China Auto Logistics, Inc. (NASDAQ:CALI)
Q3 2013 Earnings Call
November 15, 2013 8:00 AM ET
Ken Donenfeld - DGI, IR
Tong Shipping - President and CEO
Lawrence Wang - Member, Financial Team
Jin Yan - COO
Richard Sun - Secretary
Ladies and gentlemen, welcome to the China Auto Logistics’ 2013 Third Quarter Investor Conference Call for the 15th of November 2013. For today’s presentation, all participants will be in a listen-only mode. Following the presentation, there will be an opportunity to ask questions (Operator Instructions).
I will now hand the conference over to Ken Donenfeld, DGI Investor Relations. Please go ahead, sir.
Thank you very much, operator, and thanks to those of you who are joining us on the phone and on the Internet for this periodic update. We greatly appreciate your interest in our Company.
And on the conference call today will be Mr. Jin Yan, COO of the Company; other executives of the Company here today include Yang Feng, Financial Controller; Mr. Lawrence Wang, who is a Member of the Financial Team. Mr. Yan has asked me to begin the presentation, Lawrence will then walk you through the numbers, and afterwards we also have Mr. Richard Sun, China Auto’s Secretary who will be serving as translator when we have the question-and-answer period, and we look forward to responding to your questions that you may have.
I will first read the required disclaimer regarding forward-looking statements. This conference call may contain an addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding China Auto Logistics, Inc. Except for historical information contained in our comments, the statements we make are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, product demand, market competition, and risks inherent in our operations. These and other risks are described in our filings with the U.S. Securities and Exchange Commission.
Okay, I will now proceed with Mr. Tong and Mr. Jin Yan’s comments.
Thank you all again for joining us this morning, I recognize that the news we produced on our third quarter was not that exciting. However, in our still highly competitive imported luxury automobile market, we made the decision at the expense of our profit margins to do our best to flush out our weakest competitors. Given our ability to also offer customers various related services, especially short-term financing in addition to low prices, we believe we will succeed.
Our result in the interim just won’t be very pretty, so in order to see the real value in our story one has to look ahead and between the lines and see the situation as we see it. If so you will first note immediately that given our substantial sales and very small number of shares outstanding even a small improvement in our margins could have an outsized effect on our per share results.
Second that our unusually small profit margins should quickly benefit when we decide to shift out of our price war mode or when we can further expand any of our existing high margin auto-related services or add new ones as would be facilitated by successful completion of the Airport Mall acquisition we have on the table.
Whatever path we take with regard to this potential acquisition, you can be assured we’re determined to succeed by leveraging our industry leadership position in the imported luxury vehicles space. As the economy in China improved, we and other experts continued to see sales of these vehicles outstripping the anticipated growth in China’s auto sales generally to some years to come as increasing numbers of our countrymen and women joined the ranks to the middleclass.
As to the actual results in the third quarter looking between the lines, it’s possible to see that the shift into a better economic environment perhaps has already begun, while luxury import buyers had some roadblocks thrown at them in terms of the decision by various government agencies to enforce existing policies and rules more vigorously. We nevertheless saw an increase in revenues over the prior quarter.
The growth we have anticipated in the sales of both domestic and imported luxury vehicles has continued to attract some of the top brand to our stores to be manufactured here. However, the luxury manufacturers do not all produce the same vehicles here that are built and sold outside of China, which are the objects of our customer’s desire.
Looking further at the results of our leading auto-related service, financing services, while revenues in the quarter reflect the roadblocks to sales in the period, it can be seen that through the first nine months of the year our fee income from this business actually has been up by double-digits. We think this increase can continue as customers adjust to the enforcements and also begin opening their pocket books again in a better economic environment.
So while we’re fighting it out in the tranches at the moment, we remain excited about and are not losing sight of the future. We are continuing to study the potential acquisition of the Automall, also know that we have continued to explore and experiment with various new services. I know it's been some time since we have delivered a success in this regard but we have not been standing still.
