CBAK Energy Technology, Inc. Q4 FY2022 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to CBAK Energy Technology's Fourth Quarter and Full Year 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 that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I'll 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 fourth quarter and full year 2022 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer; Mrs. Xiangyu Pei, our Interim Chief Financial Officer; Mr. Xiujun Tian, our General Engineer; and Jennifer, our interpreter. We released results earlier today, and the press release is available on the company's investor relations website as well as from Newswire services. A replay of this call will also be available on our investor relations website in a few hours. Before we continue, please note that today's discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties, meaning the company's actual results may differ significantly from the expectations expressed today. Further information regarding these and other risks is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required by applicable laws. Additionally, unless stated otherwise, all figures mentioned during the conference call are in U.S. dollars. With that, I will 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. Please go ahead, Mr. Li.

Thank you, and hello, everyone. Thank you for joining our earnings conference call today. We have just released the financial report for Q4 and the full year of 2022. We are proud to present to our shareholders and investors the tremendous growth we have achieved in sales revenues. The company's revenue has grown by 3.7 times from $52.67 million in 2021 to $249 million in 2022, which is a remarkable achievement. Thanks to the continuous trust and support from our major clients and the success we have achieved in expanding our overseas markets, our battery business has grown rapidly. In 2022, the annual revenue of our battery segment reached approximately $94.72 million, a remarkable increase of 1.76 times year-on-year. In our previous announcements, we mentioned receiving orders from various important clients, some of whom we could not name due to confidentiality reasons. However, the fact that our revenue has increased by almost four times indicates the long-term trust and satisfaction of these clients with our products and services. In fact, the order amount from these previously announced clients is still growing. In this conference call, I will provide an update on these clients. Currently, we are actively expanding our production capacity to meet the high demand in our industry. I will also update our shareholders and investors on the construction stages of our new factory in Nanjing. Firstly, let me update the total amount of orders awaiting delivery in our company. As of March 31st of this year, the three main production bases located in Dalian, Nanjing, and Shaoxing have received orders totaling approximately $180 million that are yet to be delivered. This backlog of orders will support the company's high revenue growth in the future. We have reasons to hold a highly optimistic forecast for the sales performance in 2023. In fact, due to the hot market demand, some of our products have been in short supply for a long time. This is why we are actively expanding the company's production capacity. In May 2022, we announced that we received orders from a leading European provider of heating, cooling, and renewable energy systems with over a century of history and more than 14,000 employees globally. This client is currently our largest customer. As of December 31, 2022, their order amount reached €72.41 million, equivalent to $78.85 million. We have been in talks with this client since 2018, and after an extensive period of negotiations and supply chain due diligence, they have placed high-value orders since 2022 and agreed on further collaboration with us in 2023. We anticipate that they will place even larger orders this year. To protect our key client information and due to the intense competition in the new energy market, we have chosen not to reveal the identity at this time. Nevertheless, the significant increase in our revenue is consistent with the order amount we announced from this client. We will disclose the name when the time is right in the future. In addition to the rapid growth in the energy storage sector, we are also actively developing customers in the EV and LEV fields. In 2022, we signed a framework agreement with the world's largest light electric vehicle manufacturer, Jinpeng Group, and its affiliated company, Jemmell. As