Smart Powerr Corp. (CREG) Q3 2014 Earnings Report, Transcript and Summary

Good day and welcome to the China Recycling Energy Corporation Third Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jacky Shi [ph]. Please go ahead.

Thank you for joining us on today’s call. Before we start, I would like to remind you that management’s prepared remarks contain forward-looking statements that are subject to risks and uncertainties and the management may make additional forward-looking statements in response to your questions. Therefore the company claims the 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 due to such risks but not limited to fluctuation in customer demand, management of the rapid growth, intensity of the competition, general economical conditions, geopolitical events and the regulatory changes, and other information detailed from time-to-time in the company’s filings and future filings with the United States Securities and Exchange Commission. Accordingly, although the company believes the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. In addition, any projections as to the company’s future performance represents management’s estimate as of today November 14, 2014. The company undertakes no obligations to correct or update any forward-looking statements provided as a result of new information, future events, or other changes in our expectations. Joining us on today are Mr. Ku, CEO of the company; and Mr. Chong, our Chief Financial Officer. Because there will be some translations during the call, we ask for your patience at that time. Mr. Ku, the CEO of the China Recycling Energy Corporation will now deliver his opening remarks and our translator then thereafter. Mr. Ku, please go ahead.

Good morning and for those in China, good evening. We’re very pleased to report another increase in quarterly interest income on sales-type leases both year-over-year and sequentially and we reached $7.1 million, up 36% year-over-year. Interest income on sales-type leases is our major recurring revenue stream, whereas sales of the system revenue may fluctuate substantially depending on the cycle of the project completions. This is illustrated by the facts that during the past quarter total sales declined year-over-year, since no project under construction was completed. We expected a better performance in the first quarter with the completion of one system and are confident in our future as we continue to see huge opportunities created by energy efficiency and pollution control initiative in China. During this quarter, we experienced the early termination of a lease contract for a TRT system to Zhangzhi from a revenue standpoint going forward. This is more than compensated by the lease contract signed with Yida at the end of the second quarter. According to the statistics form of the National Bureau of Statistics, in the first nine months of 2014, China energy consumptions per unit of GDP dropped to 4.6% year-on-year and the carbon intensity was cut by about 5%, both representing largest drop in the recent year. The Chinese government has continually developed and implemented a policy to curb pollution and reduce wasted energy. In September 2014, the State Council approved our national climate change plan for 2014 to 2020, which said, instead of emission and clean energy target for the 2020. Innovation China’s President Xi Jinping and U.S. President Obama jointly announced on November 12, 2014 action plan on greenhouse emissions. Under this plan China were aimed to reach peak carbon dioxide emission by around 2013 and then carbon dioxide emission level will come down thereafter. Given these are favorable government policy and our strong execution capability, I am fully confident in the future of our business and its ability to deliver increasing value to our shareholders. This is one of the reason behind my recent purchase of additional share of the company. These capital injections had also provided the company with additional capital to allow it to invest in additional projects. Currently, we have six projects under construction for a total of 135 megawatt in power capacity. We expect to complete one project for Shandong Boxing with a power capacity of the 25 megawatt in the fourth quarter of 2014. Once these six projects are completed, the total capacity of the project in operation will be approximately doubled. Beyond this, we have another two projects under contract and three projects under frameworks. Looking ahead, we expect that our interest income on sales-type leases will maintain its healthy momentum through the rest of the 2014 and 2015. We will continue our efforts to further expand our waste-to-energy power generating capacity. In closing, I’d like to again thank you our shareholders and our strategic partners for their support of CREG. We look forward to updating all of you on our success in the future. Now, let me turn the call over to our CFO, Mr. Chong, to review our third quarter 2014 financial results. After the prepared financial review, I will come back to you to take your questions. Thank you. David?

