CBAK Energy Technology, Inc. Q4 FY2023 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to CBAT Energy Technology's Fourth Quarter and Full-Year of 2023 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 will turn the call over to Thierry Li, CFO and Secretary of the Board of CBAK Energy. Mr. Li, please proceed.

Thank you, operator. And hello, everyone. Welcome to CBAT Energy's fourth quarter and full-year 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. 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 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 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.

Hello, everyone, thank you for joining our fourth quarter and full-year 2023 earnings conference call. We are pleased to announce another quarter of solid growth, rounding off fiscal year 2023 on a high note with sustained orders from key clients including Viessmann Group, Anker Innovations, and Hello Tech. Our battery business maintained its growth momentum from the previous quarter with fourth quarter revenues up 30.9% year-over-year to reach $36.83 million. Of these revenues, $34.93 million came from batteries used in energy storage applications, a surge of 84.3% year-over-year, while $0.52 million came from batteries used in electric vehicles, down 88.8% year-over-year. Moreover, revenues from batteries used in light electric vehicles were $1.38 million, a decline of 69.5% year-over-year, primarily due to adjustments over the past 12 months. Accordingly, we will strategically monitor both sectors while further expanding our sales in the energy storage sector. In terms of profitability, our battery business's gross margin rose to a historic high of 36% in the fourth quarter of 2023, up 27.7 percentage points year-over-year. Furthermore, we achieved a second consecutive quarter of net income from the battery business, recording a net income of $6.62 million in the fourth quarter of 2023, a notable improvement compared to a net loss in the same period last year. In full-year 2023, our battery business generated revenues of $133 million, soaring by 40.4% year-over-year. We delivered a full-year operating income of $10.44 million with a net income of $13.37 million from the battery business based on additions. In 2023, we made significant strides in our business operations on all fronts, achieving progress at various stages. Through consistent advancements in battery technologies and production ramp-up, we effectively fulfilled customer orders and have nurtured a loyal, stable client base. We have fostered deep and robust partnerships with industry leaders worldwide, including Viessmann Group, a leading provider of residential energy storage applications in Europe and one of the world's largest manufacturers of heating and cooling systems; Anker Innovations, the largest third-party accessory supplier for Apple products; Hello Tech, the largest supplier of outdoor portable energy storage globally and parent company of Jackery; PowerOAK, the world's leading portable power station manufacturer and the parent company of Blue TTI and India-based NSURE Energy, among others. We have also forged a partnership with the largest battery manufacturer in Europe, though confidentiality obligations prevent us from disclosing their identity for now. Additionally, we have been negotiating with key stakeholders in Canada's electric vehicle industry to explore potential collaborations with the intention of formalizing agreements, and we will keep our shareholders and investors informed of these developments after securing consent from our clients. Furthermore, we expect to establish a partnership with a leading India-based scooter manufacturer in 2024. These partnerships and potential alliances demonstrate the broad recognition of our battery technologies and product excellence among top-tier players in the global battery sector. Moving forward, we will remain committed to technological innovation to bolster our product competitiveness, delighting customers with safe and reliable products. In terms of order demand, as of March 8, 2024, we have recorded RMB771 million or approximately $107 million in the combined value of orders we have received but have yet to fulfill across our two main production facilities in Dalian and Nanjing. Additionally, we have made substantial strides in our previously disclosed client initiatives. As of March 8, 2024, our collaboration with PowerOAK has resulted in orders amounting to roughly RMB61.6 million or approximately $8.57 million, while our partnership with Viessmann Group has generated orders totaling EUR213 million or approximately $195 million. Next, let me outline our latest R&D developments. In the second quarter of 2023, we successfully commenced mass production of large-scale sodium ion batteries, emerging as one of the few companies worldwide with the ability to mass-produce these batteries. Our sodium ion battery production lines are currently located at our Nanjing facility, which has a capacity of 0.5 gigawatt-hours. Since we began mass production, demand for our sodium ion batteries has exceeded supply. Consequently, we have been actively engaging with private equity investors to increase our sodium ion battery production capacity. Meanwhile, we have also been developing large-scale lithium-ion battery models, including model 40140 and 46120, with model 40140 currently in prototype A sample stage and model 46120 in prototype B sample stage. We expect model 46120 to complete prototype B sample stage and be ready for mass production by the latter half of 2024. We will continue to fine-tune these models in response to market demand dynamics, which may lead to modifications before production starts. Additionally, we have strategically optimized our production capacity with a well-coordinated production line layout; currently, at our Dalian facility, we operate three production lines, primarily manufacturing model 26650 lithium-ion phosphate batteries with a total annual production capacity of 1 gigawatt-hour, to better meet customer needs and mitigate supply shortages at our Dalian facility caused by high demand. In 2023, we leased a battery plant located in Changzhou, Hunan for producing model 26700 batteries. Today, our Changzhou facility has a production capacity of 0.5 gigawatt-hour, sufficient to fulfill part of our customer demand. This strategic move has further increased our production capacity, ensuring a more stable and reliable supply of products to clients. Regarding our Nanjing facility, the Nanjing Phase 1 project consists of two production lines—one dedicated to producing model 32140 lithium-ion batteries and the other able to produce either lithium-ion or sodium-ion batteries. The project has a capacity of up to 2 gigawatt-hours when both lines are producing lithium-ion batteries or up to 1.5 gigawatt-hours when one line is dedicated to sodium-ion battery production. Moreover, construction of our Nanjing Phase 2 project is underway with three large factories planned. Once all three are completed and operational, the total capacity of the Nanjing Phase 2 project is expected to reach up to 18 gigawatt-hours. So far, the first factory has been finished and the interior decoration is ongoing. We will decide whether to equip this factory with production lines for sodium-ion or lithium-ion batteries based on customer demand. Moving forward, we will further optimize our production line layout to enhance production efficiency, ensuring that we can respond quickly to market shifts and order fluctuations. In summary, despite the challenging macroeconomic environment and downward pressures across the battery sector, our battery business consistently demonstrated robust growth momentum and resilience in full-year 2023. This vitality was reflected in our strong financial metrics and the stability of our client base and the wealth of orders in our pipeline. More importantly, the company's industry leadership and technological advances have been recognized throughout the industry, as evidenced by the adoption of our products by the most advanced battery facilities in Europe. As a pioneer in sodium-ion battery production, we possess immense potential and competitive advantages in the renewable energy field. Looking ahead to 2024, we will increase our investments in research, development, and production capacity. Additionally, by fostering more and deeper collaborations with globally recognized clients, we aim to further increase our market share and enhance the company's global influence and visibility. We are confident that these combined efforts will solidify our position as a leader in the competitive industry for years to come. Now, let me turn the call over to our CFO, Mr. Li, who will provide details on our financial performance.

