China Ceramics' (CCCL) CEO Huang Jiadong on 2H 2017 Results - Earnings Call Transcript

| About: China Ceramics (CCCL)

China Ceramics Co., Ltd. (NASDAQ:CCCL) 2H 2017 Earnings Conference Call April 30, 2018 8:00 AM ET

Executives

David Rudnick – Account Manager

Huang Jiadong – Chairman and Chief Executive Officer

Edmund Hen – Chief Financial Officer

Analysts

Howard Flinker – Flinker & Company

Zain Khan – Private Investor

Operator

Good morning. My name is Best and I will be your conference operator today. At this time, I would like to welcome everyone to our Second Half and Fiscal Year End 2017 Earnings Conference Call.

[Operator Instructions] Thank you. David Rudnick, you may begin your conference. Please go ahead.

David Rudnick

Thank you, Best. Good morning, ladies and gentlemen and good evening to those of you who are joining us from China. Welcome to China Ceramics’ six months and fiscal year-end 2017 earnings conference call.

With us today are China Ceramics’ Chairman and Chief Executive Officer, Mr. Jia Dong Huang and his Chief Financial Officer, Mr. Edmund Hen.

Before I turn the call over to Mr. Hen, I would like to address forward-looking statements that maybe discussed in the call. Forward-looking statements involve risks and uncertainties and include among others those regarding revenue, operating expenses, other increment expense, taxes and future business outlook.

Actual performance, outcomes and results may differ materially from those expressed in forward-looking statements. The Company claims the Safe Harbor protections for such forward-looking statements as contemplated under the Private Securities Litigation Reform Act of 1995.

Please refer to the documents filed by the Company with the SEC specifically the most recent reports on Forms 20-F and 6-K, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates.

And now, it’s my pleasure to turn the call over to the Company’s Chief Financial Officer Mr. Edmund Hen, who will discuss the Company’s second half 2017 earnings results. Please go ahead Edmund.

Edmund Hen

Thank you, David. First of all, I will turn around to Mr. Huang Jiadong the Chairman and CEO of China Ceramics and Ms. Weijia Dai will be translating for Mr. Huang. Mr. Huang, you may proceed.

Huang Jiadong

[Foreign Language]

Thank you, David. On behalf of the company, I would like to welcome everyone to our second half fiscal year 2017 earnings conference call.

[Foreign Language]

For the second half of 2017, we experienced slightly improved market conditions as compared to the same period of 2016, as we aggressively marketed our products utilizing a targeted strategic approach. We were able to improve our pricing power due to the popularity of our flagship porcelain ceramic tiles abetted by our strong market presence.

Our revenue rose 7.1% for the second half of 2017 from the year-ago period primarily due to an 8.5% rise in our average selling price. In addition, our cash flow was reasonably strong after adjusting for asset write-offs during the year

[Foreign Language]

For fiscal year 2017 ended December 31, 2017, we utilized production facilities capable of producing 31 million square meters of ceramic tiles. Consistent with our practices in past quarters, we maintained or reduced utilization of existing plant capacity based on the current market condition to keep our operating costs low. We intend to bring additional capacity online as the business environment improves.

[Foreign Language]

For the remainder 2018, we are cautiously optimistic about an improved business environment due to new land sales and continued development activity as well as the government initiative to build rental homes as a means of balancing China's urban residential dynamics.

In the long-term, we believe that real estate will continue to be vital to China's economy and essential for domestic growth. We plan to target those cities in China that offer potential for new property development and will continue to forge strong relationships with larger property developers.

[Foreign Language]

With that, I would like to turn over the call to the Company’s Chief Financial Officer, Mr. Edmund Hen, who will discuss the Company’s second half 2017 earnings results in more detail. Thank you.

Edmund Hen

Thank you, Mr. Huang. I will now move on to a more detailed discussion of our financial results for the six months ending December 31, 2017.

Our revenue for the six months ended December 31, 2017 was RMB485.3 million or $72.7 million, an increase of 7.1% from RMB453.1 million or $67.1 million for the same period of 2016. The year-to-year increase in revenue was primarily due to; the 8.5% increase in our average selling price of the Company’s ceramic tiles product to RMB27.2 or $4 in the second half of 2017 that is compared to RMB25.1 or $3.8 for the same period of 2016, which was partially offset by the 1.2% decrease in the sales volume to 17.9 million square meters of ceramic tiles in the second half of 2017 from 18.1 million square meters of ceramic tiles in the second half of 2016.

