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Edited Transcript of CXDC earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 China XD Plastics Company Ltd Earnings Call

Haerbin Heilongjiang Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of China XD Plastics Company Ltd earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jie Han

China XD Plastics Company Limited - Chairman, CEO & President

* Qingwei Ma

China XD Plastics Company Limited - COO & Director

* Shaojie Wen

China XD Plastics Company Limited - IR Contact of New York, US

* Zhang Dahe

China XD Plastics Company Limited - CFO, Secretary & Director

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Conference Call Participants

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* Matthew Larson

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Third Quarter 2019 China XD Plastics Company Limited Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Shaojie Wen. Thank you. Please go ahead.

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [2]

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Hi, everyone. Thank you all for joining us for the China XD Plastics Third Quarter 2019 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer.

Earlier today, China XD Plastics issued a press release announcing the third quarter 2019 results.

Before management's presentation, I would like to refer to the safe harbor statements in connection with today's conference call and remind our listeners that management's prepared remarks during the call may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. All statements other than statements of historical fact contain our forward-looking statements, including but not limited to, the company's growth potential in the international market, the effectiveness and profitability of the company's product diversification, the impact of the company's product mix shift to more advanced product and related pricing policies, the volatility of the company's operating results and financial condition, the company's projection of performance in 2019 and other risks detailed in the company's filings with the SEC and available on its website at www.sec.gov.

These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the company and the industry. The company, therefore, claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and we refer you to a more detailed discussion for the risks and uncertainties in the company's filings with the Securities and Exchange Commission.

In addition, any projection as to the company's future performance represents management's estimate as of today, November 14, 2019. China XD Plastics assumes no obligation to update these projections in the future as market conditions change.

To supplement the financial results present in accordance with the U.S. GAAP, management will make reference to earnings before interest expense, income tax, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today.

I would like to turn the call over to our Chairman and Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese, and I will translate his opening remarks into English. Mr. Han, please go ahead.

(foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [3]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [4]

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[Interpreted] Our third quarter 2019 results were consistent with the continuous downturn in the automobile industry of China since December of 2018. China's automobile industry has been negatively affected by lackluster consumer demand in the domestic market, pressure from the newly issued and more stringent emission standards and a slash in subsidies to alternative energy vehicles. Yet to come is the trend reversal of automobile demand in China. Amid the negative growth environment, the small- and medium-sized competitors of our industry in China have experienced difficulty to fulfill customers' orders due to reasons such as changing financial conditions and tougher environmental policies. As a result, customers have started redirecting their orders to larger suppliers such as China XD. During the third quarter of 2019, the company was able to successfully leverage the increasing customer demand and up-sell its high-end products, produced with higher-priced raw materials in China as well as achieving the rapid increase of customers' orders in nonautomobile fields, evidenced by our stable sales growth in several domestic regions.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [5]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [6]

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[Interpreted] In the meanwhile, China XD continued to optimize its management structure and enhancing efficiency, resulting in decreased expense and enhanced net income. We are pleased with our good results.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [7]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [8]

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[Interpreted] Last month, the company has achieved a consortium led by ICBC, the world largest commercial bank by assets, which speaks volume of the confidence that world leading financial institutions in our business and brand. This will help us to succeed company's expansion strategy in multiple regions and sectors. We will be more fiscally vigilant and responsible and stabilize our capital structure by replacing more short-term debts with longer-term instruments, among other means, in order to maintain a stable and sound balance sheet and weather potential and unexpected turbulence in the future.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [9]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [10]

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[Interpreted] We are committed to completing our industrial project in Heilongjiang base for upgrading existing facilities of 100,000 metric tons capacity of engineering plastics in the fourth quarter of 2019, with relevant equipment on board. Together with the production capacity ramp-up in Dubai, we will continue to remain our ability to make further inroads into more specialized high-end products for various important new markets and to be confident with our core market positioning and expanded platform for growth.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [11]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [12]

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[Interpreted] With that, I will now turn the call over to Taylor Zhang, our CFO, to walk you through our financials. Taylor?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [13]

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Thank you, Mr. Han, and thank you, everyone, for joining the call today. Before I review the numbers, please let me remind you that all figures I discuss are for this reporting period, the third quarter of 2019, unless I state otherwise. Additionally, any year-over-year comparison is to the third quarter of 2018, and any sequential comparison is to the second quarter of 2019.

So let's go over our third quarter results. Revenues were $973.2 million (sic) [$373.2 million] in the third quarter, an increase of $76 million or 25.6% compared to $297.2 million in the same period last year. As a combined results, an increase of 52.3% in the average RMB selling price of our products and partially offset by a decrease of 15.5% in sales volume and a depreciation of RMB against U.S. dollar by 3.8% as compared with those of last year.

