U.S. Markets close in 3 hrs 6 mins

Edited Transcript of ZX earnings conference call or presentation 15-Aug-19 12:00pm GMT

Q2 2019 China Zenix Auto International Ltd Earnings Call

Fujian Province Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of China Zenix Auto International Ltd earnings conference call or presentation Thursday, August 15, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Junqiu Gao

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

* Ngai Lam Cheung

China Zenix Auto International Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Matthew Lewton Larson;National Securities Corporation

* John Sheehy

* Kevin Theiss;Grayling

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the China Zenix Auto International Second 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. Thank you. You may begin.

--------------------------------------------------------------------------------

Kevin Theiss;Grayling, [2]

--------------------------------------------------------------------------------

Thank you for joining us today, and welcome to Zenix Auto's 2019 Second 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.

The 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 may be identified by terminology such as aim, anticipate, believe, continue, estimate, expect, going forward, intend, ought to, planned, potential, project, seek, may, might, can, could, will, would, should, shall, is likely to and the many other forms of these words or other expressions.

Among other things, the quotations from management in this conference call 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, 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 cost or expense items as a percent of our revenues. In particular, readers should consider the risk outlined under the heading Risk Factors in our most recent annual report on Form 20-F and in 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 in any attachments are as of this date only, and Zenix Auto undertakes no duty to update such information except as required under applicable law.

Mr. Cheung will provide a brief overview and he will review the 2019 second quarter and 6 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 they will be presented in RMB and U.S. dollars. Zenix Auto prepares its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Cheung, please start your opening remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Kevin. So let me start with a brief discussion on the performance of the 2019 second quarter. China's economy continues to grow at a slower pace. GDP growth in the second quarter of 2019 grew at 6.2%, down from 6.4% in the first quarter of 2019 and below the 6.7% in the second quarter of 2018. The 2019 second quarter rate of growth represented the slowest GDP growth in the last 27 years. As the largest supplier of the wheel products to the Chinese commercial vehicles market, our lower sales reflect the slowdown in sales in that market.

Chinese commercial vehicle production during the second quarter of 2019 consisted of a 1.8% decline in April 2019, an 8.5% decrease in May 2019 and a 17.5% decline in June of 2019, according to statistics from the China Association of Automobiles. In addition, new automotive emission standards, the much stricter National 6, were implemented on July 1, 2019, in some key provinces and Tier 1 cities to improve air quality ahead of the scheduled national implementation of the new emission standard in 2020. Retailers in these areas were focused on selling their inventories of National 5 vehicles before the deadline, and this affected orders for new vehicles.

The Chinese economy and commercial vehicle purchases are also being impacted by the uncertainty caused by international trade tensions especially with the United States. According to data reported by the China Association of Automobile Manufacturers, in the second quarter of 2019, sales of on-road commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 13.9% with truck sales 14.1% lower and bus sales down by 12%.

Our revenue for the second quarter of 2019 declined by 12% year-over-year to RMB 799 million or USD 116.4 million from RMB 907.6 million for the second quarter of 2018. The revenue decrease was mainly due to the weaker demand from the OEM sector in China and international sales. Revenue from the Chinese OEM market decreased by 16.3% year-over-year to RMB 444.5 million, USD 64.7 million in the second quarter of 2019 as vehicle unit sales in the OEM market decreased by 20.6% year-over-year.

Our aftermarket revenues in China increased by 0.4% year-over-year to RMB 269.1 million, USD 39.2 million in the second quarter of 2019 despite unit sales decreased -- decreasing by 6.1% year-over-year as the softer economy affected the commercial vehicle logistics sector.

International sales decreased by 21.4% year-over-year to RMB 85.4 million, USD 12.4 million in the second quarter of 2019 with international unit sales down by 28% year-over-year. The decrease was mainly due to continued weak demand in Southeastern Asian countries due to higher material cost.