of December 31, 2022, Jinpeng Group and Jemmell have placed orders worth approximately $7 million. At the same time, our 32140 batteries have also been applied to Jinpeng Group's electric vehicles, which is very helpful to the company's future expansion in the electric vehicle market. Our cooperation with Jinpeng Group is ongoing, and we expect the total amount of orders received from this customer to continue to increase in the future. Additionally, in regards to our cooperation with Daihatsu Motor, a subsidiary of Toyota, we supplied battery products worth about RMB2.7 million in 2022. In February this year, the project team from Daihatsu Motor visited our Nanjing factory to see our production line. Our management team discussed our future collaboration with the visitors. We expect to see the order amount continue growing in the near future. The company has made significant progress in customer development. In addition to maintaining a stable partnership with our major European client in the energy storage business, we have also formed partnerships with major players in the electric vehicle and light electric vehicle markets. Moreover, the company is supplying products to several other internationally renowned clients, and we will announce these cooperations and corresponding order amounts to the capital market at the appropriate time. The company maintains an optimistic outlook for 2023. As mentioned earlier, the company's current production line is in high demand. In 2020, we partnered with the local government in Nanjing to launch our Nanjing project. By the end of 2021, the first phase of our Nanjing project was successfully put into operation. We are now adding more production lines to the first phase and expect to achieve a production capacity of 2 gigawatt hours by 2023. In 2022, we started constructing the second phase. Currently, the steel framework and infrastructure construction of the second phase have been completed. We expect to complete the first stage of construction and achieve a production capacity of approximately 6 gigawatt hours by 2023 to 2024, then add another capacity of 6 gigawatt hours annually to the total production capacity of the second phase, which will be 18 gigawatt hours. After the completion of the second phase, the company will have a production capacity of up to 20 gigawatt hours in Nanjing. Along with our mature Dalian base, we believe that the capacity will then meet the demands of the majority of customer orders. Regarding our R&D efforts, we currently focus on sodium-ion batteries. Sodium-ion batteries have become a highly contested market in China, attracting interest from a range of leading lithium battery producers. A few leading firms have released their own sodium-ion battery products. Our company recently completed the test production of 26700 and 32140 sodium-ion batteries, with formal product release and sales expected by the end of this year. By then, we will be among the earliest companies worldwide to mass-produce sodium batteries, given their significant potential for widespread application in light electric vehicles, energy storage solutions, and beyond. Sodium battery products are expected to quickly establish a market size of at least hundreds of billions of RMB, or tens of billions of dollars, in the near future, thus becoming a supplement to the lithium battery market. We encourage our shareholders and investors to keep an eye on our company and the upcoming launch of our sodium-ion battery product. In 2022, the company made significant progress in both research and development and sales. Our sales revenue increased by 3.7 times, and we will become one of the first companies in the market to achieve mass production of sodium batteries. Currently, the company has a substantial amount of orders waiting to be delivered. We also managed to maintain a good relationship with our major European customer and are supplying products to several internationally renowned clients. Relevant information will be released at the appropriate time. The price of lithium carbonate, a key raw material, skyrocketed in most of 2022 by about 300%, which affected our profitability. However, alongside the new capacity put into use by each raw material producer, the price of lithium carbonate is declining quickly. We believe that a rapid decrease in raw material prices will help us increase profits this year. The successful market development, decline in raw materials prices, and the unveiling of our sodium batteries together give us ample reasons to be optimistic about our financial performance in 2023.

