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Edited Transcript of HPJ earnings conference call or presentation 13-May-19 2:00pm GMT

Q1 2019 Highpower International Inc Earnings Call

Pinghu, Longgang, Shenzhen May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Highpower International Inc earnings conference call or presentation Monday, May 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dangyu Pan

Highpower International, Inc. - Chairman & CEO

* Shengbin Pan

Highpower International, Inc. - CFO & Corporate Secretary

* Yuanmei Ma

Highpower International, Inc. - IR Manager

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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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Greetings and welcome to the Highpower International First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yuanmei Ma, Investor Relations Director for Highpower. Thank you. You may begin.

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Yuanmei Ma, Highpower International, Inc. - IR Manager [2]

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Thank you, Jesse, and good morning, everyone. Thank you for joining us today for our first quarter 2019 earnings call.

Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our conference call today that we will make forward-looking statements. With us today are George Pan, Chairman and CEO of Highpower; and Mr. Sunny Pan, CFO of Highpower. Following management's prepared remarks, we will conduct a Q&A session.

I will now turn the call over to Mr. George Pan. Please note that George will first speak in Mandarin, and I will follow with the English translation of his remarks. George, please go ahead.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [3]

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Thank you, Yuanmei. (foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [4]

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[Interpreted] Good morning, everyone, and welcome to our first quarter 2019 earnings call.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [5]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [6]

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[Interpreted] Our first quarter results show a good start to 2019. Top line performance reached our guidance in RMB terms driven by continued growth in our battery solution businesses. We also continued to optimize our product mix and improve labor efficiency, which successfully increased our margins, which also exceeded our expectations.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [7]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [8]

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[Interpreted] During the quarter, we continued to expand our capacity to fulfill increasing customer demand. We are on track with the development of our new production line in our Huizhou facility, where 32 buildings is expected to be completed by the third quarter of this year. We also remain committed to R&D innovations and intend to maintain our ongoing effort in talent acquisition and cooperation with universities and the third-party research institution.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [9]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [10]

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[Interpreted] We anticipate that raw material prices will be stabilized in the second half of 2019. However, potential trade compete may place downward pressure on the broader global economic environment, creating uncertainties to our business.

To offset this effect, we intend to adapt to market forces and remain focused on executing our strategy while ensuring that we have the talent, technology and the capacity necessary to continue our growth. We remain dedicated to sustainable long-term growth and to providing clean, safe and efficient power solutions to meet society's needs.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [11]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [12]

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[Interpreted] Now I would like to turn the call over to Mr. Sunny Pan, Highpower CFO, who will go over our financial results in greater detail. Sunny, please go ahead.

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [13]

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Thank you, George. Good morning, everyone, and thank you for joining us on our call. Let me walk you through our first quarter 2019 financial results. Please note that unless stated otherwise, all numbers are presented in U.S. dollar terms and all comparisons are made on a year-over-year basis.

Net sales increased 16.7% to $58.1 million from $49.8 million. Our lithium business grew 16.8% to $42.7 million, and our nickel-metal rechargeable battery and accessory business grew 16.7% to $15.4 million. The primary drivers of our lithium business were high-end customer products, industrial applications and the increased demand for artificial intelligence products. We also continued to optimize our sales structure.

Gross profit increased 67.3% to $12.7 million from $7.6 million. Gross margin increased to 21.8% from 15.2%. This increase was due to best product mix and the improvement in our labor efficiency.

Research and development expenses were $3 million compared to $2.6 million. As a percentage of net sales, R&D expense remained flat at 5.1%. Selling and distribution expenses were $2.8 million compared to $2 million. As a percentage of net sales, selling and distribution expense increased to 4.8% from 4%. The increase of expenses were mainly driven by expanded business scale, including marketing expenses for more brand customers.

General and administrative expenses were $4.8 million compared to $4.1 million. As a percentage of net sales, general and administrative expenses remained stable at 8.3%.

Net income attributable to the company for the first quarter of 2019 was $0.3 million compared to a net loss of $1.1 million in the prior year period. Net income attributable to the company per diluted share was $0.02 compared to a net loss per diluted share of $0.07. EBITDA for the first quarter of 2019 increased by 374.6% to $2.8 million from $0.6 million.

Moving on to the balance sheet. As of March 31, 2019, our cash balance were $24.2 million compared to $24.9 million as of December 31, 2018. Our total assets were $284.1 million, and our total equity was $79.5 million.

