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China Zenix Auto International Limited (NYSE:ZX)

Q2 2014 Earnings Conference Call

August 21, 2014 08:00 AM ET

Executives

Kevin Theiss - Grayling

Junqiu Gao - Deputy CEO

Martin Cheung - CFO

Analysts

Matthew Larsen - Morgan Stanley

Operator

Greetings, and welcome to the China Zenix Auto International Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Kevin Theiss of Grayling. Thank you sir, you may begin.

Kevin Theiss

Thank you for joining us today. And welcome to China Zenix Auto International’s second quarter and first six months financial results conference call. My name is Kevin Theiss, and I am with Grayling, Zenix Auto’s U.S. Investor Relations Advisor.

Joining us today are Mr. Junqiu Gao, Deputy CEO; and Mr. Martin Cheung, CFO of Zenix Auto.

Before we begin, this conference call script contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as aim, anticipate, believe, continue, estimate, expect, going-forward, intend, ought to, plan, potential, project, seek, may, might, can, could, will, would, shall, should, is likely to and the negative form of these words or other similar expressions. Among other things, the revenue guidance and quotations from management in this announcement, as well as Zenix Auto’s strategic and operational plans, contain forward-looking statements.

Zenix Auto may also make written or oral forward-looking statements in its periodic reports to the SEC, in its Annual Report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees. Statements that are not historical facts, includes statements about Zenix Auto’s beliefs and expectations, are forward-looking statements.

Forward-looking statements involve inherent risk and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including, but not limited to the following: our growth strategies; our future business development, including our ability to successfully develop new tubeless steel wheels products and the planned introduction of aluminum wheels; our ability to expand our distribution network; overall growth in aftermarket and OEM market in China and elsewhere, which depends on a number of factors beyond our control, including economic growth rates and vehicle sales; and changes in our revenues and certain cost or expense items as a percentage of our revenues.

In particular, readers should consider the risk outlined under the heading Risk Factors in our most recent Annual Report on Form 20-F, and in our current report filed from time to time on Form 6-K. Zenix Auto does not undertake any obligation to update any forward-looking statements, except as required under applicable law. All information contained in the press release, script and any attachments is as of the date of the press release, and the Zenix Auto undertakes no duty to update such information, except as required under applicable law.

Mr. Gao will provide a brief overview and summary and then Mr. Cheung will review the 2014 second quarter and first six months financial results. Thereafter, we will conduct a question-and-answer session. For purpose of today’s call, the financial results are unaudited and they will be presented in RMB and U.S. dollars. Zenix Auto prepares its financial statements in accordance with the International Financial Reporting Standards, IFRS, as issued by the International Accounting Standard Board.

Mr. Gao, please start your opening remarks.

Junqiu Gao

According to the China Association of Automobile Manufacturers, the overall commercial vehicle industry unit sales, excluding gasoline powered vehicles, declined by 13.7% for the second quarter of 2014. In contrast, we experienced a smaller year-over-year decline in quarterly unit sales of just 5.5% as our broad portfolio of advanced wheels increased its market share.

We also achieved positive unit sales growth for our tubeless wheels in the OEM aftermarket and export segments of our business. On a six months basis, our higher margin tubeless unit sales grew by 8.7% year-over-year, led by our OEM unit volume increase of 3.8% compared with a 4.3% year-over-year decline in truck unit sales in China over the same period.

China’s GDP grew 7.4% in the first half of 2014, and grew 7.5% in the second quarter, according to the National Bureau of Statistics. So at the beginning of 2014, the Chinese government has adopted accommodative policies in selective areas, such as infrastructure projects, tax cuts and railroad construction. Despite the recent slowdown in the real estate investment, financial liquidity has improved from last year. It is likely that additional capital may flow into areas such as highway expansion, manufacturing and real estate investment, which could eventually benefit the truck market.

We are confident that inventory restocking to replace older vehicles and government policies will help to stabilize commercial vehicle market demand in China. We believe our broad range of wheel products and our ability to innovate will continue to drive our success. We are able to quickly adjust to market opportunities in the truck segment. Many of our wheels are enjoying increasing market acceptance at home and abroad. Our advanced wheels and efficient production enable us to consistently meet and exceed customer expectations.

We maintained a strong financial condition with RMB966.4 million, which is US$155.8 million, in bank balances, cash and bank deposits. Our cash flow remains healthy as we generated RMB173.7 million, or $28 million, in cash flow from operations for the first six months of 2014. We continue to build shareholder value by consistently generating positive cash flow and reducing debt. And our solid financial condition provides the resources to support our growing operations.

Thank you. We will now turn the call over to CFO, Martin Cheung, to go over our detailed financial results.

Martin Cheung

Thank you, Kevin and Mr. Gao. Good morning everyone. Let me first go over the second quarter results. Our revenue for the second quarter ended June 30, 2014 was RMB959.7 million, which is US$154.7 million compared with RMB1,059 million a year ago, and RMB896.1 million in the first quarter of 2014.

Aftermarket sales in China decreased by 9.2% year-over-year to RMB471.4 million, which is US$76 million, in the second quarter of 2014 compared with RMB519.2 million a year ago, and RMB449.7 million in the first quarter of 2014. There was a slight increase in aftermarket unit sales for tubeless wheels.

