China Zenix Auto International (NYSE:ZX) Q3 2018 Earnings Conference Call November 15, 2018 8:00 AM ET
Kevin Theiss - IR
Martin Cheung - CFO
Junqiu Gao - Deputy CEO
Matthew Larson - National Securities
Greetings, and welcome to the China Zenix Auto International Third Quarter 2018 Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Kevin Theiss, Investor Relations. Please go ahead.
Thank you for joining us today, and welcome to Zenix Auto 2018 third quarter and nine-month financial results conference call. My name is Kevin Theiss, and I am Zenix Auto's U.S. Investor Relations Adviser. Joining us today are Deputy CEO, Mr. Junqiu Gao; and Mr. Martin Cheung, 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, 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 forms 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 or 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 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 and the ongoing 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 our revenues.
In particular, leadership consider the risks outlined under the heading, Risk Factors, in our most annual report on Form 20-F and in our current reports 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 provided in the press release, script and any attachments are as of this date and Zenix Auto undertakes no duty to update such information except as required under applicable law.
Mr. Cheung will provide a brief overview and then he will review the 2018 third quarter and 9 months financial results. Thereafter, we will conduct a question-and-answer session.
For the purposes of today's call, all financial results are unaudited and will be presented in Renminbi and U.S. dollars. Zenix Auto prepares its financial statements in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board.
Mr. Cheung, please start your opening remarks.
Thank you, Kevin. So, let me start with the brief discussion on the performance of the 2018 third quarter.
For the third quarter of 2018 China's GDP growth slowed to 6.5% from 6.7% in the second quarter and 6.8% in the first quarter of 2018. This slower GDP growth was the weakest growth since the first quarter of 2009.
Industrial production in the month of September was slowed. According the data reported by the China Association of Automobile Manufacturers CAAM, and equivalent to 2018 sales of commercial vehicles decreased approximately by 2.2% year-over-year with both bus and truck sales down in the third quarter of 2018.
The truck market unit sales decreased as both medium duty and heavy-duty truck sales declined. The traditional diesel bus market also records a decrease in unit sales in the third quarter of 2018 year-over-year. Commercial vehicle sales fell by 8.4% in September. So, for the first nine months of the year they were up by 6.3%.
Our revenue for the third quarter 2018 increased by 13.5% year-over-year to RMB730.4 million or US$106.3 million from RMB643.4 million for the third quarter of 2017. The 24% revenue increase in the OEM results mainly from the growth of the domestic truck OEM market driven by the continued Chinese government truck overloading enforcement and our capturing of more market share. Revenue also increased due to higher pricing during the third quarter, our cost truck pricing model adjusted for increase in raw material cost.
Sales of our aluminum wheels grew by 39.2% year-over-year and represented 8.7% of revenue. Regulations by the Chinese governments reduced emissions, increased real-estate fee and a need for better fuel efficiency are generating higher demand for lightweight aluminum wheels. Aftermarket sales increased by 7.4% year-over-year to RMB218.4 million or US$31.8 million in the third quarter of 2018 with total unit sale decreased by 3.9% year-over-year and higher pricing offset the shortfall.
Our international sales decreased by 14.9% year-over-year to RMB73.6 million or US$10.7 million in the third quarter of 2018 as unit sales decreased by 23.4% year-over-year due to weak demand in Southeastern Asian countries.
We remain optimistic about the long-term outlook for the continuing growth of our aluminum wheel product in both the OEM and domestic aftermarket. Sales of our aluminum products will continue to grow in 2018 and into the year of 2019, thereby strengthening our blended gross margin.
Continuing higher fuel prices affected our gross margin in the third quarter in 2018. Our gross margin was 12.1% down slightly from 12.7% in the third quarter of last year but up from 9.3% in the second quarter of 2018. While we can pass on some price adjustments in our cost-plus model we cannot immediately and fully offset steel higher pricing.
However, we believe the rising aluminum wheel sales and continuing upward price adjustments on steel wheels to improve our gross margin overtime. Our average selling prices increased in all 3 business segments in the third quarter of 2018. We will further improve prices in our market where the opportunities arise.
With our focus on cost control, with the space of [indiscernible] factories of steel production line during the third quarter of 2018 and the write-down was non-cash in nature. This action is part of our efforts for becoming more efficient to control our unit costs per wheel. We also reduced our research and development expenses during the third quarter of 2018 as our aluminum wheel product portfolio is essentially complete and we continue our efforts in gaining market share.
