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Edited Transcript of ZX earnings conference call or presentation 26-Mar-19 12:00pm GMT

Q4 2018 China Zenix Auto International Ltd Earnings Call

Fujian Province Mar 28, 2019 (Thomson StreetEvents) -- Edited Transcript of China Zenix Auto International Ltd earnings conference call or presentation Tuesday, March 26, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ngai Lam Cheung

China Zenix Auto International Limited - CFO

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Conference Call Participants

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* William R. Gregozeski

Greenridge Global LLC - Research Analyst

* Kevin Theiss

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Presentation

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Operator [1]

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Greetings, and welcome to the China Zenix Auto International Fourth Quarter 2018 Financial Results. (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. 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 Auto's 2018 Fourth Quarter and Fiscal Year Financial Results Conference Call.

My name is Kevin Theiss, and I'm Zenix Auto's U.S. Investor Relations Adviser. Joining us today are deputy CEO, Mr. Junqiu Gao; and Mr. Martin Cheung, CFO.

This conference call script contains forward-looking statements. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward statements can be identified by terminology such as aim, anticipate, believe, continue, estimate, expect, going forward, intend, ought to, plan, potential, project, seek, may, might, can, could, will, would, shall, should, is likely to and the negative forms of these words or other expressions. Among other things, the quotations from management in the announcement as well as Zenix Auto's strategic and operational plans contain forward-looking statements. Zenix Auto may also make written or oral forward-looking statements in its periodic reports to the SEC, in its annual report to shareholders, in press releases and in 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 rates and vehicle sales; and changes in our revenues and certain costs or expense items as a percentage 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 our current reports filed from time to time on Form 6-K.

Zenix Auto does not undertake any obligation to update any forward-looking statements, except as required under applicable law. All information provided in the press release, script and in any attachments are as of this date and Zenix Auto undertakes no duty to update such information, except as under applicable law.

Mr. Cheung will provide a brief overview and then he will review the 2018 fourth quarter and 12 months financial results. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, all the 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.

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

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Thank you, Kevin. So let me start with a brief discussion on the performance of 2018 fourth quarter.

For the fourth quarter of 2018, China's GDP growth slowed to 6.4% from 6.5% in the third quarter and from 6.7% in the second quarter. This slower GDP growth has been the weakest in the last decade. Industrial production in the fourth quarter of 2018 was the slowest quarter in 2018.

According to data reported by the China Association of Automobile Manufacturers, in the fourth quarter of 2018, sales of commercial vehicles increased approximately 4.5% year-over-year and were up 5.1% for 2018.

The traditional diesel bus market recorded a decrease in unit sales in the fourth quarter of 2018 year-over-year as diesel truck sales, except heavy truck -- heavy-duty truck sales volume. Commercial vehicle sales were approximately CNY 4.4 million in 2018, up 5.1% despite bus sales declining by approximately 8%. It is believed that new government incentives may announce improved sales in the automobile industry as total car sales decreased 18% in January 2019 compared to January 2018.

Our revenue for the fourth quarter and December 31, 2018, decreased to RMB 695.4 million or USD 101.1 million from RMB 736.3 million for the fourth quarter of 2017. The decrease was due to weaker sales in the domestic commercial vehicle OEM market, which declined by 18.6% on a year-over-year basis, particularly heavy- and medium-duty trucks.

Increases in aftermarket international sales partially offset to weak OEM sales. Sales of tubed steel wheel and aluminum wheels increased in the fourth quarter. The Chinese government's campaign to reduce emission, improve road safety and enhance fuel efficiency is creating greater demand for lightweight wheels and our aluminum wheels are benefiting by this trend.

We believe that our aluminum wheels will continue to have growth in both the OEM and domestic aftermarket. Higher sales of our aluminum products will strengthen our blended gross margin in the future.

Higher steel prices continue to affect our gross margin in the fourth quarter of 2018. Steel prices in the fourth quarter of 2018 was the highest since 2010, as the Chinese government reduced excess steel capacity.

Our gross margin was 10.2%, down from 14.7% in the fourth quarter last year. We passed on some of the raw material price increases in our cost-plus model, and we were not able to fully offset steel's higher pricing. However, as our sales of our higher-margin aluminum wheels increases and further upward price adjustments on steel wheels, we improved our gross margin over time.

