China Zenix's (ZX) CEO Junqiu Gao on Q4 2015 Results - Earnings Call Transcript

| About: China Zenix (ZX)

China Zenix Auto International (NYSE:ZX)

Q4 2015 Earnings Conference Call

April 15, 2016 08:00 AM ET

Executives

Dixon Chen – Grayling, U.S. Investor Relations Advisor

Junqiu Gao – Deputy Chief Executive Officer

Martin Cheung – Chief Financial Officer

Analysts

Michael Rosenthal – QVT Financial

John Sheehy – Private Investor

Operator

Greetings. And welcome to the China Zenix Auto International Fourth Quarter 2015 Financial Results 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, Mr. Dixon Chen. Thank you, Mr. Chen, you may begin.

Dixon Chen

Thank you. Thank you for joining us today. And welcome to Zenix Auto 2015 fourth quarter and year-end financial results earnings conference call. Joining us today are Deputy CEO, Mr. Junqiu Gao; and Mr. Mr. Martin Cheung, the CFO.

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, anticipates, believe, continue, estimates, expects, 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 expressions.

Among other things, the 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 and employees.

Statements that are not historical facts, including statements about Zenix Auto's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements, including but not limited to the following.

Our growth strategies and our future business development, including our ability to successfully develop new tubeless steel wheels and the introduction of aluminum wheels, our ability to expand our distribution network, overall growth in the aftermarket and OEM markets in China and elsewhere, which depend upon a number of factors beyond our control, including economic growth rates and vehicle sales, and changes in our revenues and certain costs or expense items as a percentage of revenues.

In particular, readers should consider risks outlined under the heading Risk Factors in our most recent annual report on Form 20-F and in our current reports filed from time to time with SEC on Form 6-K.

Zenix Auto does not undertake any obligation to update any forward-looking statements except as required under applicable law. Any information provided in this press release, scripts and any attachments are as of this date and Zenix Auto undertakes no duty to update these information except as required under applicable law.

Mr. Cheung will provide a brief overview and then he will review the 2015 fourth quarter and year end financial results. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, all financial results are unaudited and they will be presented in RMB and U.S. dollars. Zenix Auto prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board.

Mr. Cheung, please start your opening remarks.

Martin Cheung

Thanks Dixon. So let me start with a brief discussion on the performance of the fourth quarter. Despite slower economic growth in China, a difficult commercial vehicle markets and lower company sales, we are reporting a return to profitable net income and total comprehensive income of RMB8.6 million or US$1.3 million in the fourth quarter of 2015, compared with a net loss and total comprehensive loss of RMB13.7 million in the same quarter of 2014.

We increased our gross margin in the 2015 fourth quarter to 19.2% from 14.4% in the same quarter a year ago. This return to net profitability was due to a combination of higher margins and reduced expenses. According to China’s National Bureau of Statistics, China’s 2015 fourth quarter GDP growth rate was 6.8%. The important Manufacturing Purchasing Managers' Index remains below the critical 50% level in each month of the 2015 fourth quarter.

Given this slower growth, according to the China Association of Automobile Manufacturers CAAM, heavy duty truck sales declined by 12.2% and medium duty trucks sales were down by 3.2% in the 2015 fourth quarter. This slow economic growth also resulted in employment layoff and the volatility of the Chinese stock market, which reduced confidence and affected meet purchasing results.

Given the headwinds, our revenue for fourth quarter ended December 31st, 2015 was RMB587.5 million or US$90.7 million compared with RMB783.6 million in the fourth quarter last year. Our revenue reductions on a year-over-year basis was due to weakness in the sales of commercial vehicles by ROEM customers in China, especially heavy-duty trucks. Less trucks traffics due to slower growth and lower realistic and infrastructure investments caused weakness in our aftermarket segment as well.

Our International sales declined as demand in several important South East Asian markets remains sluggish, the devaluation of the RMB, also lower reported sales, as most of our total sales are in RMB, but we report financial results in US dollars.

The 2015 year was a difficult year for the commercial vehicle markets in China due to slower economic growth and sluggish realistic development, as well as construction activities. According to China’s National Bureau of Statistics, China’s GDP growth rate was 6.9% for the full year 2015, representing the slowest annual growth rate in the past 25 years.