Okay. Thank you, Mr. Li, and thank you, everyone, for joining our call today. I will now go over our key financial results for the fourth quarter and the full year of 2022. For the full details of our financial results, please refer to our earnings press release. We continued to maintain a strong momentum in the increase of sales of our battery and battery material products. As mentioned by Mr. Li, the high cost of raw materials and the need to invest in and expand our operations. However, with big clients making orders and the price of raw materials declining this year, we are very confident in the future growth of our profits. In 2022, our revenues and gross profit grew, reflecting the success of our marketing strategies. We significantly increased our investments in research and development to both develop new large cylindrical lithium battery and sodium battery products. Meanwhile, we managed to slightly reduce our sales and marketing expenses and the general and administrative expenses. To increase our sales revenues while reducing our related expenses will be helpful in the long run to deliver better financial results. Moving on to our results. In the fourth quarter, our net revenues surged by 95.9% to $54.4 million from the same period of 2021. In the full year, our net revenues grew by 372% to $248.7 million. The significant growth in our revenues was contributed by several factors. First, in the EV market, our product has improved features and higher quality, which have become more attractive to EV manufacturers. Besides, the demand for electric vehicles continued to grow in 2022, leading to an increase in demand for EV battery products. In the LEV market, thanks to a huge increase in market demand, we successfully sold more batteries to LEV manufacturers. More importantly, our large cylindrical lithium battery 32140 batteries have gradually been accepted by key players in the EV and LEV markets, leading to significant growth. In the energy storage market, the increase in sales of batteries for interruptible power supplies in 2022 can be attributed to a combination of factors, including a growing demand for renewable energy sources and our development of reliable products. Additionally, our focus on research and development has allowed us to develop innovative and reliable energy storage products at competitive prices. As we continue to invest in R&D and improve our product offerings, we expect to remain a leader in the energy storage industry and see continued growth in sales. Cost of revenues was $50.7 million in the fourth quarter, up by 89% from the same period in the previous year. Our cost of revenues for 2022 was $230.6 million, up by 384.9% from 2021. The increase in our cost of revenues was in line with the increase of net revenue. Our gross profit was $3.78 million in the fourth quarter, representing an increase of 263% from the same period in the prior year. Gross profit for 2022 was $18.1 million, representing an increase of 254.1% from 2021. Gross margin was 6.7% for the fourth quarter and 7.3% for 2022, compared with 3.75% and 9.7% in the same period of 2021. Gross profit margin slightly increased in 2022 largely due to the increase in the price of battery raw materials during the year. Along with the decline of raw material prices expected in 2023, our gross profit margin will recover and increase this year. Our operating expenses rose by 84.7% to $12.6 million for the fourth quarter and by 75.9% to $29 million for 2022. The increase in operating expenses in 2022 was primarily due to our commitment to increase our investments in research and development efforts, and the impairment charge on hedges, property, land, equipment, as well as goodwill. Within that, our research and development expenses increased by 36.7% to $2.6 million for the fourth quarter, and by 101.6% to $10.6 million for 2022. Sales and marketing expenses decreased by 12.8% to $2 million for 2022, and general and administrative expenses decreased by 24.3% to $3.18 million for the fourth quarter and by 2.9% to $9.7 million for 2022. Even with the increase in R&D investments and the occurrence of impairment charges, our operating expenses worked out only 11.29% relative to other revenues in 2022 compared with 31.9% in the same period of 2021. Our operating loss in the fourth quarter was $8.8 million, which increased by 52.6% from the same period of 2021. Operating loss in 2022 was $11.5 million, reduced by 1.8% from $11.7 million in 2021. Our change in fair value of warrants in the fourth quarter was $1 million, decreased by 78% from the same period of 2021. The change in fair value of warrants for 2022 was $5.7 million compared to $61 million in the prior year. Thus, we recorded a net loss attributable to shareholders of CBAK Energy of $10.7 million for the fourth quarter compared to net income attributable to shareholders of CBAK Energy of $9.16 million. The net loss attributable to shareholders of CBAK Energy was $9.45 million for 2022 compared to net income attributable to shareholders of $61.49 million in 2021. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. The first question comes from Tian Xiao from IBM. Please ask your question, Tian.

