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Edited Transcript of ZX earnings conference call or presentation 16-May-19 12:00pm GMT

Q1 2019 China Zenix Auto International Ltd Earnings Call

Fujian Province May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of China Zenix Auto International Ltd earnings conference call or presentation Thursday, May 16, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jianhui Lai

China Zenix Auto International Limited - Founder, Chairman of the Board & CEO

* Junqiu Gao

China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director

* Kevin Theiss

* Ngai Lam Cheung

China Zenix Auto International Limited - CFO

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Presentation

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Operator [1]

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Greetings and welcome to the China Zenix Auto International First Quarter 2019 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Kevin Theiss, Investor Relations for China Zenix Auto International. Thank you. You may begin.

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Kevin Theiss, [2]

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Thank you for joining us today, and welcome to Zenix Autos 2019 First Quarter 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.

Before we begin, I will advise you that this conference call script contains forward-looking statements. These statements are made under the safe harbor provisions under U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies 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 make written or oral forward-looking statements in its periodic reports to the SEC, in its annual reports 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 risks 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 rate and vehicle sales; and changes in our revenues and certain cost or expense items as a percentage of our revenues.

In particular, leadership considers the risks outlined under the heading Risk Factors in our most recent Annual Report on Form 20F and our current reports filed from times to time on Form 6K. 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 in any other 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 2019 first quarter results. Then after, we will conduct a question-and-answer session.

For the purposes of today's call, all the financial results are unaudited and will be presented in RMB and U.S. dollars. Zenix Auto prepared its financial statements in accordance with international financial reporting standards, as issued by the International Accounting Standards Board.

At this time, Mr. Cheung, please start your opening remarks.

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [3]

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Thank you, Kevin, and take care. So let me start with a brief discussion on the performance of 2019 first quarter.

For the first quarter of 2019, China's GDP growth was 6.4%, lower than the historical pace, but in line with the board market expectations. As the Chinese economy continues to experience its transition from manufacturing to consumption, such shift also shows in the auto market.

For the first time in 28 years, vehicle sales in China suffered an annual decline in sales volume during 2018. According to data reported by the China Association of Automobile Manufacturers, in the first quarter of 2019, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 2.4%. Truck sales decreased by approximately 1%.

Looking further into the segment, heavy-duty truck sales increased by 0.4%, medium-duty truck sales declined by double digits and light-duty truck sales registered a marginal increase during the quarter.

On the positive side, the total sales of traditional engine-powered bus during the first quarter declined by 16.8%, continuing its losing streak in market share, while EV bus sales continue to demonstrate strong growth with nearby doubled volume.

Facing the slowdown in economic growth and vehicle sales growth, the Chinese government has rolled out physical policies to stimulate the market, such as loosened credit regulation, increased debt restructuring, favorable intentions for local government on infrastructure development spending and increased lending supply. With this carefully designed policy and the continuous growth of consumption in China, we are optimistic that China will return to more meaningful growth in the foreseeable future.

Our revenue for the first quarter of 2019 was RMB 669.4 million, USD 99.7 million, compared to RMB 816.3 million in the first quarter of 2018, mainly affected by a weaker domestic truck OEM market and a sluggish economic environment.

Sales to the Chinese OEM market were RMB 350.4 million or USD 52.2 million as unit sales decreased during the first quarter of 2019. In addition, lower demand led to a selling price adjustment in the domestic OEM market.

In the domestic aftermarket and international market, the total unit sales were negatively affected as our selling prices increased to reflect higher raw material costs in our cost-plus model.

Higher steel price impacted our sales and our gross margin in the first quarter of 2019. Even though lower than its peak in the fourth quarter 2018, steel prices remained high even since the Chinese government started its campaign to reduce excess capacity in steel production.

Sales of our aluminum wheels accounted for 9% of our 2019 first quarter revenue as compared to 9.5% in the same quarter a year ago. And we believe aluminum wheels will continue to grow in both the OEM and domestic aftermarket as the lighter weight makes vehicles more fuel-efficient.

Our first quarter gross margin was 12.1%, down from 15.4% in the first quarter of 2018. The decrease in gross margin on a year-over-year basis reflected weaker total sales volume combined with a lower averaging sale price in the OEM segment.