We continue to focus on our financial strength during the 2018 third quarter. Our total bank balance is in cash, plus the bank deposits and fixed bank deposits the maturity period over three months reached RMB1.3 billion or US$188.4 million. While our total bank borrowings were RMB558 million or US$81.2 million.
For the three months ended September 30, 2018 we've generated a cash flow from operations of RMB155.3 million or US$22.5 million. We generated RMB235.2 million or US$34.2 million in cash flow from operations for the first nine months of 2018.
Now let me briefly go over the third quarter results for 2018. Revenue for the third quarter was RMB730.4 million or US$106.3 million from RMB243.4 million for the third quarter of 2017. The increase in total revenue was attributable to higher OEM unit sales and higher price adjustments in response to high raw material costs.
Sales in the Chinese OEM market increased by 24% year over year to RMB438.4 million or US$63.8 million in the third quarter of 2018 compared to RMB353.5 million the same quarter 2017. Revenue on a year over year basis was mainly due to the continued growth in the domestic truck OEM market which was driven by the Chinese government's enforcement of his truck anti-loading policy.
Total unit sales in the OEM market increased by 8.5% year-over-year during the third quarter of 2017. Aftermarket sales in China increased by 7.4% year over year to RMB218.4 million or US$31.8 million in the third quarter of 2018. It was RMB203.4 million in the third quarter of 2017. Total unit sales in the aftermarket was decreased by 13.9% year over year.
International sales decreased by 14.9% year-over-year to RMB73.6 million or US$10.7 million in the third quarter of 2018 compared to sales of RMB86.5 million in the third quarter of 2017.
Total international unit sales increased by 23.4% year over year in the third quarter of 2018, it was mainly due to the continued weak demand in Southeast and Asian countries. In the third quarter of 2018 domestic OEM sales, domestic aftermarket sales and international sales contributed 60% to 89.9% and 10.1% of revenue respectively.
Sales of tubed steel wheel comprised 41.1% of 2018 third quarter revenue compared to 44.4% in the same quarter in 2017. Tubeless steel wheel sales represented 42.5% of 2018 third quarter revenue compared to 44% in the same quarter of 2017. While due to tubeless steel wheel sales remain the main sources of revenue for the company.
Sales of aluminum wheels increased by 39.2% year over year and accounted for 8.7% of third quarter revenue as compared to 7.1% in the same quarter a year ago. The tightened regulations by the Chinese government to cut emissions and increase road safety through higher demand for lighter weight aluminum wheel.
Third quarter gross profit increased by 8.9% to RMB88.7 million or US$12.9 million compared to RMB81.5 million in the same quarter in 2017.
Gross margin was 12.1% compared to 12.7% in the third quarter of 2017, but it was up from 9.3% in the second quarter of 2018. The decrease in gross margin on a year-over-year basis was mainly due to the higher raw material cost and different product mix. The Company raised selling prices during the third quarter, but the increase was not high enough to offset higher raw material costs.
Selling and distribution expenses increased by 3.1% to RMB41.9 million, or US$6.1 million from RMB40.6 million in the third quarter of 2017. The increase in selling and distribution costs was primarily due to the higher sales in domestic OEM markets. As a percentage of revenue selling and distribution costs were 5.7% in the third quarter of 2018, compared to 6.3% in the same quarter a year ago.
Research and development R&D expenses decreased by 9% to RMB12.6 million, or US$1.8 million, compared to RMB13.9 million in the third quarter of 2017. R&D as a percentage of revenue was 1.7% in the third quarter of 2018, compared to 2.2% in the same quarter a year ago.
Administrative expenses increased by 47.9% to RMB51.8 million, or US$7.5 million from RMB35 million in the third quarter of 2017. As a percentage of revenue, admin expenses were 7.1% compared to 5.4% of revenue in the third quarter of 2017. The increase in admin expenses was mainly due to a one-off loss on disposals RMB18.5 million or US$2.7 million of an absolute production line at Li & Fung [ph] Steel Wheel factory during the third quarter of 2018. The write-down was non-tax in nature.
Net loss and total comprehensive loss were RMB15.1 million, or US$2.2 million, in the third quarter of 2018, compared to a net loss and total comprehensive loss of RMB5.4 million for the third quarter of 2017.
Basic and diluted loss per ADS was RMB0.29 or US$0.04 in the third quarter of 2018, compared to basic and diluted loss per ADS of RMB0.11 in the third quarter of 2017. In the third quarter of 2018, the Company recorded net cash inflows from operating activities of RMB155.2 million, or US$22.6 million. The reduction of receivables during the quarter positively affected operating cash flows.