Sales of our aluminum wheels accounted for 8.2% of 2019 second quarter revenue as compared to 7.5% in the same quarter in 2018. Aluminum operations continue to run at a high utilization rate. We are optimistic that the sales of our portfolio of aluminum wheels will continue to expand in both the OEM and domestic aftermarket as their light weight and performance make vehicles more fuel-efficient.

Second quarter gross profit increased by 16.1% to RMB 97.7 million, USD 14.3 million, and the gross margin increased to 12.2% compared with 9.3% in the second quarter of 2018. The increase in gross margin resulted primarily from the company increasing selling prices during the second quarter while raw material cost, especially fuel prices, remained stable. We anticipate that with the market accepting our higher prices of steel wheels and our growing sales of higher-margin aluminum wheels, our gross margin will be stable and it could even improve further.

We continue to focus on increasing our operational efficiency. Selling and distribution expenses are down by 10.3% year over year and administrative expenses declined by 12.9%. Research and development increased modestly as we create new designs and explore new metal combinations to improve our wheel performance to generate additional sales.

We returned to profitability in the second quarter of 2019 as our profits and total comprehensive income for the period was RMB 10.2 million USD 1.5 million compared with a loss and total comprehensive loss in the second quarter of 2018.

We continue to be careful with our financial resources. And as of June 30, 2019, bank balances and cash, pledged bank deposits and fixed bank deposit with a maturity period over 3 months totaled of RMB 1.2 billion or USD 181.4 million. For the remainder of 2019, the central government is initiating a fiscal stimulus plan and a more growth-oriented monetary policy, including approximately CNY 2 trillion, USD 291 billion, of tax cuts and easing regulations for using government debt and some infrastructure projects to boost capital spending.

Now let me go over the second quarter results for 2019. Revenue for the second quarter was RMB 799 million, USD 116.4 million from RMB 907.6 million for the second quarter of 2018. The 12% decrease in revenue on a year-over-year basis was mainly due to the weaker demand from the OEM sector in China and international sales.

Sales to the Chinese OEM market decreased by 16.3% year-over-year to RMB 444.5 million, USD 64.7 million, in the second quarter of 2019 compared to RMB 530.8 million in the same quarter of 2018. Total unit sales in the OEM market decreased by 20.6% year-over-year during the second quarter of 2019.

Aftermarket sales in China increased by 0.4% year-over-year to RMB 269.1 million, USD 39.2 million in the second quarter of 2019 from RMB 268.2 million in the second quarter of 2018. Total unit sales in the aftermarket decreased by 6.1% year-over-year as the softer economy affected the logistics sector.

International sales decreased by 21.4% year-over-year to RMB 85.4 million, USD 12.4 million, in the second quarter of 2019 compared to sales of RMB 108.7 million in the second quarter of 2018. Total international unit sales decreased by 28% year-over-year in the second quarter of 2019 mainly due to weak -- mainly due to continued weak demand in Southeastern Asian countries due to higher material costs.

In the second quarter of 2019, domestic OEM sales, domestic aftermarket sales and international sales contributed 55.6%, 33.7% and 10.7% of the revenue, respectively. Sales of tubed steel wheels comprised 46.6% of 2019 second quarter revenue compared to 47.2% in the same quarter in 2018. Tubeless steel wheel sales represented 41.4% of 2019 second quarter revenue compared to 42.4% in the same quarter of 2018. While tubed and tubeless steel wheel sales remain the main sources of revenue for the company, sales of aluminum wheels accounted for 8.2% of second quarter revenue as compared to 7.5% in the same quarter a year ago.

Second quarter gross profits increased by 16.1% to RMB 97.7 million, USD 14.2 million, compared to USD 84.2 million in the same quarter in 2018. Gross margin was 12.2% compared with 9.3% in the second quarter of 2018. The increase in gross margin on a year-over-year basis was mainly due to the company raised selling prices during the second quarter while raw material costs remained stable.

