to ensure a long-term development of our company's core capacity and core competitiveness in the market.

[Foreign Language] [Interpreted] Okay. And from the reports that you gave us just now, I realize that the production capacity in Dalian is full and it is in full capacity and I also noticed that recently quite a few battery remanufacturers have their plans to build new production lines. So I would like to know that for CBK in the year 2022, in terms of battery material or battery production what kind of a plan do you have for the development of new production lines?

[Foreign Language] [Interpreted] Okay. So, yeah we can -- we also noticed that the market, especially those major --major players in the market are quickly expanding their production capacity and our plants in Dalian announcing are the same, but I don't see any conflict in it because our market, our customers are not overlapping because for those -- the other major players, they are focusing or they’re supplying more to the vehicle manufacturers for electric tools. But for us, we'll CBK, we are focusing on energy storage and small power vehicles. So, and our production capacity has been increased sharply in Dalian and our new production lines are gradually entering into full production phase. And in the future, if the customer demand kept increasing, it is also possible that we're going to allocate and invest more production -- more new production lines. But so far, our new production line in Dalian have already doubled what we have in the past. And in terms of energy storage, after we -- after our new production lines come into operation, two out of three customer offers have already placed orders and which -- and we believe that the new production line in Dalian can well meet their requirements in the near future. And we have a look at the raw material, we will keep a close look at the customer need in the downstream and if they have the requirements to increase their orders then we will also actively finance to expand our capacity, so as to better satisfied their needs.

[Foreign Language] [Interpreted] I have no more questions.

Thank you, Howard. It seems 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.