Day sales outstanding DSO was at 69 days in the third quarter of 2018. The capital expenditures for the purchase of property, plant and equipment in the third quarter of 2018 was RMB10.6 million or US$1.6 million.
During the third quarter of 2018 and 2017, the weighted average number of ordinary shares was US$206.5 million, and the weighted average number of ADS was US$51.6 million.
Now let me review the 2018's first nine months results. Revenue for the first nine months ended September 30, 2018, was RMB2454.2 million, or US$357.3 million, compared to RMB2094.7 million for the first nine months of 2017. It was up by 17.2% year-over-year.
Sales in the Chinese OEM market increased by 26.4% year-over-year to RMB1434.3 million, or US$208.8 million, and it represented 58.4% of our revenue. Aftermarket sales grew by 9.8% year-over-year to RMB740.5 million, or US$107.8 million in the first nine months of 2018, and it represented 30.2% of total first nine-months revenue.
International sales increased by 2% year-over-year to RMB279.4 million, or US$40 million impact in the same period last year and represents a 11.4% of revenue.
Tubed steel wheel sales over the first nine months end September 30, 2018 increased by 17.8% compared with the same period in 2017 and accounted for 46.1% of revenue. Tubeless steel wheel sales increased by 11.7% from the same period a year ago and accounted for 42.1% of revenue.
Aluminum wheels sales rose 58.6% from the same period a year ago and accounted for 8.5% of revenue. Gross part sales for the first nine months end September 30, 2018 were RMB298.9 million or US$43.5 million compared with RMB273.1 million during the same period in 2017, it was up by 9.4% year-over-year.
Gross margin was 12.2% compared with 13% in the same period last year. Net profit and total comprehensive income for the first nine months end September 30, 2018 was RMB5.2 million, and US$0.8 million compared with a net loss in total comprehensive loss of RMB0.4 million during the same period in 2017.
Basic and diluted earnings per ordinary share and per ADS for the first nine months end September 30, 2018 was RMB0.03 or US$0 and RMB0.1 and US$0.01 respectively.
Now for our balance sheet as of September 30, 2018, Zenix Auto by bank balances and cash of RMB966.1 million or US$40.7 million and fixed bank profit for the maturity period over three months of RMB290 million or US$42.2 million. Pledged deposits were RMB37.7 million or US$5.5 million. For the bank borrowings were RMB558 million or US$81.2 million. Total equity attributable to owners of the company was RMB2,551.9 million or US$371.6 million.
Kevin, round up my presentation and we are ready for questions.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from John Sheehy, private investor. Your line is now live.
Hello, everybody. Thank you for taking my call. Could you give us an update on the appeal of your New York Stock Exchange listing?
Okay. This is Martin. Some of the update on the appealing process. We have submitted our relevant documents to stock exchange, the independent committee, and same as to the New York Stock Exchange committee as well. What I understand from lawyers is they are in the process of evaluating our appeal and evaluating the information that we provided to them. We still haven't heard anything from the stock exchange and from the committee yet. Once we have that reply from the stock exchange, we will inform the market by then.
Okay. Thank you. And could you share some comments about how your OEM volume has been stronger than the industry?
As you know, on the OEM side [indiscernible] segment has experienced a quite bit decline in third quarter on the year-over-year based decrease of heavy-duty truck sales in 21%, ended third quarter was 220,000 units compared to the heavy-duty trucks.
On the bottom side, the sales in the third quarter for the industry is 113,700 units, that's also a 9% decline on the year-over-year basis.
As a medium duty truck segment, the sales from China in the third quarter was 37,400 units that's reflecting a 33% year-over-year decline.
As we mentioned these segments has been very difficult negative. And however, all performance in the third quarter was very encouraging. We sold RMB1.3 million units of wheels in the third quarter, that's reflecting 8% year-over-year increase. On the level side [ph]. even more encouraging. Our sales during the third quarter was 58,000 units, that's a 56% year-over-year increase.
While the industry OEM segment has experienced a major headwind set ourselves [indiscernible] training and booked pretty healthy and strong growth. That's boils down to three factors. First, our sales to FAW, JEC and Jinan [ph] have increased mainly due to our market share with those OEM has expanded during the quarter.
Also, on the semi-trailers area. This has been a - in the past, it hasn't been our strongest area. But this year, especially in the second half of 2018, we are experiencing pretty strong growth as well.
