Earnings Call Transcript - CBAT Q1 2022

Operator, Operator

Good day, everyone, and thank you for joining us for the CBAK Energy Technology First Quarter 2022 Earnings conference call. All participants are currently on mute. We will have a question-and-answer session later, with instructions provided at that time. Please note that we are recording this call. Now, I will hand it over to Thierry Li, Director of Investor Relations at CBAK Energy. Mr. Li, please go ahead.

Thierry Li, Director of Investor Relations

Thank you, operator, and hello, everyone. Welcome to CBAK Energy's first quarter 2022 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer; and Mrs. Xiangyu Pei, our Chief Financial Officer. We released results earlier today. The press release is available on the company's IR website at ir.cbak.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. On the call with me today are Mr. Yunfei Li, Mrs. Xiangyu Pei, Mr. Xiujun Tian, who is our General Engineer; Mr. Wenwu Wang, who is our Vice President, and our interpreter Jennifer. 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 risks and uncertainties is included in the company's public filings with the SEC. 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 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.

Yunfei Li, CEO

Thank you, and hello, everyone. Thank you for joining our earnings conference call today. We are thrilled to start 2022 with a robust first quarter. Our net revenue increased more than eight times year-over-year to $80.2 million. About $50 million of that came from the battery business, while approximately $65 million was generated from materials for lithium battery cells due to the Hitrans merger. Moreover, strong sales of high-power lithium batteries, fueled by their growing use in light electric vehicles and a steady rise in demand for uninterruptable power supplies, also played a significant role in our revenue growth. We achieved impressive performance and results even as we were still ramping up production at our Nanjing battery plant, showcasing the vast potential of our battery product ecosystem. Our Nanjing facility has a maximum production capacity of 18 gigawatt hours, significantly exceeding our current capacity if fully operational. As our battery production increases, our optimism about the growth and future of our business continues to rise. Next, let's discuss our recent product developments and production. We are actively developing large cylindrical batteries aimed at the light electric vehicle and passenger vehicle markets. In addition to optimizing our existing cylindrical battery products, we are in the process of producing a prototype for the model 42140 battery. We have successfully designed research and development plans for the model 42140 battery and anticipate steady progress as scheduled. We are pleased to report that feedback from the market regarding our products has been overwhelmingly positive. As of May 9, we have battery orders worth approximately JPY400 million, which translates to about $59 million. Our main factory in Dalian is currently operating at full capacity, and we are also scaling up production at our Nanjing facility. Additionally, we have secured approximately $30 million in orders from one of our major clients, further indicating that the quality and performance of our products are gaining recognition among key global players. In the second quarter, we will prioritize maintaining stable revenues from batteries used in uninterruptable power supplies and from the raw material business. Furthermore, we will continue to boost the revenue share of large cylindrical batteries by securing new contracts with manufacturers in the light electric vehicle and electric vehicle sectors. Now, let’s address our material business stemming from the acquisition of Hitrans. This sector is a significant contributor to our current revenues and is benefiting from material price inflation due to its advanced technology and reliable quality. Hitrans has secured several strategic customers and is operating at full capacity. In 2022, we will continue to run Hitrans’ material business while enhancing its core value and professionalism. Hitrans will invest further in research and development and product innovations to create high nickel cathode materials that can enhance safety and range for electric vehicles, aiming to position Hitrans as a world-class manufacturer of cathode materials for lithium batteries. However, the rise in material prices has put pressure on profits for our downstream battery business. To mitigate this impact, we have implemented several measures. First, we have established long-term supply agreements with major suppliers to ensure access to the necessary materials and resources for production. Second, through our merger with Hitrans, we have expanded our presence in the upstream sector to manage certain raw materials and use inflation in material prices to offset declines in the gross profits of our battery plants. Third, we have begun renegotiating prices with our downstream customers and successfully increased prices for several key customers. The increase in material prices has placed pressure on our cash flow due to the time needed to pass these costs onto downstream customers. Nonetheless, these are short-term fluctuations; as raw material producers expand their output, material prices will eventually stabilize and return to reasonable levels. With that said, we anticipate an increase in gross profit in the future. Our aim is to lead the production of lithium-ion batteries and electric energy solutions while maximizing value for our shareholders through our expansion into the raw material sector and our quick responses to market changes. Moving forward, we will actively look for high-quality assets and valuable investment opportunities both upstream and downstream in the new energy industry to stabilize our supply chain and improve our investment returns. Now, I will turn the call over to our CFO, Xiangyu Pei, for further details on our financial performance.