Selling and distribution expenses decreased by 10.3% therefore to RMB 43.9 million, USD 6.4 million, from RMB 48.9 million in the second quarter of 2018. The decrease in selling and distribution costs was primarily due to lower transportation expenses associated with lower sales volume. As a percentage of revenues, selling and distribution costs were 5.5% in the second quarter of 2019 compared to 5.4% in the same quarter a year ago.

Research and development expenses increased by 8.4% to RMB 14.9 million, USD 2.2 million, compared to RMB 13.7 million in the second quarter of 2018. Research and development as a percentage of revenue was 1.9% in that second quarter of 2019 compared to 1.5% in the same quarter a year ago.

Administrative expenses decreased by 12.9% to RMB 26.6 million, USD 3.9 million, from RMB 30.5 million in the second quarter of 2018. As a percentage of revenue, administrative expenses were 3.3% compared to 3.4% of revenue in the second quarter of 2018.

Net profit and total comprehensive income were RMB 10.2 million, USD 1.5 million, in the second quarter of 2019 compared to a net loss and total comprehensive loss of RMB 5.8 million for the second quarter of 2018.

Basic and diluted earnings per ADS were RMB 0.2, USD 0.03, in the second quarter of 2019 compared to basic and diluted loss per ADS of RMB 0.11 in the second quarter of 2018.

In the second quarter 2019, the company recorded net cash outflows from operating activities of RMB 47.3 million, USD 6.9 million. Days sales outstanding was at 63 days in the second quarter of 2019, which compare with 54 days during the full year of 2018. The company did not incur significant capital expenditures for the purchase of property, plant and equipment in the second quarter of 2019. During the second quarter of 2019 and 2018, the weighted average number of ordinary shares were RMB 206.5 million and the weighted average number of ADS was 51.6 million.

Now I will review the 2019 first 6 months results. Revenue for the first 6 months end June 30, 2019, was RMB 1,468.3 million, USD 213.9 million, compared with RMB 1,723.8 million in the first 6 months of 2018. Sales to the Chinese OEM market decreased by 20.2% year-over-year to RMB 794.8 million, USD 115.8 million, and represented 54.1% of revenue. Aftermarket sales decreased by 2.4% year-over-year to RMB 509.7 million, USD 74.2 million, in the first 6 months of 2019 and represented 34.7% of total 6-months revenue. International sales decreased by 20.4% year over year to RMB 163.8 million, or USD 23.9 million, compared with the same period last year and represented 11.2% of the revenue.

Tubed steel wheel sales for the first 6 months end June 30, 2019, decreased by 17.9% compared with the same period in 2018 and accounted for 44.8% of the revenue. Tubeless steel wheel sales decreased by 13.7% from the same period a year ago and accounted for 42.4% of the revenue. Aluminum wheels sales decreased 13.8% from the same period a year ago and accounted for 8.5% of the revenue. Construction equipment wheels sales decreased by 39% and accounted for 2.3% of revenue.

Gross profit for the first 6 months end June 30, 2019, was RMB 178.9 million, USD 26.1 million, compared with RMB 210.1 million during the same period of -- in 2018, up by 14.9% year-over-year. Gross margin was 12.2% compared with 12.2% in the same period last year. Net profit and total comprehensive income for the first 6 months end June 30, 2019, was RMB 5.7 million, USD 0.8 million, compared with RMB 20.3 million during the same period in 2018. Basic and diluted earnings per ADS for the first 6 months end June 30, 2019, were RMB 0.11, USD 0.02, compared with RMB 0.39 during the same period in 2018.

Now let's review some key balance sheet items. As of June 30, 2019, Zenix Auto had bank balances and cash of RMB 924.4 million, USD 134.7 million, and fixed bank deposits with maturity period over 3 months of RMB 290 million or USD 42.2 million. Pledged bank deposits were RMB 31 million, USD 4.5 million. Total bank borrowings were RMB 558 million or USD 81.3 million. Total equity attributable to owners of the company was RMB 2,544.4 million or USD 370.6 million.