With that, I would like to pass the microphone now to Lawrence. Lawrence who will briefly summarize for you the highlights of the quarter and afterwards we’ll rejoin you in order to answer some of the questions you may have, Lawrence can you proceed?
Thank you very much Ken. I will take a few minutes here to walk through the highlights in the quarter and then we'll be happy to go into more details in the Q&A sessions that will follow. As Mr. Tong pointed out, the numbers themselves for the quarter were not very indicative on the service of young whole company. They pretty much follow the pattern of our results in recent periods with the further complications in both the second quarter and the third quarters of some governmental decisions that caused many potential buyers of imported luxury autos to pause or pullback.
Clearly we also have been in a still slow auto perhaps recovering economic environment. Meanwhile though slower of the growth potential on -- but this have attracted many small competitors. We have decided to face this head on by providing customers with deferred best prices in the market.
As expense of further nearing of our already very slim margins and by remaining a well regarded leader, our goal has been to offset the traditionally small contributions to our bottom-line from our auto sales business, the contributions from higher margin auto-related service businesses.
The contributions to our income from auto-related service business took a hit when we made the strategic decision essentially to exit web-based advertising and focused on our high margin businesses. More recently though we have seen our financing services more than fill this gap helped to a much lesser degree by our other auto-related services. But in this year's third quarter it fell short and the impact on our bottom-line was very clear.
Net revenues in the quarter were approximately $125.5 million, down from approximately $170.5 million in the third quarter last year. Approximately 98.4% of these revenues in the quarter were from our auto sales business. With margins in auto sales business severely narrowed, the contributions to operating income in the quarter was reduced to approximately $194,000 from about $1.12 million a year earlier.
As has been the case in recent quarters the biggest contributor to operating income in the 2013 third quarter was financing services, although their contributions was reduced to about $579,000 from about $771,000 a year earlier.
Contributions to operating income from Automall management service, automobile value-added service and web-based advertising service were about $182,000, $127,000 and $89,000 respectively. Reflecting the net income attributable to shareholders in the quarter declined to about $553,000 or $0.15 per share compared with $1,518,000 or $0.41 per share in the 2012 third quarter.
For the nine months ended September 30, 2013 net revenues were $343,271,000 compared with $427,950,000 a year earlier. Net earnings attributable to shareholders in the first nine months of 2013 were $2,361,000 or $0.64 per share compared with $4,748,000 or $1.29 per share in the first nine months of 2012.
Following our reverse split last year, the diluted weighted average common shares outstanding in all periods was roughly 3.7 million shares. Continuing to look further between the lines this is what can be found. First, one of the key problems with import auto sales beginning in the second quarter was in limitations, on the PRC customs department of unified standards to complete their inspection process.
This had the effect of lengthening our purchasing cycles which made it take longer than usual to fill the orders from the customers. The Company works on this and eventually saw inventories increased to a stable level at the end of the third quarter.
Additionally, the stricter enforcement of existing rules by the PRC motor registration office, result in greater expense to our customers due to a need to make alterations on some vehicles. We have been providing advice to our customers to minimize their alterations cost which has slowly eased their concerns.
Lastly, there was a clear trend during the year toward purchase of lower-end automobiles to the three top luxury lines sold by the company. These two began to ship in the third quarter with average unit price for two of the company’s top-seven brands including Mercedes and Toyota, increasing roughly 10% and 14% respectively.
The net result is that the numbers of vehicles sold in the quarter was 1,253 vehicles, was down sharply from the 2004 vehicle. So in 2012 third quarter but it was slightly higher than the 1,240 automobiles sold in the second quarter this year. Further the average unit price for vehicles sold in the quarter increased to $99,000 from $84,000 a year earlier and $87,000 in this year’s second quarter.