Thank you, everyone, for making the time to join our earnings conference call today. As our CEO mentioned earlier, we concluded the year with a robust fourth quarter financial performance from our battery business, where we achieved a double-digit increase in net revenues and positive income for the second consecutive quarter. We are pleased to see continued growth momentum in our battery business. Building on our solid fundamentals, we remain confident in our growth trajectory through 2024 and anticipate a full-year net profit for our battery business. We will provide more details on our net income guidance at the appropriate time. Turning now to Hitrans, our current battery material unit, which we strategically acquired in 2021. At the time of the acquisition, Hitrans boasted a strong client base and a higher level of revenue. Following the acquisition, we maintained Hitrans' core management team and refrained from interfering in its day-to-day operations. We have no additional financial obligations to Hitrans, and its financial health will not materially affect the financial standing of our overall business, as it is only reflected in our consolidated financial statements. That's why we have focused on reporting financial results solely from our battery business in our earnings release and earnings conference call to provide investors and shareholders with a clear understanding of our performance. We are currently talking with private equity investors for Hitrans and the sodium-ion battery business, and we hope to complete a private placement financing to support the development of our business. These investors, whether they are interested in Hitrans or the sodium-ion battery business, are consistently valuing the individual businesses' materials and sodium-ion batteries and more than the current market capitalization of our entire public company. Notably, their valuations do not take into account our core lithium battery business, indicating that our market value is currently significantly underestimated. I will now provide an overview of our 2023 fourth-quarter financial results. In the interest of time, I will be presenting abbreviated highlights only. We encourage you to refer to our press release issued earlier today for complete details. In the fourth quarter, our total net revenues increased by 3.2% year-over-year to $56.2 million. Net revenues from sales of batteries reached $36.8 million, a year-over-year increase of 30.9%. Our total gross profit grew 235.3% year-over-year to $12.7 million, resulting in a gross margin of 22.6%, compared to 7% in the prior year period. Gross profit for the battery business increased by 470.8% year-over-year to $13.2 million, with gross margin climbing to 36% from 8.3% in the prior year period. Our total operating loss amounted to $5.9 million, compared to an operating loss of $8.8 million in the prior year period. Net loss attributable to shareholders of CBAK Energy after deducting the change in the fair value of warrants was $4.8 million, compared to a net loss of $11.7 million in the prior year period. Net income from the battery business was $6.6 million, compared to a net loss of $6.4 million in the same period of 2022. As we mentioned earlier, we have a large number of prestigious clients around the world. However, due to the confidentiality of agreements, we cannot disclose their names without their consent. Going forward, we will actively communicate with them as part of our customer disclosure. We hope to be able to disclose more client names to our shareholders in 2024. In conclusion, our solid fundamentals will continue to provide a strong foundation for our business going forward, enabling us to strike a healthy balance between growth and profitability. That concludes our prepared remarks. Let's now open the call for questions. Operator, go ahead.