Okay. Thank you, Mr. Ku. Before we start, I’d like to state that all our numbers are presented in U.S. dollars and that all comparisons are between Q3 2014 and Q3 2013, except for balance sheet items. In the third quarter ended September 30, 2014, total sales, including sales of systems and contingent rental income, were $0.24 million, compared with $21.74 million. Sales of system was $0, as compared with $21.39 million. For the three months ended September 30, 2014, no power generation system were completed and in comparison in the same period of 2013, the Pucheng Biomass Phase II system was completed and sold. Contingent rental income was $0.24 million, compared to $0.35 million. This represents income from the sale of electricity in excess of minimum lease income. For sales-type leases, sales and cost of sales are recognized at the point of sale or inception of the lease. There is no recognition of the sales revenue when the system is under construction. In addition to sales revenue, CREG's other major source of revenues is interest income from sales-type leases. Cost of sales was $0 million as compared to $16.48 million as there was no system sales, so the cost of sales was $0. Gross profit was $0.24 million as compared to $5.26 million. Combined gross profit margin was 100%, compared with 24%. Increased profit margin attributable to all the sales generated from contingent rental income and no cost of sales occurred in the quarter as there was no system sales. Interest income on sales-type leases was $7.07 million, an increase of 35.8% from $5.2 million. This increase was primarily due to the greater number of sales-type leases during the quarter. Interest income was derived from 15 sales-type leases, including TRT system to Zhangzhi, which was terminated earlier on September 24, 2014; BMPG system to Pucheng Phase I and II, 15-year and 11.9 years respectively; BMPG system to Shenqiu Phase I and II, 11-year and 9.5-year term, respectively; five power and steam generating systems to Erdos for 20-year term; WHPG system of Zhongbao, 9-year term; WHPG system of Jitie, 24-year term; two BPRT system to Datong, 30-year term; and WGPG to Yida, 15-year term. In comparison, during the same period of 2013, interest income was derived from 14 systems. Operating expenses totaled $0.86 million, down 8.4% compared with $0.93 million. Decrease was mainly due to a decrease in consulting expense. Non-operating expenses consist of non-sales-type lease interest income, interest expenses, bank charges and miscellaneous expenses. For the third quarter of 2014, net non-operating expenses were $0.13 million, compared with $3.52 million. Income tax expense provision was $1.58 million, decreased by 3.2%, compared with $1.64 million. The decrease in income tax expense provision was mainly due to a decrease in consolidated effective income tax rate, which was 25% for third quarter 2014, compared with 27.2%. Net income was $4.77 million, an increase by 8.5%, compared with $4.39 million. The increase in net income was mainly due to increased interest income on sales-type leases and decreased non-operating expenses. Basic and fully diluted EPS was $0.07, compared with $0.08. Now let me discuss our financial highlights. As of September 30, 2014, the company had cash and cash equivalents of $16.38 million. Other current assets were $21.32 million and current liabilities were $39.66 million. Total shareholders’ equity was $201.21 million, as compared to $154 million as of December 31, 2013. The net tangible asset per share was $2.42 as of September 30, 2014. The net investment in sales-type leases consists of the sum of the total minimum lease payments receivable, less unearned interest income and estimated executory cost. Unearned interest income is amortized to income over the lease term so as to produce a constant periodic rate of return on a net investment in the lease. As of September 30, 2014, net investment in sales-type leases was $189.66 million, compared to $184 million as of December 31, 2013. The total future minimum lease payments receivable was $592.69 million. And I’d like to emphasize that once again our revenue consists of two distinct revenue streams. System sales, which is erratic due to construction cycle of power plants and the second major revenue source is our interest income from sales-type leases, which is a consistent recurring interest income over and every quarter. And with that, let me join Mr. Guohua, CEO to take your questions. Operator can you please begin the Q&A, thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Barry Bergman of Alba Investments. Please go head. Barry Bergman – Alba Investments, LLC: Good morning, gentlemen. I have two questions in particular. With the share agreement in the purchase by Mr. Guohua, I’m wondering it was approximately $18.9 million, if I figure this out correctly. How much of that was new money that went into the company and available cash as opposed to forgiveness or exchange of debt and/or other obligations that he had from the company already? And my second question is we actually have a good problem and it occurs if the company gets new contracts and new projects to build, but often these projects are cash negative at the beginning and longer term will be producing a stream of cash flow that will offset those and you get targeted returns, I would think of, I believe, 20% or more. When might you think that company might need additional capital with the existing projects announced and what would be your plan perhaps to raise that money?

Barry, this is David. Barry Bergman – Alba Investments, LLC: Hi, David. How you doing?

Hi. How are you doing? Hope you are doing fine. The capital injections and share purchase by Mr. Ku consists of 100% new cash. And the company did repay Mr. Ku’s temporary loan to the company subsequently. So we treated this as two separate transactions in that month when the transition took place. I hope that answered your question your question. Barry Bergman – Alba Investments, LLC: I’m sorry. The second part I understand, there was new capital into the company, what was the part about the loan, David?

The loan was subsequently repaid. Barry Bergman – Alba Investments, LLC: I see.

Out of company to him, yeah. Barry Bergman – Alba Investments, LLC: So the company made a loan to him and then it was repaid?

No, no, he loaned money to the company. Barry Bergman – Alba Investments, LLC: I see, okay, okay. So I think I got it.

Right. So the initial figure was – he has a temporary loan to the company. Barry Bergman – Alba Investments, LLC: Right.

And then, because of the opportunity then he also make a new capital injection, 100% new cash as evidenced by the bank receipts. Barry Bergman – Alba Investments, LLC: Right.

And then subsequently the bank – I mean the company did a repayment to him. Barry Bergman – Alba Investments, LLC: Got it, got it.

Right. Barry Bergman – Alba Investments, LLC: And the other part was how much capital – I know, you said it in the announcement how much cash you have, but how much of that will be used for the – I think, you said about four projects are coming online. And is there any need – these are success-based projects, obviously, but if you do get more projects, how do you plan to raise capital for those projects?

The projects currently discussed as we reported which are under construction, these are largely been funded. And the additional capital received from Mr. Ku itself would be deployment to new projects to be rolled out. And the current borrowing conditions within China is quite favorable because of the government support in terms of the industry itself, which is energy efficiency and the banks are willing to lend. And because of the capital injection by Mr. Ku and also it has resulted in a stronger borrowing capability of the company. So we do have ongoing discussions with various banks for project financing itself, which are in the form of the project loans without having to raise new equity itself. Barry Bergman – Alba Investments, LLC: Okay. Thank you, David.

You’re most welcome.

[Operator Instructions] And we have a follow-up from Barry Bergman. Please go ahead. Barry Bergman – Alba Investments, LLC: David one other question, I know there is – I mean you’ve talked about in all the different chat rooms and everything else that the Carlyle own some stock. Do you have any update on – I think your fund actually went down and they might be in the market and it’s going to get to an overhand. Do you have any thoughts on what’s going on there or the timing of any of that?

We do not have updated information from them because they are no longer on our Board because of their own IPO. So we – I mean their shares are registered for resale. So we do not have the updated intention from them, whether they want to sell to – in the market or to someone to buy on local, whichever way. Barry Bergman – Alba Investments, LLC: Right. Okay, thank you.

You’re most welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Jacky Shi [ph] for any closing remarks.

Thank you for joining us on China Recycling Energy Corporation third quarter 2014 results conference call. We look forward to updating you on our fourth quarter 2014 results. Feel free to get in touch with us anytime if you have any further questions, concerns or comments. Have a wonderful day. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.