CBAK Energy Technology, Inc. Q3 FY2023 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. And welcome to CBAT Energy Technology's Third Quarter 2023 Earnings Conference Call. Currently, all participants are in a 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 will turn the call over to Thierry Li, CFO and Secretary of the Board. Mr. Li, please proceed.

Thank you, operator. And hello, everyone. Welcome to CBAT Energy's third quarter of 2023 earnings conference call. Joining us today are Mr. Yunfei Li, Chief Executive Officer of CBAT Energy, myself, Chief Financial Officer and Secretary of the Board; and Jennifer, our interpreter. Our General Engineer, Mr. Xiujun Tian will join us for the Q&A section. We released our results earlier today. The press release is available on the company's IR website at ir.cbat.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 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 with the SEC. The company doesn't assume any obligations 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. Go ahead, Mr. Li.

Thank you and hello, everyone. We appreciate you joining our earnings conference call today. We are thrilled to report another excellent quarter of growth in our battery business. In the third quarter of 2023, our battery sector generated revenues of $44.33 million, an increase of 71.51% compared to the same quarter last year. We shifted from an operating loss last year to an operating income of $7.58 million and a net income of $7.77 million, which is 6.3 times the amount from the previous year. The majority of our revenues, $42.81 million, came from batteries used in energy storage applications, reflecting a growth of 73.5% year-over-year, while $0.4 million came from electric vehicle batteries, which experienced a remarkable increase of 19.5 times year-over-year. Additionally, revenues from batteries used in light electric vehicles totaled $1.11 million, a decline of 2.8% year-over-year. For the first nine months of 2023, our battery business achieved revenues of $96.16 million, up 44.43% year-over-year, with an operating income of $6.15 million and a net income of $6.75 million. This growth in our financial metrics is mainly due to our solid base of key clients, particularly high-value clients from Europe and the US, whose orders have shown remarkable stability and sustainability. We are confident about maintaining strong performance and profit growth in the coming reporting periods. While the market continues to face various external pressures and challenges due to the global economic slowdown, we take pride in being one of the few Chinese battery manufacturers achieving record growth and profitability during this macroeconomic environment. Our impressive performance has attracted significant interest from equity investors who have reached out to discuss our latest developments. Now, let me provide a more detailed update on our business initiatives during the third quarter. With our growing visibility and enhanced reputation globally, our order volume has continued to increase. As of November 1, 2023, we have recorded approximately RMB900 million in the total value of orders we have received but have yet to fulfill at our two main battery production facilities in Dalian and Nanjing. Orders for the Dalian facility have been planned for late 2024, and our Nanjing facility is also experiencing high demand. New client orders will be scheduled accordingly, indicating that our revenue and profitability will sustain strong growth over a longer period. Regarding previously announced client initiatives, as of November 1, 2023, our collaboration with PowerOak, a leader in portable power station manufacturing and parent of the popular brand BlueTTI, has yielded over RMB43.2 million in revenue. We have also made significant progress with JinPeng Group, the largest manufacturer of scooters and electric tricycles globally, generating orders amounting to approximately RMB63.59 million. Furthermore, our ongoing partnership with Viessmann Group, a prominent European manufacturer of heating and cooling systems, has led to orders totaling up to EUR116.5 million from early 2023 to November 1st. Another key partner, Anker Innovations, one of the largest accessory suppliers for Apple Inc.’s products, has placed orders worth RMB58.35 million since our agreement in September, with expectations for ongoing monthly orders that will drive significant demand for our batteries. We are engaged in discussions regarding various operations with several major customers from Europe and the US and will keep our investors informed of any significant updates. Focusing on meeting primary clients’ demands by investing in production capacity and R&D, both our Dalian and Nanjing facilities have reached a production capability of one gigawatt hour as of the third quarter of 2023. Our Dalian subsidiary is currently working on developing new lithium battery models 46115 and 46157, which will surpass the current market-leading model 46800 in energy density and lifespan, making them ideal for large-scale energy storage needs. Our R&D team is actively driving these initiatives, and we expect to achieve mass production of the model 46115 batteries next year. In the long term, we plan to expand our 46 series battery production capacity to 15 gigawatt hours at the Dalian facility to increase supply. Meanwhile, the construction of our Nanjing Phase 2 project is progressing well, with the factory set to achieve six gigawatt hours of production capacity in its first stage, and we anticipate will be fully operational soon. Thus, I want to emphasize that we will have considerable capacity next year to meet the current overwhelming demand, which will enable us to boost our production expectations and drive top-line growth. Finally, I’d like to update you on our mass production of sodium ion batteries. As the only company in China capable of producing sodium ion batteries at scale, we are in talks with multiple investors about constructing a sodium ion battery plant. We expect to finalize significant private equity financing soon to accelerate the development of this plant, targeting a production capacity of 10 gigawatt hours. With the growing industrial adoption of sodium ion batteries, we anticipate they will play a critical role in sectors like electric scooters, low-speed vehicles, energy storage power stations, and household energy storage solutions. Moving forward, our company will be powered by a dual growth model, achieving an impressive 36 gigawatt-hour production capacity for lithium batteries alongside 10 gigawatt-hours for sodium ion battery production. We look forward to collaborating with our investors and partners to advance the evolution of new energy structures and technologies focused on environmental protection. Now, I’ll turn the call over to our CFO, Thierry Li, to provide 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 third quarter of 2023. For the full details of our financial results, please refer to our earnings press release. As the battery business returned to year-over-year growth in the third quarter, we also recorded ongoing improvements in gross margin and operating profit margin. This was underpinned by a sharp increase in the contribution of our higher-margin battery business and a reduction in the cost of revenues as we further leveraged our technology to improve production efficiency. Alongside a growing number of orders for our battery products, we will continue to find the right balance between growth and profitability, while investing in R&D and production capacity expansion to enhance our sustainable long-term competitiveness. Turning to our financial performance. Our net revenue for the third quarter was $63.4 million, representing an increase of 9.9%, compared to $57.7 million in the same period of 2022. This increase was primarily attributable to the growth in the company's battery business. In addition, our net revenue from batteries in the third quarter was $44.3 million, representing a strong growth of 71.5% from the same period in 2022. Our gross margin for the battery business in the third quarter was 26.4%, an increase of 17.7 percentage points from 8.7% in the same period of 2022. The cost of revenues in the third quarter was $51.2 million, representing a decrease of 5.7% from $54.3 million in the same period of 2022. The decrease in the cost of revenues corresponds to the company’s higher gross profit from the battery segment. Gross profit in the third quarter was $12.2 million, representing an increase of 264% from $3.5 million in the same period of 2022. Gross margin in the third quarter was 19.3%, compared to 6% in the same period of 2022. Our total operating expenses in the third quarter rose by 40.8% to $7 million. Within that, our research and development expenses increased by 8.1% to $2.6 million in the third quarter. Sales and marketing expenses increased by 33.8% to $1.1 million in the third quarter. General and administration expenses increased by 73.7% to $3.2 million. Our operating income in the third quarter amounted to $5.3 million, compared to an operating loss of $1.5 million in the same period of 2022. The change in the fair value of our warrants in the third quarter was $0.02 million, compared to $0.94 million in the same period of 2022. As a result, net income attributable to shareholders of CBAK Energy in the third quarter was $6.3 million, compared to net loss attributable to shareholders of CBAK Energy of $290 million for the same period of 2022. That concludes our prepared remarks. Let’s now open the call for questions. Operator, please go ahead.