Higher prices in the aftermarket and the international markets were unable to offset the negative impacts of total volume decline and the weaker OEM sales. We anticipated that with an improving economy of scale and increased sales of our higher-margin aluminum wheels and with further upward price adjustments in our steel wheels, our gross margins will stabilize and improve in the future.

As part of our efforts to be more efficient in operations, administrative costs and selling and distribution expenses declined in the first quarter of 2019. Research and development expenses increased modestly as we continue to invest in new wheel designs, materials and production techniques to improve our sales and enhance profitability.

We remain prudent in managing our balance sheet and enhancing our financial strength continue as a top priority during the first quarter of 2019.

As of March 31, 2019, Zenix Auto had bank balance and cash, pledged bank deposit and fixed bank deposits with a maturity period over 3 months of RMB 1.3 billion or USD 193.6 million.

Now let me go over the first quarter results for 2019. Revenue for the first quarter of 2019 was RMB 669.4 million, USD 99.7 million, compared to RMB 816.2 million in the first quarter of 2019 -- 2018, excuse me. The decrease in revenue on a year-over-year basis was mainly due to weaker domestic truck OEM market and a sluggish economic environment and lower demand following the company's selling price increases in the domestic aftermarket and international market.

Sales to the Chinese OEM market were RMB 350.4 million, USD 52.2 million, compared to RMB 465.1 million in the same quarter of 2018. Total unit sales in the OEM market decreased by 20.4% year-over-year during the first quarter of 2019.

Aftermarket sales in China were RMB 240.5 million, USD 35.8 million, compared to RMB 253.9 million in the first quarter of 2018. Total unit sales in the aftermarket decreased by 6.9% year-over-year as the demand was slightly affected in the aftermarket wheel segment after the company decreased the selling prices to address the higher raw material costs.

International sales were RMB 78.5 million, USD 11.7 million, compared to sales of RMB 97.2 million in the first quarter of 2018. Total unit sales in the international sales decreased by 26.6% year-over-year in the first quarter of 2019, mainly due to the company's price increase policy associated with high raw material costs, which led to weaker demand in Southeastern Asian countries.

In the first quarter of 2019, domestic OEM sales, domestic aftermarket sales and international sales contributed 52.4%, 35.9% and 11.7% of revenue, respectively. Sales of tubed steel wheels comprised 42.7% of 2019's first quarter revenue, compared to 45.7% in the same quarter in 2018. Tubeless steel wheels sales represented 43.6% of 2019 first quarter revenue, compared to 41.3% in the same quarter of 2018. Sales of aluminum wheels accounted for 9% of first quarter revenue as compared to 9.5% in the same quarter a year ago.

First quarter's gross margin was RMB 81.2 million, USD 12.1 million, compared to RMB 125.9 million in the same quarter in 2018. Gross margin was 12.1%, compared with 15.4% in the first quarter of 2018. The decrease in gross margin on a year-over-year basis was mainly due to the weaker total sales volume and lower selling price in the OEM markets.

The company raised selling prices in the domestic aftermarket and international market during the first quarter, but they were not high enough to offset the negative impact of the total volume decline and the weaker OEM demand.

Selling and distribution expenses decreased by 12.3% to RMB 39.5 million, USD 5.9 million, from RMB 45 million in the first quarter of 2018. The decrease in selling and distribution costs was primarily due to lower sales in the first quarter of 2019 compared with the same quarter last year. As a percentage of revenue, selling and distribution costs were 5.9% in the first quarter of 2019, compared to 5.5% in the same quarter a year ago.

Research and development expenses increased by 3.7% to RMB 13.3 million, USD 2 million, compared to RMB 12.9 million in the first quarter of 2018. R&D as a percentage of revenue was 2% in the first quarter of 2019, compared to 1.6% in the same quarter a year ago. The higher R&D expenses are mainly due to increased product development programs associated with new material development, new product design and new production equipment development.

Administrative expenses decreased by 6.8% to RMB 28.6 million, USD 4.3 million, from RMB 30.7 million in the first quarter of 2018. As a percentage of revenue, administrative expenses were 4.3%, compared to 3.8% of revenue in the first quarter of 2018.