Gross, profit for the six months ended December 31, 2017 was RMB57.8 million, or $8.7 million, as compared to a gross loss of RMB80.3 million or $11.9 million for the same period of 2016. The gross profit margin was 11.9% for the six month ended December 31, 2017 as compared to a 17.7% gross loss margin for the same period of 2016, which was attributable to a latter period's 28% decrease in the ASP of the Company’s ceramic tiles resulting from price cuts to spur the sales of slow-moving inventory, and a RMB59.4 million or $8.9 million write-off of inventory in that period.

Other income for the six months ended December 31, 2017 was RMB7.3 million or $1.1 million, as compared to RMB7 million or $1 million for the same period of 2016. Other income is mainly comprised of rental income that the Company received by leasing out one of the production lines from its Hengdali facility pursuant to an eight-year lease contract.

Selling expenses for the six months ended December 31, 2017 were RMB6.1 million, $0.9 million, as compared to RMB5.8 million, $0.8 million for the same period of 2016. The year-over-year decrease in our selling expense was mainly due to a decrease in adverting and travel, and travel expenses.

Administrative expenses for the six months ended December 31, 2017 were RMB79.8 million or $12.1 million, as compared to RMB35 million or $5.2 million for the same period of 2016. The year-over-year increase in administrative expenses was primarily due to the write-off of bad debt due to what we feel as uncollectible debt associated with our vendors.

Loss from asset devaluation resulting from an impairments of non-current assets for the six months ended December 31, 2017 was RMB36.7 million or $5.5 million as compared to RMB230.4 million or $34.3 million for the same period of 2016. The loss from asset devaluation resulted from an impairment of non-current assets due to decelerating growth in China and an expected contraction in the demand for the Company's products.

Net loss for the six months ended December 31, 2017 was RMB82.2 million or $12.4 million, as compared to a net loss of RMB351.3 million, or $52.4 million for the same period of 2016. The decrease in net loss was mainly due to increased gross profit and a lower loss from asset devaluation for the six months ended December 31, 2017 as compared to the same period of 2016.

Loss per basic share and fully diluted share for the six months ended December 31, 2017 on both a basic and fully diluted basis for RMB24.29 or $3.66 as compared to basic and fully diluted earnings per share of RMB127.47 or $18.99 for the same period of 2016.

Turning to our balance sheet. As of December 31, 2017, we had cash and bank balances of RMB2.3 million or $0.4 million as compared to RMB0.1 million as of December 31, 2016. Our short-term bank borrowings were nil as of both periods. As of December 31, 2017, our inventory turn was 95 days as compared to 108 days as of December 31, 2016. We had a reversal of inventory impairment of RMB2.73 million in 2017 as a result of an improved inventory turnover rate due to increased sales. Subsequent to the RMB75.1 million of inventory that was impaired for the year ended December 31, 2016, we believe that the value of our current inventories is realizable.

Our trade receivables turnover, as of December 31, 2017 was 206 days, compared with 209 days as of fiscal year ended 2016. The increase in trade receivables turnover days was primarily due to a continued difficult economic environment which has prompted us to offer extended credit terms to certain customers resulting in a higher trade receivables turnover figure than normal.

Trade payables turnover, net of value added tax was 32 days as of December 31, 2017 compared with 51 days as of December 31, 2016. The average turnover days was within the normal credit period of one to four months granted by our suppliers. In terms of our plants utilization and capacity, for the fiscal year ended December 31, 2017, we utilized plant capacity capable of producing 31 million square meters of ceramic tiles annually out of a total effective annual production capacity of 66 million square meters of ceramic tiles.

Our Hengda facility now has an annual production capacity of 37 million square meters of ceramic tiles, as a result of two old furnaces having been put out of use in the facility. The Company utilized production capacity capable of producing 9.6 million square meters of ceramic tiles for the six months ended December 31, 2017 and 18.2 million square meters of ceramic tiles for the entire fiscal year 2017.

Our Hengdali facility has an annual production capacity of 29 million square meters not including the leasing out of production capacity to a third party. And we utilized production capacity capable of producing 7.7 million square meters of ceramic tiles for the six months ended December 31, 2017 and 12.7 million square meters of ceramic tiles for the entire fiscal year 2017.

Our annual production capacity has been effectively reduced from 72 million square meters of ceramic tiles to 66 million square meters of ceramic tiles due to an eight-year contract to lease out one of the production lines from our Hengdali facility that we entered into March 2016. We will bring our unused production capacity online as customer demand dictates and when there are signs of improvement in China's real estate and construction sector.

We incurred RMB5.6 million or $0.9 million in capital expenditure attributable to the purchase of equipment were RMB4.9 million and desulfurization tower for RMB0.7 million for the year ended December 31, 2017. Although business conditions are subject to change, looking ahead to the remainder of 2018 we anticipate a low level of capital expenditures given the currently challenging market conditions.