For the second quarter of 2019, we expect net revenue to grow over 20% year-over-year. Gross margin is expected to be similar or slightly lower than that of the first quarter of 2019. We will continue to closely monitor all potential leads and the uncertainty impacts related to the trade conflict between the U.S. and China, raw material prices and the exchange rate.

This concludes our prepared remarks. We will now move into the Q&A session. Please be reminded that we will take a moment to translate questions into Mandarin and we will then respond in English. Operator, please open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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

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Matthew Larson, [2]

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Okay. Congratulations on a very nice quarter that I can see. And just wanted to know whether or not, a couple of things, that -- how much product do you sell into the U.S. that might be affected by any of the trade negotiations going on, so that we can get a gauge of future guidance you might have?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [3]

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Okay. Thank you very much. So let me translate into Chinese. (foreign language)

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [4]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [5]

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[Interpreted] Okay. Thank you for your questions, Matthew. Here is the answer from our CEO. From the figures of 2018, the total ratio of product directly and indirectly is the -- our battery to U.S. is around 14%. And for this year, 2019, we think the percentage will be around 15% to 17%, including direct and indirect using Highpower products in the U.S. Hello?

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Matthew Larson, [6]

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I'm sorry. I lost you. Are you still there?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [7]

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Yes. So you lost our answers?

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Matthew Larson, [8]

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Hello?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [9]

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Hello?

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Operator [10]

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Mr. Larson, we are able to hear you.

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [11]

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We can hear you. Hello?

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Operator [12]

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Everyone, you are still connected. It looks like Mr. Larson has disconnected from the call. (Operator Instructions) Our next question is from the line of [Bob Reser], a private investor.

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Unidentified Participant, [13]

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Can you just give a description of how the Huizhou expansions will impact revenue in 2019?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [14]

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I'm sorry. Can you repeat your question?

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Unidentified Participant, [15]

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Yes. Can you give a description of how the Huizhou expansion will impact revenue in 2019?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [16]

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Sure. Thank you very much. Let me translate. (foreign language)

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [17]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [18]

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[Interpreted] Okay. Thank you for your questions, Bob. Here is our answers. For our Huizhou Highpower, we are increasing our production capacities continuously. But as for the Phase 2, as we reported in third quarter this year, we will complete the buildings for the Phase 2. So the contribution from Phase 2 for this year is quite limited. But we anticipate that for next year, our second phase will contribute about 10% to 20% to our total sales revenue for next year. Thank you.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [19]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [20]

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[Interpreted] And it will contribute more in 2021.

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Operator [21]

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Our next question is from the line of Matthew Larson with National Securities.

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Matthew Larson, [22]

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I'm sorry. My line dropped. I'm not sure why. So I'm calling on a different phone. But we were in the middle of the question and you had answered almost conclusively that your exports are around 15%. So it's a pretty small amount and so therefore, whatever trade negotiations result in, it shouldn't have a meaningful impact.

And the only thing I wanted to ask, which I'm sure is on a lot of people's mind, is the going-private offer. I'm sure you can't give me much detail, but I just wanted to ask you this. Most recently, management has expanded and strengthened their desire to go forward with the offer. And initially, the offer was made almost a year ago.

Just wondering why it takes so long for your advisers, Roth and some law firm, to be able to consider your offer. You seem to be quite serious. And it seems to me, the longer it takes to make this assessment, your company just continues to do better and better. And so it's more difficult to justify the current $4.80 offer. So it seems to me that the quicker they resolve it, it's -- the better.

I certainly know here in the United States, when one company makes an offer to another or a private firm tries to buy a company, it -- the process is quite short. So I don't quite understand why for a company this size, it would take Roth and their legal partners so long to assess it since you all, your management as well as the director and a second investment firm, Essence or something of that nature, are very serious about going forward with it. Can you just answer why the process is so lengthy and why it takes so long?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [23]

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All right. Thank you very much. So let me translate into Chinese. (foreign language)

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [24]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [25]

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[Interpreted] So Matthew, George would like to add more information about your first questions. From the ratio perspective, our transaction with the U.S. is quite low. So current [listings combat] the impact to Highpower, the direct impact to Highpower is limited. And for Highpower, our target market is global, and we have over 18 years' experience serving the Fortune 500 and the top 10 brands in the world. And some of the international brands have cooperated with Highpower for over 15 years. So our target market is the global. And we also believe that with the green demand for the clean and safe energy solutions that our transaction with the U.S. will also get bigger and bigger. So it is the more information about your first question.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [26]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [27]

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[Interpreted] Okay. And as for your second question. Thanks for your good questions. As a member of the consulting group, I will follow the SEC regulations and procedure. The schedule depends on the progress and schedule of a special committee, ACC and a shareholder meeting. If there is any confirmed progress or schedule, the company will announce in time, and I, myself, claim such that the proposal from myself is careful and serious.