Speaking of aluminum wheel, other than the - our large customer FAW has increased procurement from us. We also expanded our penetration into the semi-trailer sector. So that helped us on the aluminum wheels business.
Yeah. Thank you for the detailed information. And can you give us an update about your aluminum wheel capacity expansion?
So, in terms of production capacity for aluminum wheels, we believe our current capacity isn't sufficient to meet the market demand. We're looking to the third quarter in the EV, electric vehicle, commercial vehicle sales.
On a year-over-year basis it was a decline. As you know, a lot of those vehicles are using our aluminum parts. So, we believe at this moment of time we don't have immediate plan to increase our capacity for the aluminum wheel production.
Okay. Thank you very much. That's all my questions, and congratulations on the strong sales performance.
Thank you. [Operator Instructions] Our next question is coming from Matthew Larson from National Securities. Your line is now live.
Hi. Thank you. Good evening. Thanks for taking the call. I want to start by saying you've built quite a nice company. In difficult - at a difficult situation you've grown sales from domestic OEMs as well as elsewhere. You have a company that due to my calculations you have about a $188 million in cash and deposits and you got some bank loans of about $81 million.
So, you have a net cash position of a $107 million. And your book value is - your shareholders' equity is $371 million. The problem is the market value of your stock in the United States where it's listed is only $39 million. So, it's trading - it's about one-third of the cash on the balance sheet.
And as far as sales, you could do close to $500 million this year if you grow them in the fourth quarter. And so, it's - sales are 12 times the market value. I mean does that bother you, I know you're trying to get relisted, I don't know why it takes so long because clearly you qualified by any sort of financial metric to be listed on an exchange.
And as an investor in the company for many years, I've lost a lot of money and yet your company has done quite well, and you run a good conference call. So, you have many measures to raise the stock price. You could do road shows; you could raise the visibility of the company, you could buy back shares. I mean you could take $5 million of that $100 million plus and you know send a message that stock would be double if you bought back $5 million worth of stock and it wouldn't change your financial condition at all. Have you thought about, or do you care about it.
I mean, I don't - in the United States this would never happen. Okay. We practice a different type of capitalism where shareholders are important. And if I was the largest shareholder of the company which the you know the Chief Executive Officer is, does he want to you know have a value of his assets at a fraction of what they're worth.
So, you know what we care about is raising the value of the stock because that's all we care about. You know other than that your great performance at the end of the day doesn't matter. So, what can you do for us here about getting your stock price higher from the $0.77 it's currently trading at. It's kind of an embarrassment I would think if it was my company. So please help us out.
Thank you, thank you for your comments. I think you've made a very good comments on our company. We all believe that we have a strong operation and performance and we do we have a very good position in the market in China. And it's just so unfortunate that investors in US or some other areas don't really understand what's happening here.
And one thing is that we have to admit that we're not doing sufficient enough to bring our company up to a level that people can understand further or better or in a transparency way. What we are now is added to that and so importantly and fortunately we have a little incident happened a few months back and we all feel very sad about that.
And I am totally with you on how we can do to promote the company to make the market understand what we are doing and how well that we're doing and in our position and definitely it is a wakeup call to the whole management is to see you as well that we are going to look into this matter more seriously and how to formulate a better investor relations strategy going forward.
The point that you - well that the strategy that dimensions, road shows, dividends, company buyback, company buyback program, senior management buyback program, dividends et cetera that's something that we are seriously thinking. But one thing is that we have to get clear with the listing issue. When as we have that done, we will we're formally where we are, we're still going for NYSE.
If we can get it, we're listening then we definitely we would have our listening back on NYSE otherwise we may think of our opportunities. Some other areas and some other stocks change there and go and make investors understand and let investors have a better access to our company.
One thing that we are working on is the capital constraints that we have the bank deposits that we have is in Renminbi. And I think you understand that as some foreign exchange restrictions in and out of countries. So, that's something that we have to tackle, it's not an easy task for us.
And honestly that we have been working on that issue for quite a long time. Particularly to this tough environment, the economy is not growing anywhere for China. And even tougher for us to go that foreign exchange relaxation and to allow us to transfer more money out of the country, to U.S. or to Hong Kong to fulfill our goals, to fulfill our objectives like we have committed buyback or dividend et cetera, et cetera. But honestly, we're thinking it very seriously.