Sales to the Chinese OEM market decreased by 9.8% year-over-year to RMB340.7 million, which is US$54.9 million, in the second quarter of 2014 compared with RMB377.6 million a year ago, and RMB308.6 million in the first quarter of 2014. The year-over-year sales decrease in the second quarter of 2014 was mainly attributable to sluggish truck sales.

International sales decreased by 9.1% year-over-year to RMB147.7 million, US$23.8 million, in the second quarter of 2014 compared with RMB162.5 million a year ago, and RMB137.8 million in the first quarter of 2014. The year-over-year decrease in international sales in the second quarter was mainly due to lighter sales volume associated with the appreciation of RMB currency in the international market.

Sales to other Asian countries continued to account for a growing proportion of international sales, as the Company proactively promoted products to new and existing customers in those markets.

In the second quarter of 2014, our three segments of business, domestic, aftermarket sales, domestic OEM sales, and international sales, each contributed to 49.1%, 35.5% and 15.4%, of total quarterly revenue respectively.

In terms of sales by product category tubed steel wheel sales accounted for 58.3% of 2014 of second quarter revenue compared with 59.5% in the same quarter of 2013. The year-over-year decline in tubed steel wheel sales as a percentage of total sales was mainly due to increase in tubeless wheels as a percentage of total sales. Tubeless steel wheel sales represented 37.2% of second quarter revenue compared with 36.6% a year ago. Our tubeless products continued to gain attraction and win more orders from customers at home and abroad due their functionality, durability and quality.

Second quarter gross profit was RMB192.2 million, which is US$31 million, compared with RMB224.7 million in the same quarter of 2013. Gross margin was 20% compared with 21.2% a year ago. We continued to fine-tune our product mix and implement an effective pricing strategy to stabilize gross margin.

Selling and distribution costs decreased by 4.9% year-over-year to RMB70.2 million, US$11.3 million, compared with RMB73.8 million a year ago. Lower selling and distribution costs resulted primarily from decreased transportation costs and lower port costs. As a percentage of revenue, selling and distribution costs was 7.3% compared with 7% in the same quarter a year ago.

Research and development expenses were RMB24.1 million, which is US$3.9 million, compared with RMB22.6 million a year ago. R&D, as a percentage of revenue, was 2.5% in the same quarter of 2014 compared with 2.1% in last year's second quarter. We remain committed to developing new products and innovative solutions to address customer needs, and to raise the barriers of entry of our product.

Administrative expenses were RMB36.3 million, equivalent to US$5.9 million, which is in line with the second quarter of 2013. As a percentage of revenue, administrative expenses were 3.8% of revenue in the second quarter of 2014 compared with 3.4% a year ago.

Profit and total comprehensive income for the second quarter of 2014 was RMB52.4 million, US$8.4 million, compared with RMB74.7 million in the second quarter of 2013. And basic and diluted earnings per ADS in the second quarter of 2014 were RMB1.01, which is US$0.16, compared with RMB1.45 in the second quarter of 2013.

During the second quarter of 2014 and 2013, the weighted average number of ordinary shares was RMB206.5 million and the weighted average number of ADS was RMB51.6 million, respectively.

Now let’s move on to our first six months results. Our revenue for the first six months ended June 30, 2014, was RMB1,855.8 million, which is equivalent to US$299.1 million, compared with RMB1,889.5 million during the same period in 2013.

Aftermarket sales declined 3% to RMB921 million in the first six months of 2014, and represented 49.6% of total six-month revenue. Sales to the Chinese OEM market increased by 0.4% to RMB649.2 million, and which represented 35% of the revenue. International sales decreased by 2.5% to RMB285.5 million compared with the same period last year, and represented 15.4% of revenue.

Tubed steel wheel sales for the first six months ended June 30, 2014, declined by 3.8% compared with the same period in 2013 and comprised 58% of revenue. Tubeless steel wheel sales increased by 0.7% from the same period a year ago and accounted for 37.6% of the revenue compared with 36.7% of the revenue for the same period in 2013.

Gross profit for the first six months ended June 30, 2014, was RMB375.1 million, which is US$60.5 million, compared with RMB396 million during the same period in 2013. Gross margin was 20.2% compared with 21% in the same period last year. Profit before taxation was RMB126.9 million, US$20.5 million, compared with RMB138.1 million during the first six months of 2013.

Profit and total comprehensive income for the first six months ended June 30, 2014, was RMB105.2 million, which is equivalent to US$17 million, and compared with RMB117.3 million during the same period a year ago. Earnings per ordinary share and earnings per ADS for the first six months ended June 30, 2014, were RMB0.51, which is US$0.08, and RMB2.04, which is US$0.33, respectively.

Now I am going to talk about the financial position of our Company. As of June 30, 2014, we had bank balances and cash of RMB806.4 million, which is US$130 million, and fixed bank deposits with a maturity period over three months of RMB160 million, which is equivalent to US$25.8 million. Bank borrowings decreased to RMB498 million, which is US$80.3 million, from RMB558 million at December 31, 2013. Total equity attributable to owners of the China Zenix was RMB2,618.1 million, which is equivalent to US$422 million.