In addition to slower economic growth, lower demand for commercial vehicles in 2015 was affected by the large number of commercial vehicles purchased in 2014, during the prebuy period before the national implementation of the strict and national V emission standards in January 1st, 2015, which significantly increased the purchase price of those vehicles.

According to CAAM, commercial vehicle sales decreased 9.0% year-over-year in 2015, however, heavy-duty truck sales declined by 26.0% and medium duty truck sales was down by 19.6% for the 2015. These are two critical market for our products.

Our revenue for the year ended December 31, 2015 was RMB2,445.8 million or US$377.6 million compared with RMB3,334.4 in 2014. This decrease is consistent with the decline in the heavy-duty truck sales in China. Our aftermarket sales decreased by 28.3%, our sales to Chinese OEM customers decreased by 29.4% and international sales decreased by 15.3%. For the year, the currency devaluation of the RMB auto lowered report sales as most of our total sales are in RMB, but we report financial results in US dollars.

We continue to adjust our product pricing and mix to reflect market additions and maintain our leadership at the largest supplier of wheels to the Chinese commercial vehicle markets. Given our recent success, with our aluminum wheels in China, especially penetrating the bus market, we are encouraged about this growth opportunity in both the OEM and aftermarket in China.

As more vehicles experienced the advantages of our aluminum wheels, we expect the interest and the growth opportunities, and then will rise. To offset lower economic growth the Chinese government has relaxed its monetary policy with a reduced reserve ratio and lower interest rates to stimulate economic growth. Other policy such as the yellow label program to remove older more polluting inefficient vehicles will add to demand for new OEM vehicles in the future. An estimated $13 million blue-yellow label vehicles may be restricted through 2017, which should provide momentum for a new commercial vehicle replacement cycle.

There were many commercial vehicles sold in the 2010 to 2011 years that are nearing the end of their use. We also believe that central government may provide an incentive for commercial vehicles consistent with the tax benefits of the current passenger vehicle program already underway. And it may further increase investments in public housing and building China’s infrastructure. Together these policies may provide encouragement for the future.

At December 31, 2015, we had cash, bank balances and fixed bank deposits maturity period, over three months of approximately RMB166.2 million. We have reduced our inventories to US$28 million and managed our cash receivables. We generated US$14.5 million in cash flow from operation for the year ended December 31, 2015.

Total equity attributable to owners of the Company was US$395.7 million. We continue to focus on maintaining high product quality, improving our stringent cost controls and utilization rates as we maintain our market leadership. We are expanding our production of our high margin aluminum wheel and developing the modest broaden number of vehicles we could supply in. As always, our operations are a focused cash flow generation and maintaining our strong financial position.

During 2015, we advanced and exciting new developments and increased our exposure to the growing electric vehicle market into China. We entered into a strategic partnership with Anhui Jianghuai Automobile Co Ltd (JAC), the third largest commercial vehicle manufacturer in China, to penetrate the electric-powered commercial vehicle market. The Chinese government has established a goal of putting 5 million electric power vehicles in the road by the end of 2020 to help alleviate urban smogs and reduce petroleum imports.

Government incentives to increase the use of electric-powered vehicles include three license plates, tax incentives for qualified vehicles and building a nationwide network of charging stations. JAC plans to become the number brand of electric-powered commercial vehicles in China, with electric-powered vehicle representing 30% of its total production and sales by 2025.

The new JAC-Zenix Auto partnership includes both technology and marketing initiatives to increase the partners' respective market share in the Chinese commercial vehicle markets, including the burgeoning electric-powered vehicle segment. Zenix Auto will focus its research and development efforts on creating advanced steel wheels for JAC's high-end, light-duty trucks. In addition, Zenix Auto's aluminum alloy wheels will become one of the preferred aluminum wheels for JAC heavy-duty trucks.

Heavy-duty truck sales have demonstrated improving quarter by quarter results, as sales declined by 33.7% in the 2015 first quarter, 28.9% in the 2015 second quarter, 26% in the 2015 third quarter and 12.2% in the 2015 fourth quarter. Medium duty trucks also displayed a comfortable track. CAAM has reported improving truck sales in the January and February period of 2016 with a 1.4% increase, and heavy duty truck sales rose approximately by 2%.

