CBAK Energy Technology, Inc. Q2 FY2022 Earnings Call

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 instructions will follow at the time. As a reminder, we are recording today’s call. 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, 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.

Thank you and hello everyone. Thank you for joining our earnings conference call today. After our impressive revenue growth in the first quarter, surpassing the entire revenue from 2021, we have again achieved significant success this quarter. Our revenues reached $56.4 million in the second quarter and $136.5 million in the first half, representing increases of 8.57 times and 7.92 times, respectively, compared to the same period last year. Specifically, revenues from our battery business reached approximately $25.7 million, which is over three times higher than the same period last year, illustrating an extraordinary growth. This remarkable increase in revenues can be attributed to our management team's deep understanding of the new energy industry. With China prioritizing carbon neutrality in its development strategy and governments investing heavily in the new energy sector, we have decided to expand our production capacity for new energy batteries. Our grasp of the new energy vehicle market is strengthening, which has led to a shortage in battery material supplies, prompting us to enhance our battery materials division to support our growth. These strategic decisions, based on our comprehensive industry knowledge and experience, have been crucial. Alongside our record revenues, I'm also pleased to share our developmental efforts in three areas: capacity expansion, sales performance, and research and development progress. First, let me outline our capacity expansion plan for the year. We currently operate two major production centers—one in Dalian and another in Nanjing. The Dalian center, operational for about a decade, has an annual capacity of 1 gigawatt hour. In Nanjing, our Phase 1 expansion, which started production in late 2021, has increased capacity from 0.7 gigawatt hours to 1 gigawatt hour, with plans to reach its full capacity of 2 gigawatt hours by the end of this year or early next year. However, we recognize that this capacity is insufficient given the growing market demand. Our upcoming Phase 2 project in Nanjing will significantly ramp up capacity to 18 gigawatt hours, with operations expected to commence from late next year, producing 6 gigawatt hours annually until capacity is fully reached. The Nanjing facility will focus on producing large batteries, primarily for electric vehicles and low-speed electric vehicles, while the Dalian center will continue to specialize in 26650 and 26700 batteries for energy storage in ships. In this quarter and the first half of 2022, we maintained strong sales momentum for our battery and battery material products. Demand for our products continues to exceed supply. As of August 6th, we have orders valued at approximately $55.35 million pending delivery, and we expect a significant influx of orders. We believe this will greatly boost our sales performance in the latter half of the year. Additionally, I would like to provide updates on previously announced developments. We have delivered around $208,000 worth of battery pack samples to various partners, and more samples are currently in production. We anticipate an order of 5,000 to 10,000 battery packs from Diehubs next year. In July, we established a framework operation with Jemmell, an LEV manufacturing unit under JP Group, one of China's leading LEV manufacturers. After providing several samples for testing, we expect to start receiving substantial orders from Jemmell and JP Group once they pass the tests. We are also engaging with more LEV and EV manufacturers to secure additional valuable orders for our stakeholders. Going forward, we will continue to strengthen our energy storage business while also expanding our revenue from the EV and LEV segments. Our research and development efforts have made considerable progress, and we're developing new types of batteries tailored to specific market needs, which will enhance our marketing strategy. Last quarter, we reported progress on model 42140 battery development, and this quarter, we successfully tested the prototype and are preparing to establish production lines. These larger synergistic batteries are more suitable for the EV and LEV markets, and will significantly contribute to our LEV market initiatives. Excitingly, we have recently formed a joint development agreement with a leading firm specializing in sodium-ion battery research and development. We are currently on track with this project, having released a prototype that passed testing, and we expect to initiate mass production in the second half of the year. Major Chinese battery manufacturers are also investing in sodium-ion batteries, contributing to potential market growth valued at tens of billions of RMB. Being a pioneer in this area will be crucial for our strategic growth. In the second quarter, we enjoyed substantial advancements across revenues, R&D, sales, and capacity expansion. We are making significant investments in our battery materials division and the emerging sodium-ion battery sector to gain a competitive edge. Despite rising raw material costs due to inflation affecting our profit growth, we believe that inflation will ultimately be controlled through increased production capacity from battery material suppliers and the introduction of innovative battery types like sodium-ion batteries. We anticipate that our profits will return to a normal growth trajectory as these factors stabilize. Moreover, as our Nanjing plant has only been operational since late 2021, we expect to see greater profit generation as it reaches full capacity. Strategically, our investment in the battery materials business, Hitrans, has yielded positive results. We are actively scouting for valuable targets and engaging with experienced teams to identify profitable investment opportunities. Our goal is to accelerate growth in our core business while positioning ourselves as an industrial investor in the new energy sector. With our robust industry experience, we are confident in our ability to activate and acquire assets to enhance our portfolio. Our management team remains optimistic about the future of the company. Now, I'll hand the call over to our CFO, Xiangyu Pei, who will share details on our financial performance.