Gross profit was $60.1 million in the third quarter ended September 30, 2019, compared to $47.2 million in the same period of 2018. Our gross margin increased to 16.1% during the third quarter ended September 30, 2019 from 15.9% during the same quarter of 2018, primarily due to more sales of higher-end products during this quarter ended September 30, 2019 as compared to that of the prior year.

General and administrative expenses were $6 million for the quarter ended September 30, 2019 compared to $8.1 million in the same period of last year, representing a decrease of 25.9% or $2.1 million. The decrease was primarily due to our approach to optimize management structure and enhancing efficiency, leading to the decrease of $0.6 million in share-based compensation incurred for external consultancy, $0.6 million in salary and welfare, $0.9 million in traveling, transportation and miscellaneous expenses.

Research and development expenses were $19.9 million during the quarter ended September 30, 2019 compared with $23.3 million during the same period last year, representing a decrease of $3.4 million or 14.6%. This decrease was primarily due to a decrease of $2.5 million in raw material consumption and a decrease of $0.9 million in the salary and welfare of R&D personnel. As of September 30, 2019, the number of ongoing research and development projects was 361.

Operating income was $33.8 million in this quarter compared to $13 million in the same period of last year, representing an increase of 160% or $20.8 million. This increase was primarily due to the higher gross profit, lower selling expenses, G&A expenses and R&D expenses.

Net income was $17 million in the third quarter of this year compared to a net income of $9 million the same quarter of last year, representing an increase of $8 million or 88.9%. Basic and diluted earnings per share for the 3 months period ended September 30, 2019 were both $0.25 compared to $0.13 per basic and diluted shares for the same period of last year. The average number of shares used in the computation of basic and diluted earnings per share in the current quarter was 51.8 million compared to 50.9 million and 51 million for the basic and diluted earnings per share, respectively, in the prior year period.

EBITDA was a $54.6 million for the third quarter of 2019 compared to $30 million for the same period of 2018, representing an increase of $24.6 million or 82%. For a detailed reconciliation of EBITDA, a non-GAAP measure to its nearest GAAP equivalent, please see the financial table at the end of our press release issued earlier today.

Now let's turn to the balance sheet. As of September 30, 2019, the company had $235.1 million in the total amount of cash, cash equivalents and restricted cash, a decrease of $131.9 million or 35.9% as compared to $367 million as of December 31, 2018, mainly due to cash outflows used in operating activities. As of September 30, 2019, working capital was $89.8 million, and the current ratio was 1.1 compared to a current ratio of 0.9 as of December 31, 2018. Stockholders' equity as of September 30, 2019 was $889.8 million, an increase of $140.9 million or 18.8% as compared to $748.9 million as of December 31, 2018.

Recent developments. Xinda Holding Hong Kong Company Limited, a wholly-owned subsidiary of the company, entered into a facility agreement on October 2, 2019 for a loan facility in an aggregate amount of $135 million with a consortium of banks and financial institutions led by Industrial and Commercial Bank of China Macau Limited.

Moving to our financial guidance and outlook for 2019. In light of the current changing macroeconomic environment in China, Chinese auto industry market still showing certain decline, and yet to come is the trend reversal of automobile demand in China. The company will continue to opt -- to adopt the policy of eliminating inventories and ensuring capital safety during the first quarter of 2019. With the completion of Heilongjiang base for upgrading existing facilities, and the successful trial run in Dubai, resulting in new production capacity to be added, our expansion into new markets overseas, diversified customer base and escalation of sales categories, the company updated its financial guidance for fiscal 2019 to range $1.1 billion and $1.3 billion in revenues, net income to range between $70 million and $90 million. It also assumes the average exchange rate of U.S. dollar to RMB at 7.1. This financial guidance reflects the company's current view of its business outlook for fiscal 2019 and is subject to revision based on changing market conditions at any time.

Before we opening the call to your questions, I would like to note that for any questions directed to management is China, I will translate both the questions and their answers. If you want to ask a question in Chinese, please also ask it in English for the benefit of other listeners.

Please also note that we'll only be able to respond to question about our financial and operating results. For other matters, including the going private offer, we refer you to our already-issued press releases. We'll not be able to respond to questions that are directed to the principles of the going private offer about a proposed transaction.

With that, we're now opening the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Matthew Larson from National Securities.

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Matthew Larson, [2]

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Just a couple of questions here, I'm trying to make it short. Your guidance, which is lower than your previous guidance. But if I look at your news release, year-to-date through 9 months, the company's already done $1.138 billion in revenue, and yet your guidance for the whole year is $1.1 billion to $1.3 billion. So you -- I do know what you're going to earn on the net income basis for the fourth quarter, you guys have adjusted that also. But isn't that guidance kind of not accurate because you can't have negative revenues in the fourth quarter. So was that just a typo?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [3]

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Matthew, let me translate your question.