Now, let me go over the fourth quarter results and then the annual results for 2015. Our revenue for the fourth quarter ended December 31, 2015 was RMB587.5 million or US$90.7 million from RMB783.6 million for the fourth quarter of 2014. The decline in revenue on a year-over-year basis was mainly due to the significant in truck sales in China, especially the heavy-duty trucks, coupled with continued weaknesses in aftermarket segments and international markets.

Aftermarket sales in China decreased by 24.4% year-over-year to RMB287.2 million or US$44.3 million in the fourth quarter of 2015 from RMB380.2 million in the fourth quarter of 2014. Total unit sales in aftermarket decreased by 16.6% year-over-year, as a result of weak commercial vehicle market. The weak OEM market also affected the aftermarket segment in China as compositions were intensified, but the price will vained in the fourth quarter as compared to that in the previous quarter.

Sales to the Chinese OEM market decreased by 23.5% year-over-year to RMB212.3 million or US$32.8 million in the fourth quarter of 2015 compared to RMB277.6 million in the same quarter of 2014. Total US sales in the OEM market decreased by 12.8% year-over-year, as a result of weak truck sales, especially heavy-duty trucks during the fourth quarter of 2015.

International sales decreased by 30.1% year-over-year to RMB88 million or US$13.6 million in the fourth quarter of 2015 compared to sales of RMB125.9 million in the fourth quarter of 2014. The decline in export sales in the fourth quarter 2015 was mainly due to sluggish economies in Southeastern Asian countries including Thailand, Indonesian, Burma, which have weakened the demand from these markets.

In the fourth quarter of 2015, domestic aftermarket sales, domestic OEM sales and international sales contributed 48.9%, 36.1% and 15% of revenue, respectively.

Sales of tubed steel wheels comprised 53.9% of 2015 fourth quarter revenue compared to 57.3% in the same quarter in 2014. Tubeless steel wheel sales represented 36.5% of fourth quarter revenue compared to 37.8% in the same quarter of 2014. Tubed and tubeless steel wheel sales remain the main sources of revenue for the Company. However, sales of aluminum wheels increased and accounted for 4.7% of the fourth quarter revenue.

Fourth quarter gross profit increased by 0.2% to RMB112.9 million or US$17.4 million, compared to RMB112.6 million in the same quarter in 2014. Gross margin was 19.2%, compared with 14.4% in the fourth quarter of 2014. The increase in gross margin on a year-over-year basis was mainly due to the decline of raw material costs and mass production, as well as shipment of higher margin aluminum wheels.

Selling and distribution expenses decreased by 27.3% to RMB45.1 million or US$7 million from RMB62.0 million in the fourth quarter of 2014. The decrease in selling and distribution costs was primarily due to the lower number of units shipped in the fourth quarter of 2015 compared with the same quarter last year. As a percentage of revenue, selling and distribution costs were 7.7% in the fourth quarter of 2015, compared to 7.9% in the same quarter a year ago.

Research and development expenses decreased by 45.4% to RMB14.3 million or US$2.2 million, compared to RMB26.2 million in the fourth quarter of 2014. R&D as a percentage of revenue was 2.4% in the fourth quarter of 2015, compared to 3.3% in the same quarter a year ago.

Administrative expenses decreased by 3.4% to RMB38.1 million or US$5.9 million from RMB39.4 million in the fourth quarter of 2014, mainly due to higher personnel-related costs. As a percentage of revenue, administrative expenses were 6.5%, compared to 5% of revenue in the fourth quarter of 2014.

Net income and total comprehensive income for the fourth quarter of 2015 were RMB8.6 million or US$1.3 million, compared to net loss and total comprehensive loss of RMB13.7 million in the same quarter of 2014.

Basic and diluted earnings per ADS in the fourth quarter of 2015 were RMB0.17 or US$0.03 compared to basic and diluted loss per ADS of RMB0.27 in the same quarter of 2014.

In the fourth quarter of 2015, the Company recorded cash outflows from operating activities of RMB16.2 million or US$2.5 million. Capital expenditures for the purchase of property, plant and equipment in the fourth quarter were RMB6.6 million or US$1 million. Deposits paid for acquisition of property, plant and equipment in the fourth quarter were RMB16.3 million or US$2.5 million. During the fourth quarter of 2015 and 2014, the weighted average number of ordinary shares was 206.5 million and the weighted average number of ADSs was 51.6 million.

