CBAK Energy Technology, Inc. (CBAT) Q2 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, thank you for standing by, and welcome to CBAK Energy Technology’s 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 instruction will follow at the time. As a reminder, we are recording today’s 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 second quarter and first half 2022 earnings conference call. Joining us today are Mr. Yunfei Li, 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. Ya, 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 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. Following our great success in the increase of revenues in the first quarter, which had already surpassed that 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 8.57 times and 7.92 times from the same period last year. Specifically, revenues from battery business were about $25.7 million, up by over 3 times, 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 neutralization as one of its basic development guidelines and that governments put great resources into the new energy industry, it is our decision to expand our current production capacity for new energy batteries. Understanding the business of new energy vehicles is getting hotter, which leads to the shortage of battery material supply, it is again our decision to acquire hightened strength of our battery materials unit to support our development. Both of these decisions with our thorough understanding on and solid experiences in the industry cannot be precisely made. Besides our record high revenues, I'm also happy to extend to all shareholders and investors here our efforts for development from three perspectives. From capacity expansion, 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 in this year. I will introduce the capacity of our battery business, we currently have two 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 planned two phases in our Nanjing manufacturing center. Phase 1 was put into production in late 2021 with a carrying capacity increased from 0.7 gigawatt hour at a 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 grows. Our Phase 2 project in Nanjing starts much bigger [Technical Difficulty] 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 and due to the capacity reaches 18 gigawatt. Going forward, our Nanjing plant will mainly produce large electrical batteries that are mostly power batteris for EV and LEVs. Our Dalian facility will continue focusing on its mature 26650 or 26700 batteries they are mainly for energy storage in the ship. 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 we’ll 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 dues that we have announced before. We have already delivered samples of battery packs worth of about $208,000 to the other part and diehubs. And now are producing more samples. We anticipate to receive an order of 5,000 to 10,000 units of battery packs from diehubs 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 evolved to further expand our revenues from the EV and LEV structures. We view our research and development capability has achieved rapid development. Developing new type of batteries that caters for variable market demands would make us easier in our marketing campaigns. In last quarter, we had reported that we were in the process of developing new model 42140 batteries. In this quarter, we are pleased to report that the testing on the prototype of model 42140 batteries was successful. We are currently preparing for the establishment of its production lines. Larger synergical batteries such as model 42140 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 hires 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 had 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 versus tens of billions of RMBs. If we are able to take a lead in this area, it will be virtually 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 a battery material business and the potential sodium-ion batteries business in an attempt to obtain breakthrough competitiveness. Despite the inflation of the price of raw materials has resulted in a rising manufacturing cost and led to a slow progress in our profits 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 Nanjing 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 [indiscernible] Hitrans, which is our battery material business has been proved to be a successful investment. We are still monitoring any valuable targets alongside it’s supply chain and talking to experienced teams in an attempt to search for valuable and profitable investment opportunities. In the future, we’ll only wish to grow faster in our principal business, which expect we're producing, but also anticipated to act as an industrial investor to focus on the new energy structure. With our solid experiences in the industry, we are confident to activate and acquire assets and make our book look better. Our management team has full confidence about this company's future. Now let me turn the call over to our CFO, Xiangyu Pei, who will provide details on our financial performance.

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 second quarter and the first half of 2022. For the full details of our financial results, please refer to our earnings press release. The strong sales in our battery and battery material products are fully relaxed to the -- in the astonishing increase of revenues. Here is the raw material price hike is still a short-term debt back to the battery business, which limits the growth of the assets [Techncial Difficulty] actions in order to mitigate this impact. As always, we've continued our investments into our new facility to enhance our new platform for growing orders. We also increased the [Technical Difficulty] our investment in research and development and sales marketing efforts. Moving on to our results. In the second quarter, our net revenue stood by 857% to $56.4 million from the same period of 2021, primarily due to growing sales in our battery products and battery materials. Specifically, net revenues from our battery business grew by about 337% from the same period of 2021. In the first half of 2022, net revenues still demonstrated 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 that approximately 176% from that of 2021. Cost of revenues was $50.8 million in the second quarter and $125.7 million in the first half, up by 961% and by 916% respectively from the same period than periods 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 270%, 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 rose. As noted earlier, we signed a long-term contract rate with [13%] (ph) [Technical Difficulty] into raw material business and began renegotiations with our clients to tackle the price gap and we expect that the price of raw materials to decrease, while new capacity is being added by the industry. Our operating expenses rose by 41% to [Technical Difficulty] $4 million in the second quarter and by 105% to $12 million in the first half, primarily due to growth in headcount. The [indiscernible] 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. Sales and marketing expenses increased by 29% to $0.7 million in the second quarter and 103% to $1.7 million in the first half. And the general and administration expenses increased by 5% to $2.7 million in the second quarter and by [12.8%] (ph) to $4.7 million. Even with this includes our operating expenses were held only 9.6% are 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 in fair value of wallet was $2.1 million in the second quarter and $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 CBAK Energy 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. Operator, please.