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Matthew Larson, [28]

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All right. And I guess I'll just close and let somebody else ask a question with -- I would think your advisers probably have enough time to make a decision. So I think it's in your best interest certainly that the earlier that they can arrive with some fairness appraisal, it's good for you and it gives some transparency to the shareholders, which is -- myself, I'm a fairly light shareholder. So thank you for your time.

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Yuanmei Ma, Highpower International, Inc. - IR Manager [29]

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Thank you.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [30]

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(foreign language)

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Yuanmei Ma, Highpower International, Inc. - IR Manager [31]

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[Interpreted] Yes. We believe that the proposal, the offer is for the best interest of the company and all shareholders. Thank you.

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Operator [32]

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(Operator Instructions) We do have an additional question from the line of [Alan Owl], a private investor.

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Unidentified Participant, [33]

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I have a question on your balance sheet. I noticed that your accounts receivable has dropped significantly year-over-year. That contributed to improvement in cash flow for the quarter. Is there any explanation for the drop of the accounts receivable?

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Yuanmei Ma, Highpower International, Inc. - IR Manager [34]

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Thank you very much for the question. So let me translate. (foreign language)

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [35]

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Okay. So Alan, this is Sunny. Let me answer this question. So actually, our accounts receivable (inaudible) [carefully] and also, we kept the support from our brand customers. Normally, our receivable terms days actually, the most, 90 days. So because of those variations, the fluctuation is mainly due to the seasonality. So it means actually we always almost keep 3 months sales revenue as our accounts receivable figure, yes. (foreign language) Okay. Hello, Alan. Did that answer your question?

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Unidentified Participant, [36]

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Okay. So do you mean that it's related to the customer practice? So, is that what you mean? Or like how do you expect the number will fluctuate around for -- like in the rest of the year?

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [37]

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Yes. The -- compared to last year, actually, because of last year, our peak season is globally the third quarter and the fourth quarter. So it means our accounts receivable by end of last year is almost peak time. By the fourth -- Q1 normally is the lowest season. So that is -- we have 90 days accounts receivable days, so that means will keep 3 months sales revenue, yes, so that's the reason. So every...

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Unidentified Participant, [38]

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I got it.

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [39]

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Yes. Every quarter end, actually, we will have a lot or most -- so this quarter sales, means the turnover figure, yes. Okay. Thank you. Yes.

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Unidentified Participant, [40]

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Got it. Another following question on the -- also on your balance sheet side as well on the liability. The -- I noticed that short-term loans has also decreased. Also just one on financial institutional borrowing, that also has -- that line also dropped already. So it's a good sign. I'm just wondering, do you expect the short-term loan to remain at this level? Or how do you expect to move in rest of the year?

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [41]

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Okay. Very good question. Yes. Also let me continue to answer the question.

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Yuanmei Ma, Highpower International, Inc. - IR Manager [42]

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Okay. So let me translate your question into Chinese first. (foreign language)

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [43]

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So Alan, let me answer this question, yes. So thank you for your question. Yes, actually, in the Q1, our vendor and also the loan from the third-party reduced the debt too because they -- actually, we kept operating cash inflow [practically] in Q4 and Q1. So that means we have the capability to reduce them (inaudible). But on the upside, actually because our business still keeps growing, so we still need quite money for the investment, not only the facility, also for the R&D expense, et cetera. So that means, actually, in the coming period, quarterly, so we still need other financing, yes, to support our business growth. So I think our panel, yes, will increase in the coming quarter.

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Operator [44]

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(Operator Instructions) Thank you. It appears that we don't have additional questions at this time. I would like to pass the floor back over to management for any additional concluding comments.

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Shengbin Pan, Highpower International, Inc. - CFO & Corporate Secretary [45]

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Okay. Thank you for joining us today. We look forward to speaking with you next quarter. As always, on behalf of the entire Highpower team, we welcome your feedback and visit to our facilities in China. Thank you.

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Dangyu Pan, Highpower International, Inc. - Chairman & CEO [46]

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Thank you.

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Yuanmei Ma, Highpower International, Inc. - IR Manager [47]

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Thank you.

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Operator [48]

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Ladies and gentlemen, this does conclude today's conference. Again, we thank you for your participation, and you may disconnect the lines at this time.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]