Now, let me review the 2015 year financial results. Revenue for the year ended December 31, 2015 was RMB2,445.8 million or US$377.6 million compared with RMB3,334.4 million in 2014. Aftermarket sales decreased by 28.3% to RMB1,194.2 million in 2015, and represented 48.8% of total revenue. Sales to the Chinese OEM market decreased by 29.4% to RMB814.6 million, which represented 33.3% of total revenue. International sales decreased by 15.3% to RMB436.9 million compared to last year, and represented 17.9% of total revenue.

Tubed steel wheel sales in 2015 accounted for 56.1% of revenue compared with 57.8% in 2014. Tubeless steel wheel sales accounted for 37.5% of the revenue compared with 37.6% in 2014. With the shipment started in 2015, aluminum wheel sales accounted for 1.1% of revenue in 2015.

Gross profit for full year 2015 was RMB363.8 million or US$56.2 million, compared with RMB589.5 million during the same period in 2014. Gross margin decreased to 14.9% compared from 17.7% in 2014. Loss before taxation was RMB30.1 million or US$4.7 million, compared with profit before taxation with RMB97.9 million in 2014.

Net loss and total comprehensive loss for full year 2015 was RMB28.6 million or US$4.4 million, compared with profit and total comprehensive income of RMB79.2 million in 2014. Basic and diluted loss per ordinary share and per ADS for the full year ended December 31, 2015 were RMB0.14 or US$0.02 and RMB0.55 or US$0.09, respectively.

As of December 31, 2015, Zenix Auto had bank balances and cash of RMB817.2 million or US$126.2 million and fixed bank deposits with a maturity period over three months of RMB260 million or US$40.1 million. Total equity attributable to owners of the Company was RMB2,563.5 million or US$395.7 million.

For the full year ended December 31, 2015, the Company recorded cash inflows from operating activities of RMB293.8 million or US$45.4 million. Capital expenditures for the purchase of property, plant and equipment were RMB20.5 million or US$3.2 million. Deposits paid for acquisition of property, plant and equipment were RMB70.1 million or US$10.8 million.

Before we begin the question and answer section, we would like to express that we remain concerned – while the share price right now have been rectified and we’ve filed our 6-K accordingly. However, the management believe the stock price remains undervalued and does not reflect our leading market position in the largest commercial vehicle wheel market in the world. Our financial strength and our proven cash flow generating capabilities.

Now, Dixon, that rounds up my presentation.

Dixon Chen

Operator?

Operator

Yes, I’m here.

Dixon Chen

We’re open for Q&A question.

Question-and-Answer Session

Operator

Okay. Thank you. [Operator Instructions] Our first question comes from the line of Michael Rosenthal with QVT Financial. Please proceed with your question.

Michael Rosenthal

Good evening, Martin and Junqiu. I have a few questions. Can you talk about the quarter-over-quarter increase in the gross margin, I guess specifically how much of it is due to raising price backup versus the impact of I guess the relatively small amount of aluminum wheel sales?

Martin Cheung

[Foreign Language]. So during the fourth quarter compared with third quarter, we did make some price adjustments, we increased some of the prices for some of our product prices and also we had, as you noticed as we increased our aluminum product shipment. Aluminum product carries favorable gross margin, so that's why our gross margin are trending up. Mr. Gao will give you little more detail.

Junqiu Gao

To answer the question, Michael, last quarter the gross margin, we reported a 12.5% in the third quarter 2015, and this quarter it’s 19.2%. As mentioned, we started selling our aluminum wheels in this quarter and for the aluminum wheels, the gross margin is approximately 25%. So I think the increase in the gross margin for the fourth quarter, the aluminum wheel sales that made a certain contribution.

Michael Rosenthal

Okay, great. Thank you. The next question just on the aluminum wheel business, is that primarily now in the OEM business or is there some component that's in the aftermarket as well?