Moving on to our business outlook. In fiscal 2017, we increased the pricing of our ceramic tile products by 10% each in April and July, respectively. This followed a 20% decrease in prices of our slow-moving products beginning on October 1, 2016, that was instituted in an effort to convert some of our inventory into cash. Our renewed pricing strength in fiscal 2017 was generally accepted by the marketplace as our fiscal 2017 sales volume increased 10.6% from fiscal 2016.

Looking ahead to the remainder of 2018, we expect conditions to slowly improve with an expansion in residential land supply, which will ultimately result in real estate development, especially in certain Tier 2 and Tier 3 cities. In addition, the Chinese Government began a program to increase the development of rental homes, affordable housing and housing co-owned by individuals and the state to help stem real estate speculation.

There have also been efforts to develop rural land into rental housing which could help to address housing shortage and stabilize price increase in Tier 1 and Tier 2 cities. These initiatives could lead to an additional real estate development and help to offset inventory declines in certain regions. In addition, local governments have begun to go forward with construction project, which has resulted in property investment growth. In the long-term, we believe that the real estate sector continues to be vital to sustaining China's strong economic growth since it is an important component of China's GDP.

We typically receive orders from customers two months in advance of production on a rolling basis. We enter into dealership agreements with customers, and a sales or purchase contract each time a customer places an order. As of December 31, 2017, our backlog was approximately RMB70.7 million or $10.8 million, which represents approximately the next two months of revenue. This as compares to a backlog of approximately RMB61.4 million or $8.9 million as of December 31, 2016, a year-over-year increase of 15.1%.

Under normal circumstances, our backlog is an indicator of revenues that might be expected in the next quarter, though it is subject to a change due to unforeseen business conditions and events including credit payment terms.

We view the growth of real estate sector and our building materials sector as sustainable since China's urbanization, where the population continues to shift from rural to urban areas, serves as its foundation. In addition, urbanization is expected to lead to a more consumption-driven economy, a key objective of government policy.

We have refocused our efforts to where we see active real estate development and where property developers use our products as part of their finished home products. We believe we have a competitive advantage in our sector due to our comprehensive product platform, customization capabilities, marketing expertise and strong reputation. Our goal for the year ahead is to continue to strategically penetrate regions with sound fundamentals and generates sustainable sales volume consistent with current real estate development trends.

In an event that occur after our December 31, 2017 fiscal year-end. On April 24, 2018, we run effectively with a capital raise of $1.2 million in capital raise, through the sales of 770,299 of common stock at a purchase price of $1.56 per share, to a certain individual investors. Proceeds from the Offering shall be used for working capital and general corporate purposes. The Offering was 10% to a previously filed and effectively Registration Statement in prospectus supplement.

At this point, we would like to open up the call to any questions pertaining to our second half and fiscal year 2017 financial results. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Howard Flinker [Flinker & Company]. Your line is open.

Howard Flinker

Thank you. [Foreign Language] Edmund, you said prices were up 5% in the second half, the earning release says you raised prices 10% two times. How much were prices up in the second half, were they up two times 10%?

Edmund Hen

No, because – as reported increased by 10% and also by quarter mix on average our price has just increased about 5% for the second half.

Howard Flinker

So you mean 10% for half a year, it goes 5%, okay, but 10% annualized. And second, you reported pretax loss of about $11.5 million in the second half and your write-offs receivables in plant and inventory were about $16 million or $17 million, is that correct?

Edmund Hen

Yes.

Howard Flinker

Together?

Edmund Hen

Yes.

Howard Flinker

So if I include write-offs, you actually made some money, is that correct?

Edmund Hen

Yes, you can see on the press release the adjusted EBITDA is positive RMB42 million or RMB43 million.

Howard Flinker

Yes, that’s for the second half or for the whole year, I overlooked it.

Edmund Hen

Yes, this is for the whole year.

Howard Flinker

So the – and the adjusted EBITDA for the second half was also positive?

Edmund Hen

Yes.

Howard Flinker

And your – from EBITDA, your depreciation and amortization is very small and you have no interest so that is almost all of your pretax profit, is that correct? In the second half?

Edmund Hen

Yes, of course, it will mix later.

Howard Flinker

Okay, thank you.

Edmund Hen

Thank you.

Operator

Your next question comes from the line of Zain Khan [Private Investor] Your line is open.

Zain Khan

My question is do you anticipate needing to raise cash again in 2018?

Edmund Hen

I cannot, I'm not sure. But yes, high chance that we are not going to raise the money in 2018 it depends on the economic situation.

Zain Khan

Okay, thank you. And my question is in the United States, tax loss you can have tax loss carryforwards with a loss. Is it the same thing in China so that assuming you start to make money at some point this year or next year or whenever, you won't have to pay taxes on it because you can carryforward your tax loss from prior years, is that right in China?