Our focus on cost control as part of our asset to be more efficient to control our unit cost of wheel resulted in lower selling distribution, research and development as well as administrative expenses during the fourth quarter of 2018. Our broad aluminum wheel product portfolio is gaining more market penetration.

Focusing on our financial strength remain a top priority during the 2018's fourth quarter. As of December 31, 2018, bank balances and cash, pledged bank deposits and fixed bank deposits with maturity period over 3 months reached RMB 1.3 billion or USD 182.8 million. While our total bank borrowings declined to RMB 473 million or USD 68.8 million.

For the 3 months end September 30, 2018, we generated -- excuse me -- for the 3 months end December 31, 2018, we generated cash flow from operations of RMB 55.1 million or USD 8 million, and we generated RMB 290.3 million or USD 42.2 million in cash flow from operations for the 2018 year.

Now let me briefly go over the fourth quarter results for 2018. Revenue for the fourth quarter end December 31, 2018, was RMB 695.4 million or USD 101.1 million from RMB 736.3 million for the fourth quarter of 2017. The decrease in revenue on the year-over-year basis was mainly due to weaker sales in the domestic OEM markets.

Aftermarket sales in China increased by 11.3% year-over-year to RMB 262 million or USD 38.1 million in the fourth quarter of 2018 from RMB 235.4 million in the fourth quarter of 2017. Total unit sales in the aftermarket increased by 12% year-over-year while pricing slightly decreased. The aftermarket wheel segment regained growth as new truck sales started to tape off.

Sales to the Chinese OEM market decreased by 18.6% year-over-year to RMB 323.8 million or USD 47.1 million in the fourth quarter of 2018 compared to RMB 397.9 million in the same quarter of 2017.

Total unit sales in the OEM market decreased by 19.2% year-over-year as a result of slower new truck sales growth, especially heavy- and medium-duty trucks during the fourth quarter of 2018.

International sales increased by 6.5% year-over-year to RMB 109.6 million or USD 15.9 million in the fourth quarter of 2018 compared to sales of RMB 102.9 million in the fourth quarter of 2017. During this quarter, the company increased selling price to reflect the higher material costs. Total unit sales in the international sales decreased by 6.1% year-over-year in the fourth quarter of 2018 as the market -- as the weaker demand in the price-sensitive regions such as Southeast Asia negatively affected overall sales.

In the fourth quarter of 2018, domestic aftermarket sales, domestic OEM sales and international sales contributed 37.7%, 46.5% and 15.8% of revenue, respectively.

Sales of tubed steel wheels comprises of 46.3% for the fourth quarter of 2018 -- 2018's revenue compared to 44.3% in the same quarter in 2017. Tubeless steel wheel sales represented 37.7% of fourth quarter revenue compared to 43.2% in the same quarter of 2017. Tubed and tubeless steel wheels sales remained the main sources of revenue for the company. However, sales of aluminum wheels continued to increase and accounted for 10.3% of fourth quarter revenue as compared to 8.1% in the same quarter a year ago.

Fourth quarter gross margin decreased by 34.6% to RMB 71 million or USD 10.3 million compared to RMB 108.5 million in the same quarter in 2017. Gross margin was 10.2% compared to 14.7% in the fourth quarter of 2017. The decrease in gross margin on a year-over-year basis was mainly driven by the significant price appreciation of steel, which slightly outpaced Zenix's wheels prices increase. Due to the government-sponsored campaign to curb overcapacity in the steel sector, steel prices reached the higher levels since 2010.

Selling and distribution expenses decreased by 5.4% to RMB 38.9 million or USD 5.7 million from RMB 41.1 million in the fourth quarter of 2017. As a percentage of revenue, selling and distribution costs were 5.6% in the fourth quarter of 2018, same as that of the fourth quarter a year ago.

Research and development expenses decreased by 19.1% to RMB 12.5 million or USD 1.8 million compared to RMB 15.5 million in the fourth quarter of 2017. R&D as a percentage of revenue was reduced to 1.8% in the fourth quarter of 2018 compared to 2.1% in the same quarter of 2017.

