Earnings Call Transcript - CBAT Q3 2024

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the CBAK Energy Technology's Third Quarter 2024 Earnings Conference Call. 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 Xiujun Tian, IR Specialist of CBAK Energy. Ms. Tian, please go ahead.

Xiujun Tian, IR Specialist

Thank you, operator, and hello, everyone. Welcome to CBAK Energy's earnings conference call for the third quarter 2024. Joining us today are Mr. Zhiguang Hu, or Jason, Chief Executive Officer of CBAK Energy; Mr. Jiewei Li, Chief Financial Officer and Secretary of the Board; our General Engineer, Mr. Xiujun Tian and Yvan, who will help with our interpretation during the Q&A session. We released our 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 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. Zhiguang Hu. Please go ahead, Jason.

Zhiguang Hu, CEO

Hello, everyone. Thank you for joining our earnings conference call for the third quarter of 2024. I'm pleased to report on the performance of our battery business for the third quarter and the first nine months of this year. Although net revenue from our battery business slightly declined to $33.5 million in the third quarter, the overall revenue of the battery business in the first three quarters achieved a year-on-year growth of 18.4%, reaching $114 million. This is quite remarkable considering the general pressure and the downturn in the entire new energy industry. The main reason for the decline in the net revenue from our battery business in the third quarter was a one-month suspension of the production line at our Dalian facility in September. The production line had been operating at full capacity since the beginning of the year, and the high energy costs necessitated the suspension for refurbishment. We would like to provide a closer look at the revenue breakdown in our battery business. The revenue from battery for the energy storage sector reached $33.46 million, a 25% decrease compared to the previous year. EV battery contributed $333,000, a decrease of 17% compared to the same period last year. Battery for light electric vehicles, including two-wheelers and three-wheelers brought in $4.9 million, a year-on-year increase of 341%. Overall, our battery business remains focused on the energy storage market, supplemented by our endeavor to continue exploring the light electric vehicle market, with an increase in orders from our Indian and Vietnamese customers. We believe that the revenue proportion of light electric vehicles will gradually increase. Our battery business has maintained a high gross profit margin, reaching 34.3% in the first three quarters of this year, an increase of 15.2 percentage points compared to the same period in 2023. This gross margin figure is higher than that of most competitors, including some well-known industry giants. This year, our battery business achieved a net profit of $11.68 million in the first quarter, $7.89 million in the second quarter and created a net profit of $2.04 million in the third quarter. When our competitors are suffering from an industry-wide downturn, we managed to make three consecutive quarters of net profit, amounting to approximately $21.6 million. As usual, we will also provide an update on the announced plans. As of November 1, 2024, the total amount of orders received but not yet delivered at our major production bases in Dalian and Nanjing reached RMB 59.61 million, approximately $8.38 million. Our accumulated order amount with PowerOAK has reached approximately RMB 80.55 million, about $11.35 million. Our orders with Viessmann Group have reached up to €213 million, about $233 million. As for Jinpeng Group, our accumulated orders value has reached approximately RMB 67.01 million, about $9.42 million. In addition, our important client, Anker, has made an order of RMB 321 million, approximately $45.12 million since our collaboration. This customer has a stable relationship with us, and some of them are encouraging and pushing us for the establishment of our overseas factories and are willing to place orders in advance to help facilitate our move to expand overseas. Our Dalian facility has long been profitable, and in Q3, we are pleased to see our Nanjing factory also achieved profitability. The Nanjing factory, which started operations and manufacturing the new model 32140 large cylindrical battery at the end of 2021, has only been in business for less than three years. Originally, we anticipated that Nanjing factory would have to suffer net losses for a three-year period. Thanks to the hard work of our team, the Nanjing facility has successfully become profitable ahead of schedule. More importantly, the production lines at our Nanjing factory are currently operating at full capacity due to high demand, prompting us to accelerate our capacity expansion plan. As of now, we have signed a procurement contract with an equipment supplier, and plan to add a new production line that will enable compatible production of model 32140 and 40135 batteries in the second phase of the Nanjing factory with an estimated capacity of approximately 1.5 gigawatt-hours for model 32140 and 1.5 gigawatt-hours for model 40135. We anticipate equipment installation in the first half of next year, followed by mass production in the second half. Furthermore, with respect to our R&D efforts, we are steadily advancing the development of new battery models. As just reported, we will soon be able to mass produce the model 40135 large cylindrical battery. This model has a strong market demand in applications such as light electric vehicles and energy storage. Additionally, we successfully developed the tablet model 26650 cylindrical battery and have started mass production in Dalian. The product has a characteristic of 25C discharge rate and performs really well in applications that require rapid energy release. Besides, the tablet 26650 cell can be charged from zero to 100% in just 15 minutes, which holds great practical significance for applications that require fast charging and discharging, such as drones, desktop power supplies, and data centers. Currently, we are one of the few companies in the market with the ability to produce this tablet model 26650 battery. Overall, we have successfully maintained strong momentum in our battery business by sustaining a high gross profit margin and net profit. Considering the current high demand for our model 32140 cells produced at our Nanjing factory and the newly added capacity for our new model 40135 cells, we will accelerate the pace of capacity expansion to drive continued revenue growth. Now let me turn the call over to our CFO, Jiewei Li.