Edmund Hen

It is similar but China has a lot of restriction so the tax loss will be much smaller than your calculations from U.S.

Zain Khan

Okay. Can you tell me how much smaller?

Edmund Hen

I have to go into detail about that. Probably we can have a separate discussion on this metric.

Zain Khan

Okay, thank you.

Operator

We have a follow-up question from Howard Flinker [Flinker & Company]. Your line is open.

Howard Flinker

Is the main difference between the use of tax loss carryfowards in China and U.S. that in China you have to spread them out over a longer period time?

Edmund Hen

Yes, and also that would be typical for the tax losses, not as dynamic as in U.S. So there is a lot of restriction item in China. So we may have a separate discussion on this. So we can go into detail for the conversion.

Howard Flinker

Okay. Thank you.

Operator

[Operator Instructions] There are no further questions. We do have a follow-up question from Zain Khan [Private Investor]. Your line is open.

Zain Khan

A follow-up question, I noticed in looking at the balance sheet that your – I’m sorry, I’m trying to find it. You have net current value of – in U.S. dollars of about $91 million, is that correct of assets – net of liabilities?

Edmund Hen

You mean the balance sheet of our – yes, might be – you mean current asset of the property and equipment.

Zain Khan

Yes, the net current assets, yes? It says, RMB597 million, $91 million.

Edmund Hen

You mean the net current assets?

Zain Khan

Yes, that’s right.

Edmund Hen

Around $91 million.

Zain Khan

Okay, so in terms of valuing your company, even though of course, I would not like it ever to be liquidated, if you were to liquidate your company, if you decided to shut down business and give the money back to the shareholders. Is that – what you think is the realizable value of the entire business assets and the like?

Edmund Hen

I would definitely tell you if the company one day going into the liquidation, I don’t know.

Zain Khan

I think you would tell me if the company does go into liquidation, but you will not tell me now, is that what you are saying.

Edmund Hen

We do not have a stand for the liquidation.

Zain Khan

No, of course not, I meant in terms of perceiving this as a valuable company, if it is worth a lot more in net current assets and its liquidation value is in excess of its share price. That is something that we can consider in valuing the shares. Do you agree?

Edmund Hen

Yes, you may, for the net you may value the – you may see the Company’s value from the net assets, which is a common estimate for every company.

Zain Khan

Right. So, I would close by saying that in the United States it is very rare to find a company like yours whose net current assets are so much greater than the share price, net current assets per share are so much greater than the share price, which suggests to me that your company may still be very undervalued.

Edmund Hen

Yes, we all think so, that the company is undervalued.

Zain Khan

Thank you.

Edmund Hen

Thank you.

Operator

Your next question comes from the in of Paul [indiscernible]. Your line is open.

Unidentified Analyst

Good morning, I saw that you, there was a provision for bad debt. And so you wrote off a certain amount of bad debt. I wanted to – in the receivables that you have in the current assets could you comment on how you are doing in the converting of receivables, cash and whether you are making progress there or is the level of receivables staying constant, how do you see, how do you see the debts from the premier customers. And do you still see that you have to offer terms in order to make sales.

Edmund Hen

We changed the terms according to time as you can see, we – for the typical period, for those, we have a longtime relationship and we believe that they have this paying. We can provide a long period for them for the terms. Well when we notice, there is some dangers in difficulty in collecting the money, we may ask for some strengthened rules for them. And ask them to payback us as soon as possible. For most of our customer has a very long time relationship and despite a very difficult economic situation, we understand some of the customer is also in difficult. So, for whatever we can see, we will deal with them and grow with them to collect the money.

Unidentified Analyst

What is average age of your receivable.

Edmund Hen

As you can see from our press release, it is about 206 days.

Unidentified Analyst

206?

Edmund Hen

Yeah, the receivable turnover.

Unidentified Analyst

Is that lengthening or growing shorter?

Edmund Hen

It will maintain about the same level as last year.

Unidentified Analyst

I see, so in general you feel that your receivables are got to diminish over the next few months, or you feel like your receivable, will just stay the same.

Edmund Hen

We will feel for the coming one or two months of receivable, we will be staying above the same level and we will try to keep it above the same level, because we feel the current level is good for our customer and us at this point.

Unidentified Analyst

Thank you.

Operator

There are no further questions. I’ll turn the call back to our presenters for closing remarks.

David Rudnick

On behalf of the entire China Ceramics management team, we want to thank all of you for your interest and participation on this call. This concludes China Ceramics’ second half and fiscal year end 2017 earnings call. Thank you all very much.

Operator

This concludes today’s conference, you may now disconnect. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!