Martin Cheung

[Foreign Language]. So, the breakdown of aluminum sales is more than half of our more shipment went to the OEM customers, and about one third went to domestic aftermarket and the remaining we have some international sales for the export business. [Foreign Language]. So in the OEM business for the aluminum product, most of them are – our aluminum product are purchased by the bus makers, with a small portion of that sent to the – are bought by trailer makers, these are transportation vehicles, trailers for the chemical products transportation. [Foreign Language]. We believe there is growth potential for aluminum product in the future, aluminum can become a major part of our business, aluminum product sales. [Foreign Language]. Truck makers such as FAW, they have come to realize this aluminum wheel is going to be very important for the wheel component in the future, so they can visit us quite – they assemble team in that location from different division of FAW and they came to visit and they start doing some preliminary due diligence in the product and everything. So we are optimistic in that space we believe, aluminum wheel is not only going to limit itself only in the bus market and we’re going to venture into truck space as well.

Michael Rosenthal

Okay. I have just two more quick ones. Should we think of the 4.7% mix in aluminum wheels being lower than what we should expect in 2016, or was there any sort of recognition of full-year sales in the fourth quarter?

And then lastly, is now all of the aluminum wheel plant CapEx now in PP&A and no longer capitalized and we’ll see the full impact of depreciation and interest in 2016, or is there some portion that's not put into commercial operation yet?

Junqiu Gao

Michael, can you repeat the second question.

Michael Rosenthal

All of the capital – sort of construction in progress and capitalized expenses related to aluminum wheels is now put into international, therefore depreciated and all of the capitalized interest is now going to flow through P&L or if there is still a portion that's not?

Martin Cheung

[Foreign Language]. Okay, I’ll answer your first question on the 4.7% aluminum sales comment for the – relative to the full fourth quarter revenue. We are seeing – although definitely the aluminum business will grow in 2016, but also we saw some good challenges, of course since we have a lot of customers coming in and making orders, but these are different variety of products for a small quantity. And this posed some kind of challenge to us because our facility is turned for the mass production for the larger, for a couple of models. And so we have to kind of contain our equipment to fulfill these small orders. The relationship is also important, so we’ll have to do some of these work, but again it will take some time because every OEM or regular customer they have to get some product size, so we have to make adjustment for each individual customers. So that alone will take some time, but we believe we’re on track to increase the volume overall.

Martin Cheung

[Foreign Language]. This is also a reason we’re being working hard on some of the major OEM customers, such as FAW, they are a dominant player in the truck space. And we’ll have to perform a long-term supply contract for our aluminum line of product and expand it to the truck business. So that will give us large volume, and then we can achieve a better economy of scale out of production.

Michael Rosenthal

Okay.

Junqiu Gao

Okay. Let me explain the second part of the Michael question. For up to approximately 85% of the CIP, which is aluminum wheel factory related CIP have specific assets, so yeah, the question is, the depreciation would hit 2016 P&L for coming year.

Michael Rosenthal

And Martin was that for the balance of the fourth quarter, was it like that or it was not clear if it reflected in the fourth quarter that 85%.

Junqiu Gao

85% has been transferred, the rest of it will be transferred in the coming quarter is what I believe.

Michael Rosenthal

Thank you.

Operator

Our next question comes from the line of John Sheehy [ph], who is a Private Investor. Please proceed with your question.

John Sheehy

Hello everybody, congratulations on the results and thank you for taking my call. I think that first quarter 2016 commercial vehicle sales have improved a little bit, how do you feel about the outlook for the year?

Martin Cheung

[Foreign Language]. Okay. So, from first quarter we definitely see a sign of a recovery. And however it’s still early for us, it will be premature for us to make the assessment for the full year outlook. As you know the Chinese economy is still highly dependent on government policies. If we have a stronger policy continue to come to the marketplace, then we are going to expect a very strong, a much improved year. And if the policy start to stagnant then we mostly will cover a flat year compared with 2015. But however, we do see overall the confidence of recovery, from our customer and from our peers. So we generally feel, there is definitely a sign of recovery, but it’s still hard to quantify at this moment or monitor changes in mark and I’ll make announcements when it’s appropriate.

John Sheehy

Okay, thank you.

Operator

There are no further questions at this time, I’d like to turn the floor back over to management for closing comments.

Junqiu Gao

Thank you for attending China Zenix Auto 2015 fourth quarter and annual results earnings conference call. We look forward to speaking with you. Thank you.

Martin Cheung

Thank you.

Dixon Chen

Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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