[Now after that round] of my presentation, and we are ready for questions. Heather?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of John Sheehy, private investor.

--------------------------------------------------------------------------------

John Sheehy, [2]

--------------------------------------------------------------------------------

I would like to ask 2 questions. First, can you share some information about the strategic cooperation agreement you announced earlier this year with Doublestar Tire Group? Is this going to be important for Zenix?

And the second question, can you share any update about corporate issues such as evaluation of a new exchange listing?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Second question, can you repeat it?

--------------------------------------------------------------------------------

John Sheehy, [4]

--------------------------------------------------------------------------------

Can you share any update about corporate issues such as evaluation of a new exchange listing?

--------------------------------------------------------------------------------

Ngai Lam Cheung, China Zenix Auto International Limited - CFO [5]

--------------------------------------------------------------------------------

Okay, great.

--------------------------------------------------------------------------------

Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director [6]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Ngai Lam Cheung, China Zenix Auto International Limited - CFO [7]

--------------------------------------------------------------------------------

Okay. As Gao commented.

[Interpreted] For the strategic operation, it's just an intentional -- I think it's at a stage of understanding only and there is no concrete plans or any cooperations that has been confirmed so far for the time being.

And for the #2 -- the second part of the questions, yes, I think we reported in our previous quarters to our shareholder about our plans, a relisting plan to recognized stock exchanges, recognized stock exchanges in either in U.S. or in Hong Kong or in Asia. Now I think it's becoming more complicated as with the economic downturn in China and with the China-U. S. trade war, and that seriously affected the performance of our share, our profitability. And we are reviewing it because there are quite a number of options that we can take. But definitely, they have different requirements, and evaluation is -- a more in-depth evaluation required.

And we are keeping conversation or dialogues with our professionals, including our lawyers and accountants and some of the financial experts as well. But we don't have any concrete plans so far due to these complicated environments so far. If we can come out some concrete plants, definitely we'll inform shareholders as soon as possible.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Lewton Larson;National Securities Corporation, [9]

--------------------------------------------------------------------------------

As a long-term shareholder, I have an interest in seeing what you all can do, besides from an operating basis, of how to improve the value of the company, the stock price here for U.S. investors. And currently, your stock, even though it's not listed, is traded but not very often. But it's pretty much at its lowest level that it’s ever been. And as a percentage of sales or as a percentage of book value, it's 1/10 of book value. And as a percentage of the net cash you have in the bank, it's a fraction. And if you aren't going forward aggressively to find some soft of listing because of certain complications, there are other ways to help the share price besides the profitability prospects of your company.

So have you considered using some of the large cash balance to buy back some shares? It wouldn't take much. I mean just a few million dollars would make a very large impact. And it wouldn't impact the liquidity of the company. Or any other measures. And then as part of this question, I don't have the 10-Q in front of me, but what is the float, that is, of the American depository receipts?

--------------------------------------------------------------------------------

Ngai Lam Cheung, China Zenix Auto International Limited - CFO [10]

--------------------------------------------------------------------------------

Okay, thank you.

--------------------------------------------------------------------------------

Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director [11]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Ngai Lam Cheung, China Zenix Auto International Limited - CFO [12]

--------------------------------------------------------------------------------

[Interpreted] Well, for the ADS program that's been in place, that approximately about 30% in public hands. Six -- rather, the rest is in the major shareholders' holding.

And thank you for the suggestion of using the company resources. Definitely, I think in our previous releases and in our previous, I think, our question-and-answer section is definitely -- we've -- I mean the management is looking at seriously how to make use of the resources that we have to support the share price, not just making use of the resources to buying shares from the market. Definitely, we will think about having dividends again, but I think everything needs to strike -- to -- I think to come up with a balance, whether we can make the best use of our resource on hands to support our shares.

I can assure you that management is thinking it -- well, it's investigating and studying it very seriously. However, there's some reality that we have to face is the exchange, the renminbi and the U.S. dollar exchange, is not an easy issue for us. I think it has been -- we have been discussing this issue for quite a number of occasions. So we are looking to that. It's not an easy issue, but definitely making use of our resources to support our share price can be something that we can come up with when the time comes. But we don't have a concrete plan for the time being.