Xiangyu Pei, CFO

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 first quarter of 2022. For the full details of our financial results, please refer to our earnings press release. Our significant revenue expansion validates the effectiveness of our growth strategy. The raw material price hikes remain as short-term headwinds to the battery business, but we have taken action to mitigate their impact. Additionally, we expanded our investments into our infrastructure with a primary focus on sales and marketing as well as research and development for our next phase of growth. Moving on to our results. In the first quarter, net revenues increased 752% to $80.2 million from the same period of 2021, primarily due to additional revenues from battery materials brought by the acquisition of Hitrans and strong sales of high-power lithium batteries. Cost of revenues was $74.9 million in the first quarter, up 888% from the previous year. Gross profit was $5.3 million, an increase of 189% from the prior year. Gross margin was 6.6% in the first quarter, compared with 19.5% in the same period of 2021, as raw material costs rose. As noted earlier, with the long-term contracts with certain suppliers, we expanded into the raw material business and renegotiated prices with our clients to tackle the price hikes. We expect the prices of raw materials to decrease as new capacity is added by the industry. During this quarter, our operating expenses rose 256% to $6.7 million, primarily due to growing headcount and the acquisition of Hitrans. Within that, our research and development expenses increased to 585% to $3.3 million. Sales and marketing expenses increased 290% to $0.8 million. General and administrative expenses increased 69% to $2.2 million. Even with these increases, our operating expenses were held at only 8.3% relative to other revenues, compared with 19.8% in the same period of 2021. Our change in fair value of warrants was $1.6 million in the first quarter compared to $28.4 million in the prior year. Thus, net income attributed to shareholders of CBAK Energy was $0.4 million during the period, compared to $29.6 million in the same period of 2021. As of March 31, 2022, our cash and cash equivalents reached $5.6 million compared to $7.4 million as of the end of 2021. Looking ahead, we will remain committed to our long-term growth strategies for our development in the industry. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead. Thank you.

Operator, Operator

Thank you. We will now begin the question-and-answer session. First question, we have Laura from Stone Street Group. Please go ahead.

Unidentified Participant, Analyst

Before the company provided updates on the production of the model 464 series, there was significant interest in the development of the 46800 battery. Could you share more information on the progress of the 46800? Thank you.

Yunfei Li, CEO

Okay. We announced the progress on the development of the 46800 battery and our investment in R&D for this model. We have completed the prototype development and can confirm that it meets the original design requirements. We will continue to advance steadily in our further developments.

Unidentified Participant, Analyst

Okay. So my second question concerns the company’s development plan and customer development progress in the Nanjing plants. I would like to know more about the production situation in the Nanjing plants. What will be the major products produced in the Nanjing plant over the next three to four quarters? Additionally, could you provide updates on the customer development targeting the products that will be produced in Nanjing?