Jiewei Li, CFO

Thank you, Jason, and thanks, everyone, for making time to join our earnings conference call today. Since Jason has introduced our key financial metrics, in the interest of time, I will not be duplicating the presentation of the numbers. We encourage you to refer to our press release issued earlier today for complete details. In the third quarter, our battery business experienced a slowdown. As Jason mentioned in his remarks, this was primarily due to a one-month suspension of production at our Dalian factory. For the first eight months of the year, the factory operated at full capacity without any breaks, which led to a significant increase in energy costs. To mitigate these costs and enable upgrades, we paused operations for a month. During this period, we optimized energy usage and upgraded one production line to support the production of our new tablet model to 26650 cells. As for our Nanjing factory, now in its third year, it has successfully transitioned into a profitable production center with a steady flow of orders fully booking its capacity. Currently, we face a supply shortage of approximately 5 million cells from Nanjing, underscoring the strong demand. Looking ahead, although our gross margin has been exceptionally high, we anticipate a gradual return to more typical levels, yet still higher than our industry competitors. In summary, our Dalian factory has long been a key contributor to our net profits, while our Nanjing facility initially incurred losses due to construction, setup of new production lines and the promotion of new battery models. Now that Nanjing has turned profitable, we expect that both factories will drive our financial growth in the future. With the expanded capacity in Nanjing next year, we remain optimistic about the company's performance. Thank you, and we will now open the floor for the Q&A section. Operator, please go ahead.

Operator, Operator

We will now take the first question from Brian Lantier of Zacks Small-Cap Research. Please proceed.

Brian Lantier, Analyst

Good morning, everyone. I appreciate all the updates. That you're navigating a difficult environment and having success is good to see with some of the new products. I guess, the first question is just around some of the weakness that you're seeing in the battery business. Is it principally derived from pricing pressures from competitors or is it more on the demand side from some of your clients in Europe?

Zhiguang Hu, CEO

So first of all, since we are using the tablet design for our 26650 models, we can improve the C-rate performance of the cells. This enables our products to be utilized more effectively in the startup battery business, particularly for new energy vehicles as well as combustion engine vehicles. From this new business, we can achieve a reasonable profit. Secondly, for our energy products, we are gradually increasing the production capacity. In terms of the industry, compared to our competitors, we have a higher energy density in our products, which makes them more competitive overall. To summarize, that's all my answers.

Brian Lantier, Analyst

I'll jump back in with another question if that's okay. How frequently do you anticipate doing maintenance shutdowns like you did at Dalian? Is this an annual process or every three to five years that you would do this?

Xiujun Tian, IR Specialist

So the shutdown from Dalian factory is mainly because we are upgrading our products from energy battery cells to high-series battery cells. It’s a matter of optimization and upgrading our production line. To carry out this optimization, we need to shut down the cell temporarily. The decision to do this was also influenced by market trends. This shutdown was planned in the first half of this year, and it's a normal operation as intended from the beginning.

Jiewei Li, CFO

Yes. As we mentioned in our remarks, the other reason for the suspension of production at Dalian for one month is simply that the factory had been operating without any breaks since the beginning of the year until September. The energy costs were high at that moment, so we decided to suspend production to reduce these costs while simultaneously upgrading our production lines.

Brian Lantier, Analyst

The LEVs are obviously a bright spot right now. Is that principally coming from Vietnam and India?

Xiujun Tian, IR Specialist

Sorry, can you repeat your question?

Brian Lantier, Analyst

Sorry, the LEV business, the light electric vehicles, is that demand principally coming from customers in India and Vietnam?

Zhiguang Hu, CEO

Yes. The main business for the LEV is mainly in Southeast Asia, which includes India, Vietnam, Indonesia, etc. These countries cannot produce the batteries themselves, so they rely on importing batteries from China. Among all cell manufacturers in China, our products are the most stable. That's why we see a dramatic increase in demand.

Brian Lantier, Analyst

The last one for me is, I think I heard you mention the prospect of overseas expansion. If I heard that correctly, any details on that, where you're looking, timelines, things like that?

Jiewei Li, CFO

I will directly respond to your question, Brian. At this moment, the only information we can provide is that this is client-driven. We have significant clients approaching us requesting the acceleration of our overseas factory setup. We are looking into various suitable locations, including the U.S., but we have not yet determined which country we will establish our production lines in. Additionally, we will not undertake this project independently; we are seeking domestic partners to help manage daily operations alongside handling government applications and management. This is still in an early stage, but the management treats this as part of our routine operations. We are currently engaged in serious discussions with multiple parties. This is all we can disclose for now. As we mentioned in our remarks, our clients are eager to place orders in advance to encourage us to establish this factory.

Brian Lantier, Analyst

Okay. Great. Thank you very much.

Operator, Operator

Thank you. Seeing no more questions in the queue, let me turn the call back to Jason for closing remarks.

Zhiguang Hu, CEO

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.

Operator, Operator

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