--------------------------------------------------------------------------------

Matthew Lewton Larson;National Securities Corporation, [13]

--------------------------------------------------------------------------------

Okay. I just have a follow-up question. According to the news release, there's 15 million outstanding ADS. And if 30% are in the float, that's 5 million. And the stock currently is trading at $0.34, $0.35. So the 15 million times that, that's roughly $5 million, is the float. So again, if you paid a dividend on $5 million worth of stock or just brought back a couple million of -- I assume that you have the capability of that, whether you have deposits in Hong Kong or elsewhere that are dollar denominated, and the exchange rate's immaterial for such a small amount.

I guess what I'm saying is that having a presence in the United States as far as a shareholder base has real value and certainly should have value in the future, but you just -- no one can tell what the future holds. And where you don't have any sort of sponsorship for support here because of the low stock price, I just urge you all to not only continue to do the good work you're doing there in some difficult times. You might have material cost come down in some point in the future and your margins expand. We've seen iron ore drop, which goes into steel prices. Your aluminum business hopefully will trend higher. But also having a strong shareholder base would have some tremendous value, it's -- in the future. You've already gone through the process of being available to U.S. investors here.

So that's just what I'm trying to touch on, is managing a company is twofold, it's operationally, but it's for the shareholders. So any sort of help you could do with a very, very small amount of resources would go a long way.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director [15]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Thank you. Thank you for the comments. I think it's been -- I think the share price issue, the shareholders issue, the marketing issues, I think it's been always an issue for us. I think we have these tested issues for quite a number of times already. The company has been absent in terms of marketing, in terms of a physical face-to-face meetings with the shareholders. I think -- and it just happened that we got delisted. And I think that's something that we really need to seriously look into, is the promotion about our company and definitely making use of the resources that we have to support our shares, definitely something that we need to do and we have to do. I think our management is looking to that. But still, we don't have any concrete plans for the time being. But thanks for the comment and thanks for the suggestion and the points.

--------------------------------------------------------------------------------

Matthew Lewton Larson;National Securities Corporation, [17]

--------------------------------------------------------------------------------

Okay. Well, one last quick question. We -- the public never found out why you were delisted. I tried to call the New York Stock Exchange and they wouldn't answer me. And in your public news releases, there was just some sort of disagreement with them. Can you clarify why there was a delisting? Because clearly from a financial point of view, you're very strong. And normally, that would be enough to keep you listed.

--------------------------------------------------------------------------------

Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer & Director [18]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Ngai Lam Cheung, China Zenix Auto International Limited - CFO [19]

--------------------------------------------------------------------------------

[Interpreted] Well, I think we shared no more -- I think we shared similar information that you have and that the market has. And it's all been disclosed in the market. We filed appeal, and they would never -- and they are not willing to give any further explanation and exploration -- an explanation, and any ideas on why they delisted the company shares. Then our lawyers also make further requests as well. But again we don't have any [positive effects] from the stock exchange. I think this is the information that we have and this is the news that we can release to the market as well.

--------------------------------------------------------------------------------

Matthew Lewton Larson;National Securities Corporation, [20]

--------------------------------------------------------------------------------

Okay. So there wasn't anything specific. Very well.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Kevin Theiss;Grayling, [22]

--------------------------------------------------------------------------------

Well thanks, everyone, for joining us today and your continued interest.

Martin, do you have any final comments?

--------------------------------------------------------------------------------

Ngai Lam Cheung, China Zenix Auto International Limited - CFO [23]

--------------------------------------------------------------------------------

Thank you for participating in 2019 Second Quarter Finical Results Conference Call. And we look forward to speaking with you again and we wish you all have a good day. Thank you.

--------------------------------------------------------------------------------

Kevin Theiss;Grayling, [24]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

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

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