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 related to the astonishing increase in revenues. However, the raw material price hike is still a short-term setback for the battery business, which limits the growth of profits. As always, we've continued our investments into our new facility to enhance our new platform for growing orders. We also increased our investment in research and development and sales marketing efforts. Moving on to our results. In the second quarter, our net revenue skyrocketed 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 demonstrated strong growth momentum, increasing by 792% to $136.5 million from the first half of 2021. Revenues in the battery sector grew in the first half of 2022 by approximately 176% compared to 2021. Cost of revenues was $50.8 million in the second quarter and $125.7 million in the first half, up by 961% and 916% respectively from the same 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 compared to 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 costs rose. As noted earlier, we signed a long-term contract rate with suppliers and began renegotiating with our clients to address the price gap. We expect the price of raw materials to decrease as new capacity is being added by the industry. Our operating expenses rose by 41% to $4 million in the second quarter and by 105% to $12 million in the first half, primarily due to growth in headcount and operation of our new facility along with the acquisition of our Battery Materials business. Additionally, 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. General and administrative expenses increased by 5% to $2.7 million in the second quarter and by 12.8% to $4.7 million. Despite this, our operating expenses were held to only 9.6% 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 warrants 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.

Ladies and gentlemen, we now begin the question-and-answer session.

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.

The first question is about sodium-ion batteries. The company announced a plan to develop these batteries. As you mentioned, they are expected to be ready for mass production soon. Will sodium-ion batteries become the company's primary focus in the future? What is their strategic significance to the company? What advantages do sodium-ion batteries have over lithium-ion batteries?

Yes. We believe that sodium-ion batteries are a valuable addition to lithium-ion batteries. However, we want to highlight that lithium-ion batteries currently have several advantages, including higher energy density, stable performance, and a well-established supply chain. As a result, they remain our primary focus. Nevertheless, we have observed that since 2020, lithium prices have risen, and demand for lithium batteries has significantly increased, which may lead to a structural shortage. Conversely, sodium-ion batteries have abundant raw material reserves and lower costs. For our company, we have completed prototype testing, and production is stable with satisfactory results. We have addressed various production technology challenges successfully. Therefore, we believe sodium-ion batteries will be an important addition to our product range and will help us target niche markets and improve our competitiveness. Thus, sodium-ion batteries are strategically significant for the company. Thank you for the question.

Okay. The second question is about the company's revenue; we have observed another notable increase in revenue, yet we are not seeing significant progress in profit growth. What is the primary reason for this? Will the company implement any strategies to enhance profit growth?

Yes, we can see that in the second quarter, our profits did not increase proportionally with revenue, and there are reasons for this. The main reason is the rise in raw material prices, which has led to higher manufacturing costs that have impacted our profit growth. However, we should note that our production capacity expansion in Nanjing and Dalian is progressing well, and we believe that as production capacity reaches full operations in the second half of the year, along with a decline in raw material prices, our profits will return to a normal level soon.

Okay. The planned capacity for the second phase of development at the Nanjing manufacturing center is substantial, with nearly 18 times the capacity of the existing plants in Dalian. How does the company plan to allocate this capacity, and what types of batteries, such as sodium-ion batteries, are being developed in this plant in the future?

Yes, I will answer this question. Regarding the second phase development plan, the planned production capacity is indeed substantial. However, we will gradually tap this potential year by year. In August this year, we will start establishing the production line, and this first stage will only complete one-third of our total capacity. The remaining capacity will be finished over the next three to five years. Our expansion in the new energy market is expected to align well with our production capacity and the robust market demand. Currently, we see a consistent demand exceeding supply in this area. Additionally, many major economies have set targets to stop producing fuel vehicles by 2030, suggesting that the market for new energy vehicles will continue to grow significantly. Notably, other leading companies are also increasing their production, with some planning capacities of 100 gigawatt hours or more. In terms of market segments, we anticipate that 50% of our capacity will be dedicated to new energy vehicles, 30% to energy storage products, and the remaining 20% to other related products. Sodium-ion batteries will also account for a portion of our production. Thank you for the question.

Yes, we are pleased to see that the company has reached an agreement for cooperation with Jemmell and JP Group. Can you provide a brief introduction about these companies? Additionally, can you estimate the possible order volume expected from this cooperation? Is the company still in talks with other large group customers regarding further cooperation?

I will give a brief introduction about Jemmell. Our collaboration with Jemmell has successfully completed the testing of the battery pack. We expect to receive small lot orders in September, and following the delivery of these orders, we anticipate an increase in order volume. JP Group is a major player in China, and Jemmell operates as a subsidiary focused on assembly and packing. JP Group specializes in electric three-wheelers and traditional three-wheelers, making it the largest manufacturer in this sector globally, with annual shipments around 1.5 million units and sales ranking number one worldwide. Jemmell has the capacity to produce complete vehicles and has its production facilities for four-wheelers. The potential partnership with JP Group could involve high-speed electric vehicles and low-speed four-wheelers, starting with an estimated delivery of 5,000 vehicles per month, leading to an order value of JPY 100 million. We also have positive discussions with other large groups and are currently approaching additional customers. However, at this stage, we cannot disclose specific details. I assure you that we are in talks with clients that may be larger than JP Group, and we will share more information when it is appropriate.

Okay. I don’t have any further questions. Thank you very much for your answers.

Thank you for your question. There are no further questions at the moment. I will hand the conference back to Mr. Yunfei Li for closing remarks.

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.