Thank you. We will now start the question-and-answer session. The first question comes from Brian Lantier from Zacks Small Cap Research. Please proceed.

Good evening, gentlemen. I wanted to focus on the gross margin. Do you think the gross margin in the fourth quarter will be sustainable moving forward? Was it mainly influenced by product pricing and new contracts, or was it more about decreased costs for some of your inputs?

Let me respond to your question, Brian. I think as you may be aware that the current competition in the battery market is very intense and key players in this industry keep lowering down their price to gain more orders and customers. We are completely different; our batteries boast a feature of high stability and safety characteristics, and our biggest clients, after three years of testing, are completely satisfied with the performance of our battery products. That's why they are willing to keep us at a high price in this market condition. Coming back to your question, we believe that being affected by the current market condition, the price will also go down in the long term, but we are still confident that the gross margin that we will present to you in the coming reporting period will still be higher than the market average. Thanks.

Great. Thank you. And I know we've talked in the past about long-term capacity goals, and I know that's a little bit in flux right now because it will be based upon whether you're producing lithium batteries or sodium batteries. But do you have any long-term capacity goals for 2024, 2025 that you can share with us at this point?

Yes. In terms of capacity growth, we have consistently increased our capacity in response to our clients' needs. Over the past years, we have gradually expanded our capacity across various production facilities. Our reports from 2024 to 2025 indicate that we have welcomed several large customers, and meeting their demand will necessitate boosting our production capacity. We anticipate a significant increase in the production capacity of sodium-ion batteries due to their advantages over lithium-ion batteries, such as performance in low-temperature conditions. Therefore, we expect to see substantial growth in sodium-ion battery production in the future, and we have positive expectations for that.

Let me add one point. As we mentioned in our report, we have three major factories under construction for the Nanjing Phase 2 project, and the first factory has been completed. We are currently doing interior construction at this moment. If everything goes well, we will have one production line for this factory operational in 2024, but we cannot determine yet whether it will be producing sodium-ion batteries or lithium-ion batteries, as that decision will depend on client demand. We're also talking to private equity investors about financing on the sodium-ion project, which will also affect our decision-making. So, it's a decision we will make this year, as many factors affect our decision.

I appreciate that. The last question I have is regarding outside investment. Could you provide an update on how advanced these negotiations are? Will we hear something in the first half of 2024 or the second half of 2024 concerning Hitrans or a sodium investment?

Well, let me respond to this question. We hope that we can announce something really positive in the first half of 2024, but it really depends on the private equity investors. What I can share is that many investors from China are very interested in our sodium-ion batteries, as we are almost the only company that can mass-produce large-scale sodium-ion batteries. But we are currently negotiating with them, as investing in a new battery plant is very expensive, and we need to discuss with them how much financing we need and what structure would be both feasible for us and agreeable to them. The negotiations are ongoing, and everyone is very interested.

Great, thank you.

Thank you for the questions. Seeing no more inquiries in the queue, I will now turn the call back to Mr. Yunfei Li for his 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 updating you again next quarter on our progress.

Thank you all again. This concludes the call. You may now disconnect your lines.