CBAK Energy Technology, Inc. Q3 FY2022 Earnings Call

Good day, ladies and gentlemen, thank you for standing by, and welcome to CBAK Energy Technology’s Third 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’s call. If you have any objection, you may disconnect at this time. 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 third quarter 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. 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 US 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. 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 US 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.

Thank you, and hello, everyone. Thank you for joining our earnings conference call today. In the third quarter, we maintained strong revenue growth, with an increase of over five times to around $37.7 million. For the first nine months of this year, revenues reached approximately $200 million, a sevenfold increase compared to the same period last year. This significant revenue growth was driven by the remarkable expansion of our battery business in a thriving market. In Q3, revenues from our battery sector reached about $25.8 million, an increase of roughly 170%. During the first nine months, battery sector revenues surprisingly rose by 167.7% to around $66.6 million. Alongside our commitment to stabilizing and boosting revenues from the energy storage segment, we are also effectively exploring the EV and LEV markets. A few months ago, we announced a partnership with JinPeng Group, one of the largest LEV manufacturers in China, along with its EV unit, Jemmell. This collaboration allows our cylindrical lithium batteries to be included in more EVs. Additionally, we are actively working on developing larger cylindrical batteries to enhance our presence in the EV, LEV, and energy storage markets. In this call, I will discuss our advancements in both business development and product research and development with our shareholders and investors. First, I will outline the progress in our business development. As of September 30, our three main manufacturing centers in Dalian, Nanjing, and Shaoxing received approximately $100 million in orders awaiting delivery. These orders are expected to support rapid revenue growth in upcoming reporting periods, indicating that our target market is particularly strong at the moment. Currently, some areas of our production line cannot meet the increasing demand for our products. In Q3, we secured an order of approximately $29.3 million from a leading European provider of heating, cooling, and renewable energy systems. This is not the first time we’ve received an order from this client; to date, this European customer has ordered about €60 million of our products. Our engagement with this client began in 2018, involving several rounds of negotiations and due diligence on the supply chain. Our ongoing partnership has led to substantial orders this year, showcasing the trust in our product quality. With consistent marketing efforts, we are confident that our work will continue to pay off. In addition to the rapid growth in our energy storage business, we are committed to cultivating more clients in the EV and LEV sectors. By September 30, our partnership with JinPeng Group and Gmail had already resulted in orders totaling about $4.3 million. We are pleased to see our batteries being used in electric vehicles produced by CBAK Energy and are optimistic about receiving further orders from them. Regarding our collaboration with House model, we supplied battery pack products worth about KRW 2.7 million in Q3, marking an 80% increase compared to the previous quarter, and we expect continued growth in this segment. This year, we also established a strategic partnership with Welson Power, a China-based company that has an extensive global sales network aimed at the Indian market. With the Indian government announcing subsidy programs, this market is anticipated to evolve into one of the largest LEV markets. Welson Power has a robust global network focused on India, and our partnership will introduce our 32140 batteries there. By September 30, Welson Power had ordered batteries worth about 380,000 Chinese yuan from us, which is a strong start considering our partnership has only lasted a month and we are still developing the market. Overall, we achieved satisfying results in business development, maintaining strong relationships with key European clients in the energy storage market and collaborating with significant brands in the EV and LEV markets. We are constantly looking for new opportunities and anticipate announcing more exciting news regarding partnerships and orders to our investors and shareholders. Concerning our product research and development efforts, we have been investing in larger cylindrical batteries and have made significant progress in sodium-ion battery development. In Q3, we completed pilot production of 26700 and 32140 sodium-ion batteries and are currently testing and optimizing to enhance energy density. As previously mentioned, the sodium-ion battery market has substantial potential with an estimated value in the billions. We aim to lead the market as one of the first companies to mass-produce sodium-ion batteries, which we believe will enhance our market share. In summary, we have made considerable progress in both business development and product research and development. Our investments in sodium-ion batteries and larger cylindrical batteries are intended to increase our competitiveness. Although elevated raw material prices and the need for ongoing capital investments have resulted in a small net loss, we are confident that our profits will increase significantly as raw material prices stabilize due to enhanced capacities from suppliers. Furthermore, our capacity expansion will gradually generate more profits. Our focus moving forward will continue to enhance marketing efforts, execute our capacity expansion plan, and promote the research and development of sodium-ion batteries and larger cylindrical batteries. Now, I will turn the call over to our Interim CFO, Xiangyu Pei, who will provide details on our financial performance.