(foreign language)

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Qingwei Ma, China XD Plastics Company Limited - COO & Director [4]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [5]

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[Interpreted] Matthew, there -- it is not a typo. So essentially, as we described in our earnings release, we have the headwind of macroeconomy and also the auto industry has been weakening for quite a while. So there -- the answer came from Mr. Ma, our COO. So there probably some of conservatism building in the guidance. So the guidance is a $1.1 billion to $1.3 billion. So most likely, we'll probably somewhere in between and hopefully closer to $1.3 billion. So I guess we are seeing is that we have been conservative in this challenging environment.

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Matthew Larson, [6]

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No, I get that. I just -- if you've already done 1 -- more than $1.1 billion, then even if you did 0 revenue in the fourth quarter, or just shut down your business, you would still exceed your lower end of the guidance. Anyway, that's -- it's a talking point.

On the other hand, you all said in your press release that the difficult period -- the difficult times in the automobile industry over there is benefiting companies like China XD Plastics because smaller -- less -- lower -- undercapitalized companies are unable to get the orders that you all are going to get. So in the long run, that should be a benefit to yourself and investors. So at some point, cyclical industries have an up cycle. And since the automobile industry over there in China, I think, has been down for 15 months in a row. At some point, you'll see an uptick because that's just the way cycles work. And so anybody investing in a cyclical company would be better to do so at the bottom of the cycle than at the top. Now let me ask you something about this. I mean, the company's stock is probably the most -- least volatile that I've ever seen. It's traded between $2 and $2.20 for months. In almost every other stock that I invest in, or I follow on my screen, generally has a wider band. And since this is a closely held company, 74% is held by 2 entities and then the float, which is maybe $12 million or $13 million is -- half of it's held by a handful of people. Has it ever occurred to you or Mr. Han that -- that's kind of an unusual situation, it's almost as if it's manipulated to trade in the narrow band because almost any other stock I've ever looked at might run up $0.30, down $0.10, up $0.40, it's just never happened. So it just seems that there's a perpetual seller at some price at $2.25 and there's a perpetual buyer at $2 to maybe establish a trading pattern. I mean, can you comment on that or can Mr. Han? I mean, he's got a lot of money tied up in this thing. He's owned the company for 34 years. The value of his holdings is a fraction of where it was 10 years ago. Does that ever upset him considering all the hard work he's put in and you as well? Is there any sort of sense that the valuations just doesn't make sense? Or if it does, then why -- whenever you put out good press releases, it doesn't go up. And if you put out bad press releases, it doesn't go down.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [7]

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Okay. Matthew, let me translate your question for Mr. Han.

(foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [8]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [9]

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[Interpreted] Matthew, here's the answer coming from Mr. Han, Chairman. So basically, a narrow range where the stock has been trading, to him, he is now glued to the stock price every day. He spent most of his time and efforts to make sure the company is executing its business strategy. The stock probably historically has been not very volatile for a number of years back. So that's not something that he has insight or knowledge of. As for the valuation, he probably feels the same way as you. The company has been undervalued over years.

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Matthew Larson, [10]

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All right. I mean, I'll say this. With Morgan Stanley retreating from the consortium, and they are a shareholder like everybody else and with the new loan commitment that you all were able to get, which is a great development, by the way, Mr. Han has pledged his shares and made a personal guarantee on the loan. So now you have the banks, Morgan Stanley, Mr. Han, and then people, investors like myself, who all would like the same thing, which is the stock to go up. Because if this company can't make it, Mr. Han loses. The banks -- they get stock that they can't do anything with to collateralize their loan and Morgan Stanley loses. So I expect very good things going forward because everybody is aligned. And with your book value growing to now almost $900 million, the shareholder equity, this company continues to grow in value from an intrinsic point of view, the metrics just get better. And if we get us up cycle in the upcoming months or weeks or days, I would assume that your earnings and revenues would grow dramatically.

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [11]

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Okay. Thank you, Matthew.

(foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [12]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [13]

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[Interpreted] Thank you, Matthew, for your comments.

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Operator [14]

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There are no further questions at this time. I would now like to hand the conference back to today's host. Shaojie, please continue.

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [15]

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On behalf of China XD Plastics, we want to thank you for your interest and participation in this call. If you would like to speak with us further, please call either myself or Taylor in New York office. The contact numbers for all of us are listed at the end of the press release. Thank you.

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Operator [16]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]