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

Hello? This is the Interpreter. I just want to check whether you can hear me. Hello?

Yes. We can hear you.

Okay, great. Thank you. Sorry for the interruption.

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

Hi operator, we have an investing -- we have an investor saying that she pressed star one, one and cannot be put on the line.

They have to press -- oh I get -- we have a question now. The question is from Laura Liu. Please go ahead.

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

[Foreign Language] [Interpreted] Yes. And 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 main business currently. However, we also notice that since 2020, the price of lithium has been increasing and the market demand for lithium battery has been grow 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 star reach and reserves, enterprise is relatively low. And so we -- for our companies, we have already finished the prototype divestments 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 driving 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.

[Foreign Language] [Interpreted] Okay. So the second question is concerning the revenue of the company, we can see that the company's revenue have witnessed a great increase again, but still we cannot see breakthrough in the profit growth, which is the main reason behind it. And will the company take any measures to post profit growth?

[Foreign Language] [Interpreted] That's right. Yes, we can see that in the second season, our profits cannot achieve a 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 through 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 its 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.

[Foreign Language] [Interpreted] Okay. We can see that the planned capacity for the second phase development of Nanjing manufacturing center is huge. With nearly 18 times the capacity of the existing plants in Dalian. How does the company plan to allocate this capacity and what are the types of batteries such as sodium-ion batteries being developed in this plant in the future?

[Foreign Language] [Interpreted] So, yes, I'm going to answer this question. For the second phase development plan, yes 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. In August this year, we're going to kick off the establishment of the production line and it -- and enterprise space will only finish three or one-third of our total capacity -- exact capacity and therefore the rest of them, we are going to finish them in the coming three to five years. So we will gradually finish our construction and then we will 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 false 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 expand 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 battery with over 100 or even 1,000s of gigawatt hours. So this is a huge market. This will be a huge market. And thirdly, let's say, if I look at the markets of energy storage, it is also a huge market as well. And for the global markets, it has been developed, it has been witnessing great development, especially the [indiscernible] site energy storage. The market made is almost as big as the need of new energy vehicle. So if you ask me how are we going to allocate our capacity? I can say that for 505 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 tick up some proportion in our production. That's it for the answer. Thank you for the question.

[Foreign Language] [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 this companies? And could you make an estimate of the possible order volume to be brought by this corporation? And is the company still talking to other large group customers about other cooperation?

[Foreign Language] [Interpreted] Okay. I'm going to give you a brief introduction about Jemmell. Jemmell -- 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 this 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’s responsible for assembly and packing. And then for JP Group its main products is electric three-wheelers and traditional three-wheelers. And it is the largest manufacturer in electric three-wheelers and traditional three-wheelers in the world. Every year, the shipments of this company is $1.50 million and the sales also ranked number one in the world. For Jemmell 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 [indiscernible] of production and sales for four-wheelers. So in the future, the possible cooperation between us and JP Group is high speed AOO grade EV and low speed four-wheelers. And it is activated through with 5,000 vehicles per month until our corporation and the value of the order will reach JPY100 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 stage, 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.

[Foreign Language] [Interpreted] Okay. I don’t have any further questions. Thank you very much for your answers.

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.

[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. You may disconnect from the call.

This concludes the conference for today. Thank you for participating you may [Technical Difficulty]