Thank you, Mr. Yunfei Li, and thank you, everyone, for joining our call today. I will now go over our key financial results for the third quarter of 2022. For the full details of our financial results, please refer to our earnings press release. We managed to maintain a strong momentum in the increase of sales of our battery and battery material products. However, the high cost of raw materials and the need to invest in and expand our capacity reduced our profits. As Mr. Li mentioned, we remain confident in the future growth of our profits as more raw material producers increase capacity and our capacity expansion plan is completed. We also significantly increased our investments in research and development, and sales and marketing efforts to develop new larger cylindrical lithium battery products and to acquire new clients in the market. Moving on to our results. In the third quarter, our net revenues surged by 500% to $57.7 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 170% from the same period of 2021. Cost of revenues was $54.3 million in the third quarter, up by 544% from the same period in the previous year. Gross profit was $3.5 million in the third quarter, representing an increase of 206% from the prior year. Gross margin was 6% compared with 12% in the same period of 2021 due to rising raw material costs. As noted earlier, we signed a long-term contract with certain suppliers and expanded into the raw material business, negotiating with our clients to manage price hikes, and we expect the price of raw materials to decrease while new capacity is added by the industry. Our operating expenses rose by 14.8% to $4.9 million, primarily due to an increase in headcount in our new facilities and the acquisition of our battery material business. Within that, our research and development expenses increased by 31% to $2.4 million. Sales and marketing expenses increased by 64% to $0.8 million, and general and administrative expenses decreased by 14% to $1.9 million. Even with this increase, our operating expenses were held to only 8.6% relative to our revenues in the third quarter compared with 45% in the same period of 2021. Our change in fair value of warrants was $0.9 million compared to $23 million in the prior year. Thus, we recorded a net loss attributable to shareholders of CBAK Energy of $290 during the third quarter, compared to net income attributable to shareholders of $12 million in the same period of 2021. However, if we deduct the item of change in fair value, we had a net loss attributable to shareholders of CBAK Energy of $0.9 million, reduced by 68.6% from a $3 million loss last year. That concludes our prepared remarks. Let’s now open the call for questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we now begin the question-and-answer session. We have one question from an unidentified participant. Please go ahead.

Okay. I have the first question. I am glad to hear that the company has received orders worth nearly €60 million from a major European client in the past nine months, but the specific name of this company was not disclosed. Could you tell me the reason behind it? And will the state of cooperation with this company further expand in the future?

Okay. First of all, this client is a well-known company in Europe that has experienced rapid growth in recent years. As the major supplier of battery products, we need to ensure confidentiality in this cooperation to help our client maintain stability in their supply chain, which also allows us to keep our competitive edge in the market. So please understand that we cannot disclose the name of this company. Regarding future cooperation, I can tell you that we have reached agreements and will continuously expand our partnership in the coming years. We believe that the orders they place with our company will significantly increase.

I noticed that most of the company's revenue still comes from energy storage. In comparison, although the revenue from EV and LEV is growing rapidly, the total amount is still relatively small. How do you see the future revenue composition of the company? Do you think the energy storage segment will still occupy a robust majority of the income, or do you expect the proportion of LEV and EV to grow and possibly surpass energy storage?

This question relates to the revenue and the share of EV and LEV. As Mr. Li mentioned, we have received substantial orders from EV and LEV manufacturers, indicating a positive trend that we expect to see continue. Additionally, we are committed to developing new customers and are optimistic about making significant progress next year. We anticipate an increase in orders from car manufacturers, leading to notable growth in the revenue share from EV and LEV. Furthermore, we expect our energy storage business to also expand in the future. Overall, we foresee encouraging prospects for both energy storage and the EV and LEV sectors, with a steady increase in the revenue proportion from EV and LEV.

Thank you for the answer. I have a third question. The company is developing sodium-ion batteries, and we believe that the target market for sodium-ion batteries overlaps with the existing target market of lithium-ion phosphate. How does the company plan to tap the potential of sodium-ion batteries in the future? Can you share your strategic plan with us? Thank you.

Yes. It is indeed true that the applications of sodium-ion batteries and lithium-ion phosphate batteries are similar in some cases. However, our experience suggests that the introduction of new products or systems does not entirely replace old ones. Regarding our strategic plan for sodium-ion batteries, it is notable that sodium-ion batteries have advantages not comparable by other similar products, such as their strong performance in low-temperature conditions and lower costs. Thus, we plan to apply sodium-ion batteries in both the storage market and for passenger vehicles, especially LEVs for short-distance trips in colder areas. We intend for sodium-ion batteries to serve as an excellent supplement to our lithium-ion batteries rather than replace them. We are committed to developing both battery types to expand our product portfolio and coverage.

I have the last question. I'm pleased to hear that the company's revenue has seen significant growth, although the adjusted net profit attributable to the parent company remains negative, the loss has been considerably reduced. We recognize that raw material prices are still high this year. Based on your assessments, do you anticipate that raw material prices will decrease next year? What effect would that have on your company's profitability? Should we expect the adjusted net loss attributable to the parent company to further decline or potentially shift to a profit?

Okay. As you can see from our financial performance in the third quarter of this year, profitability is on the rise. However, we are still greatly impacted by the increase in raw material costs. Although some raw materials have seen price declines, the main raw material—lithium carbonate—has not decreased and has even increased slightly. That is why we have raised our sale prices to offset the increases in raw material costs. Therefore, orders that will be shipped in the future, including the rest of this year and next year, will see an increase in prices compared to what we offered to customers in the past several months. We believe that next year, our company’s profits will increase.

Okay, that's all my questions. I appreciate all the speakers for answering them, and I look forward to seeing further development and progress of the company.

Thank you for your questions. There are no further questions in the queue. Let me turn the call 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 again. This concludes the call. You may now disconnect.