Listen, I just don't understand it. I mean Chinese companies get listed all the time in the United States, the largest companies. You know Ali Baba, JD. They're all listed here, okay. I live in New York. There are thousands of people from the PRC who are buying apartments here.
So, somehow, they're getting money out of the - out of Renminbi or Yuan. And I own a number of other small price Chinese stocks and they all sell at levels that would never be - they sell it at a such low levels that you would never see that in the United States or in Western Europe or any place else.
So, I have to question, what is the ultimate motive of private companies there in the PRC? You work very hard. Everyone talks about how tough it is there, but your economy is growing at three times at what most other countries grow at.
And so, even though it might be difficult there, you're growing at 6.5%, motor vehicles have grown to 30 million a year. I mean that's more than any other country in the world. And in the last five years, your company is growing quite nicely. I really like your company. I think you guys are doing a very good job and I complement management in growing your OEM business, the aluminum business is wonderful.
But at the end of the day, your stock is $0.77. I mean - so it's really, really frustrating. I also wanted to ask this is that when you were delisted which cut the stock in half, I mean literally overnight my investment got cut in half and I have a large one, I might add.
But I never understood why the New York Stock Exchange had said that your stock had been trading below a $1 back in 2015 and 2016. But here it was 2018 and you would have been above a $1 and again all your metrics, okay, I mean you know your book value is? It is nine times the value of the company, nine times. You would never see that in anywhere in the world.
I mean doesn't that bother you guys? It's embarrassing. I mean and I'm sure the owners of the company the largest shareholder would love to be worth 9 times more than they are now as far as their valuation of the U.S. listing. Because you should be selling at least book value that's my comment.
So, I want to leave with the fact that I think you're doing a great job in operationally, but at the end of the day the valuation it's not helping me out and my investors are very frustrated. I mean many peoples' retirements are they have been put at risk because they've invested in the number of small Chinese companies that majority ownership is in the hands of some people that I guess just don't care about the valuation of the company. They work very hard to grow the company but at the end of the day the valuation is not representative of that.
So, I would really love to see you figure out a way to get $5 million $3 million $6 million out of the country buyback some shares, pay dividend, I don't know whatever it is, but it can't be that hard. Because millions of Chinese are buying apartments in Vancouver, London, United States. They seem to be able to do it. why can't you guys get a few millions out to support the stock in some way. Thank you very much if you could answer that in any way, I'd appreciate it.
Okay. I'll try to summarize this. All right. Thank you for your comment. I think the management share your frustration and I think so as do the other investors. The incidence is so unfortunate. And back to the aspect issue, we will be working very hard as basically as a computer. So, on periodical time period we have been talking to relevant banks and authority to talk to relevant quarter. And yes, I can assure you that management is working it seriously first time here.
All right. Listen, I am happy to get involved, all right. I've been in the business for 40 years, I know people all over the street, all right. And there is no reason why you should not be able to get a listing because of your income level, your balance sheet, everything else. I am just frustrated, I think you guys are doing a good job, because numbers speak for themselves, your growing the business quite well.
And in fact, I normally would be a very large buyer of your stock here, but I am afraid that I would be throwing away a good money after bad, because these stocks that are just sitting there at $0.75 for all I know they go to $0.35 and then I've got to be in bigger problem.
So, if I could see some effort by management beyond just trying to get - I mean for you to get realistic you got to get the stock above $1, you are not going to let you get realistic at $0.75. So reverse splits, that's not always the best idea, because you might be able to create a short squeeze on that sort of notion, but if necessary, I can call in New York Stock Exchange,
I know people who work there and have them take a closer look at your situation, because it's unfair to not necessarily you all over there in the PRC, but to all the investors, most of them American investors who have suffered huge losses, because of some sort of administrative issue and I happy to get involved, because I want to get my money back.
So, I'll leave it there. You have my confidence as far as you are ability to manage the company over the PRC, what you don't have is my confidence in the way to manage your stock price, and there is a lot of ways that people do that, and the stock price speaks for itself, it's $0.77. So, thank you very much for letting me say that. But I am supporter of what you do of an investor, but I need to get a higher price, because your company is worth many times the current price, we both know that. Thank you very much.
Thank you, we will take a note of that.
Thank you for your question.
Thank you. We reach the end of our question-and-answer session and I turn the floor back over to Kevin Theiss for any further closing comments.
I want to thank everyone for joining us today. Martin, do you have any follow up comment?
No, I think that's it from my side.
Okay. Well, we look forward to speaking with you again in the future. Thank you.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today.