Thank you. Our first question comes from Brian Lantier with Zacks Small Cap Research. You may proceed.

Good afternoon, gentlemen. Really impressive performance in light of a challenging operating environment. If I could drill down a little bit more on the power in the - on uninterruptible power business, do you feel like that was principally in the third quarter, driven by new customer wins or higher volumes with your existing customer base? And it sounds like going forward, some of the new customers are going to contribute a larger portion of that growth. And then I'll follow up another question after that.

In response to your first question, the growth in the third quarter was partly due to our existing customers. For instance, customers in Dalian and Nanjing have significantly increased their orders, which contributed to our sales volume growth. Additionally, we developed some new customers who also played a role in this growth. This is the situation reflected in the third quarter. Specifically, for our model 321400, which has already passed certification, we have initiated small production and are gradually moving towards mass production. We believe this will contribute to further sales growth. Additionally, we are expanding our production lines and increasing our production capacity for the 26 series of products, which we also expect will result in higher sales volumes in the future.

Great. Thank you so much for all of that. And could I, if I could just ask a question about the raw material business, I know in the past, there's been some interest from outside investors. Is that something you're still exploring? Or I guess, just an overall general update on the raw material business and where that stands today?

Okay, Brian. I will respond to your questions. The raw material industry is currently experiencing a slowdown, with most producers facing declines in sales volume, including Hitrans' solid raw material units. However, Hitrans has a solid structure, and their subsidiaries from CHL are similar. We believe that once the industry recovers, Hitrans will see a significant improvement in their financial performance. Additionally, we have not integrated Hitrans' business with our battery operations; we operate as financial investors, and their team remains independent from ours. This is why we consistently separate Hitrans' financial performance from our battery business in our Form 10-Q and press releases, which makes more sense. Many investors are showing interest in Hitrans, and we anticipate they will perform well once the industry rebounds. We are encouraging private equity investors to engage with Hitrans and will also refer them to Hitrans to assist with funding for capacity expansion and to see if we can attract more investors. Thank you.

Thank you. Our next question comes from TPG. You may proceed.

I would like to ask about the sodium ion batteries. In your speech, you mentioned that you have been involved in the preparation and construction of sodium ion battery technology. Can you provide us with an update on this technology? Additionally, regarding the project investment in the segmentation stage, how is the progress of this project? Could you please give me another update?

In response to the first question, we focus on sodium ion batteries. In June this year, we launched our first sodium ion battery product, making us the first company in China to achieve mass production of these batteries. While some competitors have announced their research or production efforts in this area, we are the only company that has truly reached mass production. This year, we also installed sodium ion batteries in vehicles. While our battery products may not yet reach full satisfaction, they can achieve 2000 to over 3000 cycles. We have established a stable product system. Regarding our production line, our products are very well-received in the market, although some competitors are still in the initial stages with just startup teams or prototypes. In contrast, CBAK has developed a product with 0.5 gigawatts of production capacity, which we plan to expand in the future. Currently, four partners have approached us, and we are in the process of selecting one location for the production line, aiming to choose the best option. Next year, we plan to increase our production capacity to as much as 10 gigawatts, which will enhance our ability to meet customer demand.

In your introduction, you mentioned that CBAK has become a business partner of Anker Innovation. We would like to know how large the order volume from Anker will be. Could you also share your expectations for your partnership with Anker?

Currently, Anker has completed the launch of models with our factory, and seven to eight of their products will incorporate our battery. They have begun pilot production, which has yielded excellent results. This is why we are eager to expand exports to Europe, the United States, Japan, and India. We have been in detailed discussions with Anker regarding future collaboration. Presently, we have an order volume of about 500,000 units, valued at approximately RMB20 million. In the future, this is expected to grow to between 800,000 and 1.2 million units, with an estimated order value of around RMB14 million.

Thank you. Seeing no more 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.