Net loss and total comprehensive loss was RMB 4.5 million, USD 0.7 million, in the first quarter of 2019, compared to net income and total comprehensive income of RMB 26.1 million for the first quarter of 2018. Basic and diluted loss per ADS were RMB 0.09, USD 0.01, compared to basic and diluted income per ADS of RMB 0.51 in the first quarter of 2018. In the first quarter of 2019, the company recorded net cash outflow from operating activities of RMB 37.6 million, USD 5.6 million. Days sales outstanding remained at 61 days in the first quarter of 2019, slightly increased from 54 days during the full year of 2018.

Capital expenditures for the purchase of property, plant and equipment in the first quarter were 0. During the first quarter of 2019 and 2018, the weighted average number of ordinary shares were 206.5 million and the weighted average number of ADSs was 51.6 million.

For key balance sheet items. As of March 31, 2019, Zenix Auto had bank balances and cash of RMB 977.2 million, USD 145.6 million, and fixed bank deposits with a maturity period over 3 months of RMB 290 million or USD 43.2 million. Account receivables were RMB 523.6 million or USD 78 million, compared to RMB 527 million at the end of 2018.

Total bank borrowings were RMB 558 million, USD 83.1 million. Total equity attributed to owners of the company was RMB 2,534 million or USD 377.6 million.

Now, Kevin, that rounds up my presentation, and we are ready for questions.

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Kevin Theiss, [4]

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Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Ladies and gentlemen, our first question comes from the line of [John Sheehy], private investor.

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Unidentified Participant, [2]

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Could you share any updated comments about the path to a new listing on a major exchange?

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [3]

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Thank you, John. I received an email and there are a lot of information that we can consider. Again, I want to reiterate, there are quite a number of issues that we need to resolve, including some of the technical -- some fundamental issues that we need to clear before we can actually go forward with the application. But I can assure you that we have reached out to talk to some of the key persons from some of the institutions, including some professionals and lawyers and accountants, and we believe that having a listing somewhere -- some recognizable stock exchange is a viable choice for us. But again, this is not a concrete plan yet. We are contemplating that we could go forward in a short period of time that we can come up with a plan. Then by then we'll update the market and update definitely yourself about the plan of the relisting. Hello?

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Operator [4]

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(Operator Instructions)

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Jianhui Lai, China Zenix Auto International Limited - Founder, Chairman of the Board & CEO [5]

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Hello? (foreign language)

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Operator [6]

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One moment please.

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Kevin Theiss, [7]

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One moment. (foreign language)

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Operator [8]

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(Operator Instructions) Our next question is from [John Sheehy], private investor.

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Unidentified Participant, [9]

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Sorry, everybody, I was disconnected. For the entry (inaudible) and also, last year, Zenix said that the Board of Directors would explore options to deploy some of its cash through share buybacks and cash dividends, and I would like to ask if any decision was reached about that.

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director [10]

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(foreign language)

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Unidentified Participant, [11]

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(foreign language)

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director [12]

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(foreign language)

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Unidentified Participant, [13]

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(foreign language)

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [14]

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Okay. So since last conversation and Mr. Gao has reported to the -- along with other senior management has reported to the Chairman as well as the Board of Directors. And they do have a -- believe there is a possibility of moving along our share buyback. However, there's one technical challenge right now is the foreign exchange or what we call capital control in China. The Chinese government has implemented a very strict, complicated regulation for capital to leave China, whether from corporate or from individuals. So we are working with some of the government agents -- agencies to resolve that issue. Once we make progress on that, then we will turnaround looking into detailed plans on share buyback.

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Unidentified Participant, [15]

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That's great. (inaudible)

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [16]

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Hello, John?

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Unidentified Participant, [17]

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(inaudible) That's all my questions for today.

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Operator [18]

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(Operator Instructions) Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Theiss for any final comments.

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Kevin Theiss, [19]

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We want to thank you all for participating in the 2019 first quarter financial results conference call. We wish you all good day. Martin, do you have any final comment?

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [20]

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All right. Thank you for participating in the 2019 first quarter financial results conference call and look forward to speaking with you again. And we wish you all a good day. Thank you.

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Operator [21]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.