For the first six months ended June 30, 2014, we posted cash inflows from operating activities of RMB173.7 million, US$28 million. CapEx for the purchase of property, plant and equipment in the first six months were RMB16.9 million, approximately which is US$2.7 million. Deposits paid for acquisition of property, plants and equipment in the first six months was RMB19.5 million, which is US$3.1 million. And now basically rest of my report. Kevin?

Kevin Theiss

Operator, we’re now ready for questions.

Questions-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Matthew Larsen with Morgan Stanley. Please proceed with your question.

Matthew Larsen - Morgan Stanley

Good morning. Thanks for taking my call. It’s like a pretty sound quarter. I didn’t hear anything about a potential share buyback. Am I missed it if you did mentioned it? You got a lot of cash and free cash flow coming-in. And with the stock significantly depressed in my mind primarily because of the offer that was made for the Company for some other assets it is depressed the stock. But now that that’s been removed, it seems to me that it offers even more value at this level. But have you made -- have you put forth some thoughts or made some plans to initiate a share buyback that would not only galvanize greater support for the stock but certainly would be a good value and a good use of Company funds on the balance sheet?

Martin Cheung

This is Martin of Zenix. I think we have touched upon that issue last time, somebody had asked whether Company has any plans to buy back the shares, if the Company has a certain level of cash sitting in the banks. But if you look at the bank borrowings we have around 500 million bank borrowings incurred in the balance sheet and judging from the current liquidity situation in China I think bank borrowing having a liquidity facility is more important than paying all those balances that we have to get ready for our Company for further investments particularly for auto operations. But buyback shares is a plan that the management will give us edge to that but we don’t have that sort of plan for the moment.

Matthew Larsen - Morgan Stanley

If I can just have a follow up. Do you guys have indication that there has been any new institutional ownership taking advantage of the lower price that the stocks been trading at? Or how about management stepping up and buying some shares, even if there was a small amount I think it would put forward the good message to the market.

Martin Cheung

I think the management, this is a very good suggestion as well I think the management could give a thought to that, this is new idea and we need some time to convey the message. And these sort of ideas to our management, but as said our management is pretty concentrated in consolidating the business right now because the market is, if you look at the trends, the economic trends, down trend in China. I think the attention is better placed in maintaining our market share or even expanding our market shares in this tough market. But indeed this is a very good idea; I think we can convey the same idea so the management will see whether they will like to consider it.

And back to your first question whether there is any new institution of investors. For the past two, three months I am not aware of any new or big institutions bind in our shares.

Operator

(Operator Instructions). Our next question comes from the line of John Kehe a Private Investor. Please proceed with your questions.

Unidentified Analyst

Could you give us an update on the status of the aluminum wheel production? What is the current production? And then what is the status of the expansion to our second production line?

Martin Cheung

For the past quarter with adding the statuses we are to fine tuning productions though, but we can assure you that we have achieved certain level of success in improving the production flow.

And also for worker’s training in using the equipment we are carrying different programs in training up our staff and adapting the use of the equipment which is has been imported from Germany.

Well, it is estimated that we could achieve a normalized production plan by quarter four this year.

Unidentified Analyst

And what about the construction of second production line?

Martin Cheung

We don’t have a time line for the second production line yet, but we are studying the machines that we are going to import in.

Unidentified Analyst

Then I would like to ask about the international sales. Did you have any negative impact in Thailand from the political situation that occurred earlier this year? And then in India do you see any positive impact from the new government that has come to power there?

Martin Cheung

In Thailand I don’t think we’ve been hit by the political crisis there. We can maintain a certain market; we have to maintain certain markets there in Thailand. But for India the market is becoming a little bit, it’s getting a little bit downturn because one thing is because of the currency devaluation; the other thing is that the market is not really that good for the time being in India.

Unidentified Analyst

And then there was a period of uncertainty for about eight months as a result of the restructuring offer and I think that the company lost interest or attention from investors as a result. Do you have any plan to make efforts to reintroduce the Company to investors by making a non-deal road show, updating your investor Web site and so on?

Martin Cheung

Yes, I think it’s pretty unfortunate for the consortium to withdraw the proposal due to many factors from their side, so there are some changes in the sentiments there. And I think this has been affected the Company above. But yes the Company is considering to have an IR contained somehow in quarter four already next year.

Unidentified Analyst

I hope that you will make an effort to get the story out because investors should be able to look at comparable auto parts markers listed in Hong Kong which traded valuations of around 10 times earnings and then you have some smaller domestic competitors in China listed on the Shenzhen Exchange which traded higher valuations. And if people could just get a good understanding and comfort with your information then I think it would benefit the current shareholders a lot.

Martin Cheung

Thank you. We’ll do that. We’ll consider that.

Operator

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Kevin Theiss

Thank you for participating in our 2014 second quarter and first six months conference call. We look forward to speaking with you again. And we wish you a good day. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Source: China Zenix Auto International's (ZX) CEO Junqiu Gao on Q2 2014 Results - Earnings Call Transcript

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