So the first question is from IBM. I am glad to see the rapid growth of the company's revenue, and I've also noticed that the company suffered some losses in profit. Can you give us more details on this issue? The management also mentioned a significant decrease in raw material prices. Do you think the company will be able to control its production costs in 2023?

Thank you for your question. According to our report, in 2022, due to fluctuations in lithium carbonate prices, a key raw material for our product, our company's gross margin declined compared to 2021. However, our operating expenses increased significantly due to a higher investment in R&D, totaling $106.3 million in 2022, which is more than double the amount spent in 2021. This investment also contributed to a reduction in profits. Moving forward, we remain committed to continuous investment in R&D for our high-quality battery products to maintain our industry leadership. Additionally, we are focused on optimizing our production processes to lower production costs and improving our management structures to enhance operational efficiency. In 2022, our revenue experienced a 3.7-fold increase, and our operating loss shrank by 1.8%. For 2023, with raw material prices stabilizing and our management structures being optimized, we believe our profitability will increase further.

Thank you for your question, and I appreciate your earlier response. I would like to ask another question. Recently, senior management discussed sodium batteries. Can you explain the application scenarios and the market size for sodium batteries? Specifically, could you provide an update on their popularity in the Chinese market? Is the company currently a leader in sodium batteries? Thank you.

This is a very good question. First, I'd like to address the popularity of sodium batteries in the Chinese market. Over the past three years, the price of lithium-ion batteries has seen significant fluctuations, primarily due to the volatility of lithium carbonate prices, which have increased dramatically. This price variability has negatively impacted the market. In contrast, sodium batteries have a more stable price and are easier to access. Their performance in low-temperature conditions is also superior, making them an excellent choice for vehicles, especially in winter. In fact, they perform better than lithium batteries in cold weather. Given their low and stable prices, we believe the popularity of sodium batteries will increase in the market. We project a billion-dollar market size for sodium batteries, and the decline in the popularity of lithium batteries will create further opportunities for sodium batteries. We expect the market to continue expanding. As for our company's development of sodium batteries, we have completed three generations of development and have projects like the 26700 and 32140. For the latter, we've developed products that achieve 130 watts per kilogram. We have partnered with others to integrate this product into vehicles, and soon we will promote mass production for greater use in vehicles. Thank you for your question again.

Thank you. We have a follow-up question from Tian Xiao. Please ask your question, Tian.

Thank you for your response. I have two more questions. First, the company has seen considerable revenue growth in both the EV and LEV sectors. Since the majority of revenue still comes from the energy storage business, do you anticipate that EV and LEV will continue to grow quickly in the future, particularly once sodium batteries enter mass production?

Okay. The question goes to Mr. Li.

Okay. Yes, you're right. You mentioned that most of the revenue comes from energy storage. What is the reason behind it? If you look at the products manufactured in our Dalian plant, namely our 26650 and 26700 batteries, you are correct that energy storage does take up a large proportion. However, if we look at the Nanjing facility, it is the plant that mainly produces 32140, and this product hadn't been mass-produced until last year. Many OEM companies are still doing certification at the moment. However, our sales have already amounted to $50 million. After the vehicle manufacturers pass certification and as we increase production capacity, say in the second half of this year, we believe that our production capacity will better meet the demands of customers, leading to more orders from our LEV and EV customers. We have reason to believe the sales volume in the LEV and EV markets will continue to grow. Regarding the impact of when sodium battery is put into production, our priority this year is R&D and production, and we will send samples to our customers and help them pass certification. For next year, we expect that more of our products will go into mass production and be used in vehicles. That's the answer to question number three. You said you have another question, right?

Yes, in previous conference calls, the company mentioned developing larger cylindrical batteries. Can you provide any updates on the progress of that development for investors?

Yes, indeed, over the past two years, we have increased our efforts in developing large cylindrical batteries, particularly the 46 series. We have completed the prototype design and trial production, and the test results show that this prototype meets the design objectives. We have also finished prototype B, including mode development, and are currently working on the manufacturing process. We anticipate it will enter mass production soon. Additionally, we are working on other products within the 46 series, like the 120 model. We believe these two new types, which are 50 volts and 100, will be highly suitable for household energy storage and offer a better price-performance ratio. They outperform current market-leading products. We are optimistic about the future of this product. Thank you.

Okay. Now I have finished all my questions. Thanks a lot for the answers.

Thank you. Our next question comes from the line of Steve Cole from eSeis. Please ask your question, Steve.

Now, congratulations on your immense revenue growth. Regarding the current liabilities and the negative cash flow in the past years, do you believe there will ever be serious liquidity issues in the near future if the cost of revenue does not come down?

Thank you for your question. We can address this from two perspectives. First, in terms of operational cash flow, our production capacity generates enough cash flow. The revenue generated by our existing business is adequate. We have conducted calculations for both last year and this year, and the revenue from our battery and material businesses is sufficient to support our cash flow. On the other hand, for the expansion of our production capacity, we have financial and revenue support from various sources. The first is from the local government where our facilities are based, which has provided us with significant policy incentives. Secondly, we have received support from banks in China. Additionally, in the U.S. capital market, both domestic and international investors are showing strong interest in our products, and we are currently engaged in many discussions with them. We believe they will also offer us financial support.

Thank you. Steve, do you have any follow-up questions? All right, thank you. All right, seeing 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.