And of note, while revenues from auto sales in the quarter were $123,468,000 down approximately 27% from revenues in the prior year period. They were up double-digits from the approximately $108 million in revenues in the second quarter this year. Of course, despite the increased unit sales and high average unit price, the lower gross margins in the quarter as we sell off the decision to continue highly competitive pricing, we felt in the decrease contributing to operating income.
While revenues and operating income from our still highly profitable financing service operations decline in the quarter compared with prior year over the first nine months of 2013, we saw gross margins in this business increase to 62.42% from 51.24% a year earlier. And we also saw the fee income of this business grow approximately 14% year-over-year in this period. We think these are clear signs of continuing growth potentials for this business.
Further, we continue to be very comfortable with the support we are receiving from the PRC banking and communities, which provide underpinning for the short-term financing we provide to customers. As of September 30th this year we had drawn just under $50 million on aggregate credit lines of about $139 million to support the business.
We also had at that date 13.7 million foreign currency borrowings arrangements with Agricultural Bank of China and essentially believe we can readily access credit lines and loan facilities on an as needed basis in the PRC.
The last thing I would comment is regarding the potential acquisitions in May this year, our largest operating subsidiary Tianjin signed a non-binding letter of intent to acquire the company which owns the and operate the Auto -- the Airport International Automall in Tianjin, it made a refundable deposit of about $16.3 million related to this.
We anticipate the purchase price of the acquisition including the 26,000 square meters of facility and surrounding land used rights. Will be between $65 million and $130 million, if we succeed in acquiring the Mall it would become a springboard for growing auto-related business. So I will stop here and hand the floor back to Ken, and we will then welcome your questions. Ken?
Thank you very much, Lawrence, Mr. Tong wanted to make just a couple of final comments. First he wanted to thank shareholders for their continued patience. He believes it is essential for the future of the Company that it maintains its leadership position and what is widely seen as a still fast growing segment of China's auto business. In turn, this will help the company expand its existing more profitable services businesses as well as help launch new ones in the future.
With that, operator we are ready to open the floor to any questions, could you assist us?
Thank you, sir. (Operator Instructions)
Let's see I might begin here, I've got a couple of questions emailed to me. This is Ken again.
Could you tell us what would the normal margins on auto sales, typical margins if it weren't for the situation that you're in now?
Mr. Yang Fong to answer your question that well if there were not the impact from, due to the economic elements or the government regulations we believe our product’s third quarter result will be very similar to the one of last year.
The other question that I have unrelated to that is, are there other services, auto-related services that you are exploring, still you'd mentioned some in the past could you give us a bit of an update on that?
The management of company has discussed at several discussions with related governmental agencies to explore the possibility of the new auto-related already, but I am sorry that for the time being we cannot say more about it.
Okay. But you are continuing to look at other possible services with higher margins? The last question I have, before I let someone else ask the question, operator is there another question on the floor?
(Operator Instructions) There appears to be no questions at this time.
Okay. Then here is one that I'll just start, I guess last week there was a big meeting in China of the Communist party coming up with an economic plan or outline for the next several years. Is there anything that you -- and what they have said so far that you think to have in access on your business positive or negative?
Well Ken during the meeting one important trend that determined or discussed during the meeting is that the government will improve -- will continue to improve marketing oriented economy in the country. And we believe this will bring positive impact to our business. However, up till now we cannot say more about the result of this conference without some details or some details of the conference or just published a couple of hours ago and we cannot illustrate more from it, yes.
Yes, that's received a lot of coverage here and I guess most are saying that it will take possibly weeks until what these new outlook will mean for various companies. Operator, are there any further questions from anyone?
There appears to be no questions from the phone.
Okay. Well in that case hopefully we answered your questions during the presentation. If you have other though, please feel free to give me a call and I will be happy to put you in touch with appropriate people at the Company. Thank you all very much for joining us and I guess that is the end of this conference call. Thank you all very much again.
This concludes China Auto Logistics’ 2013 third quarter investor conference call. Thanks for participating. You may now disconnect.
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