Yunfei Li, CEO

We are pleased to report that production capacity in Nanjing has been growing since the start of the year as we continue to explore and expand our market presence. We have seen an increase in orders that align with market demand, and we expect even more orders to come in toward the end of the second quarter or the beginning of the third quarter. Our product development efforts are focused on the needs of the market, particularly for two-wheelers and three-wheelers. Our primary business will concentrate on battery swapping and leasing. We are close to finalizing agreements with major clients who are anticipated to place orders by the end of June, which are projected to generate total sales of approximately $1 million to $1.5 million. Additionally, our energy storage sector is gaining traction, with several customers already conducting shakedown tests, and a few have begun limited production. We expect to see larger orders emerge in the third quarter, with an increase in sales volume following that. Looking forward, we plan to develop products aimed at low-speed and freight vehicles, targeting two to three projects that will utilize our new production lines by the fourth quarter. We also intend to build a broader customer base to ensure that when our 18-gigawatt production capacity is ready, we can secure the necessary orders from significant clients. Our efforts so far are setting a strong groundwork for securing more orders in the future. Our sales goal for the next three quarters is to achieve $300 million.

Unidentified Participant, Analyst

Okay. My last question is about the serious situation caused by the COVID pandemic. On one hand, we see tightness in the supply chain. On the other hand, we have noticed that in China, many cities are currently under lockdown due to the pandemic surge. We would like to understand what impact this will have on the company's performance in the second quarter and for the rest of the year.

Yunfei Li, CEO

We acknowledge that the pandemic has introduced some uncertainties to our factory operations. However, since COVID-19 emerged in early 2020, our three plants in Dalian, Nanjing, and Shaoxing have not been disrupted by any lockdowns. While we cannot rule out the chance of future lockdowns, we are in a fortunate position as our plants are strategically located. In the event of a lockdown in one city, we are ready to implement measures to lessen the impact. Currently, we are in a strong position, but we recognize that circumstances may change.

Unidentified Participant, Analyst

That’s it for my question.

Yunfei Li, CEO

Thank you, Laura.

Operator, Operator

Thank you. Next question is Howard from Linden. Please go ahead.

Unidentified Participant, Analyst

Okay. After the acquisition of Hitrans, does the company have plans to acquire or merge with other battery plants either upstream or downstream? If so, could you share the reasoning behind this and what strategic areas you are considering for such acquisitions?

Yunfei Li, CEO

Thank you for your question. We believe that our acquisition of Hitrans has been successful, and we hope to cooperate further with companies like Hitrans in terms of equity or strategic cooperation. We are interested in such cooperation from two perspectives: financial investment and the development of our core business. From a financial perspective, many countries, including China, are advocating for the development of green and clean energy, making renewable energy a promising industry. It is crucial for us to integrate upstream and downstream resources in new renewable energy, particularly lithium batteries, which hold great potential. From the perspective of business development, CBAK is a high-end player in lithium batteries. Based on our 20 years of experience, we know that the quality of raw materials and the stability of production capacity are vital. Therefore, we focus on leveraging resources upstream and downstream to ensure product quality and the stability of our supply chain, facilitating long-term development and competitive advantage in the market.

Unidentified Participant, Analyst

Okay. From your reports, I noticed that the production capacity in Dalian is full, and I also see that several battery manufacturers have plans to build new production lines. What plans does CBAK have for battery material or battery production development in terms of new production lines for 2022?

Yunfei Li, CEO

We have noticed that key competitors in the market are quickly increasing their production capacity, including at our facilities in Dalian. However, I don't anticipate any issues since our customer markets don't overlap. Other major players are more focused on vehicle manufacturers for electric tools, while we concentrate on energy storage and small power vehicles. Our production capacity in Dalian has significantly increased, and our new production lines are gradually becoming fully operational. If customer demand continues to grow, we may invest in additional production lines. So far, our new production line in Dalian has already doubled our previous capacity. In terms of energy storage, two out of three customer offers have already placed orders, and we believe that our new production line can meet their needs soon. We will closely monitor raw material requirements from our customers, and if they request more orders, we will actively seek funding to expand our capacity to fulfill those demands.

Unidentified Participant, Analyst

I have no more questions.

Operator, Operator

Thank you, Howard. It seems there are no more questions in the queue. Let me turn the call back to Mr. Yunfei Li for closing remarks.

Yunfei Li, 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.

Operator, Operator

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