Administrative expenses decreased by 8.6% to RMB 31.5 million or USD 4.6 million from RMB 34.4 million in the fourth quarter of 2017. As a percentage of revenue, administrative expenses were 4.5% in the fourth quarter of 2018 compared to 4.7% of revenue in the fourth quarter of 2017.

Net loss and total comprehensive loss for the fourth quarter of 2018 was RMB 13.2 million or USD 1.9 million compared to a net profit and total comprehensive income of RMB 9.5 million in the same quarter of 2017.

Basic and diluted loss per share in the fourth quarter of 2018 was RMB 0.06 or USD 0.01 compared to basic and diluted earnings per share of RMB 0.05 in the same quarter of 2017.

In the fourth quarter of 2018, the company recorded net cash inflows from operating activities of RMB 51.1 million or USD 8 million as compared to net cash outflows of RMB 41.8 million during the same period of 2017. The capital expenditures for the purchase of property, plant and equipment was RMB 0.3 million or USD 0.1 million in the fourth quarter of 2018.

During the fourth quarter of 2018 and 2017, the weighted average number of ordinary shares was 206.5 million.

Now I will review the 2018 fiscal year's results. Revenue for the year-end December 31, 2018, grew 11.3% to RMB 3.149 billion or USD 458.1 million compared to RMB 2.831 billion in 2017.

Aftermarket sales increased by 10.2% to RMB 1 billion or USD 145.8 million in 2018 and represented 31.8% of the total revenue. Sales to the Chinese OEM market increased by 14.7% to RMB 1.758 billion or USD 255.7 million and represented 55.8% of total revenue.

International sales increased by 0.3% to RMB 389 million or USD 56.6 million compared to last year and represented 12.4% of total revenue.

Tubed steel wheel sales in 2018 accounted for 46.1% of revenue compared with 45.4% in 2017. Tubeless steel wheel sales accounted for 41.1% of revenue compared to 43.9% in 2017. With the increase in market acceptance, aluminum wheel sales accounted for 8.9% of revenue of 2018 compared with 6.8% in 2017.

Gross profit for fiscal year 2018 was RMB 369.8 million or USD 53.8 million compared with RMB 381.6 million in 2017. Gross margin was 11% in 2018 as compared to 13.5% in 2017.

Net loss and total competency loss for full year of 2018 was RMB 8 million or USD 1.2 million compared with net profit and total comprehensive income of RMB 9.1 million in 2017. Basic and diluted loss per share for the full year end December 31, 2018, were RMB 0.04 or USD 0.01 as compared to basic and diluted earnings per share RMB 0.04 in 2017.

Let's review our balance sheet. As of December 31, 2018, China Zenix had bank balances and cash of RMB 933.3 million or USD 135.7 million and fixed bank deposits with the maturity period over 3 months of RMB 290 million or USD 42.2 million.

Short-term bank borrowings were reduced to RMB 473 million or USD 68.8 million from RMB 558 million at the end of 2017. Total equity attribute to owners of the company was RMB 2.538 million (sic) [RMB 2.538 billion] or USD 369.2 million.

For the year end December 31, 2018, the company recorded cash inflows from operating activities of RMB 290.3 million or USD 42.2 million. Capital expenditures for the purchase of property, plant and equipment were RMB 10.9 million (sic) [RMB 11.2 million] or USD 1.6 million.

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

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Kevin Theiss, [4]

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Operator, would you please begin the question-and-answer session.

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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 William Gregozeski with Greenridge Global.

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William R. Gregozeski, Greenridge Global LLC - Research Analyst [2]

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I have a couple of questions. Where do you guys see the outlook for the commercial market for this year and next year? And then what impact will the National VI have on that?

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Unidentified Company Representative, [3]

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(foreign language)

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Unidentified Company Representative, [4]

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(foreign language) 2018 heavy-duty truck sales reached a historical high of 1.145 million units. (foreign language) Looking into 2019, we do not believe it's going to be another record setting year for heavy-duty truck sales. (foreign language) There are 2 reasons, 2 factors will determine 2019 trend for the heavy-duty sales and the first one is the environmental policy change. Government is pushing -- pressing very hard to improve the environment in China. One of the key initiative is to increase the deployment of rail and encourage more rail transportation and to replace highway transportation. (foreign language) On the cargo side, governments are also incentivized to use more waterway or marine to -- for transportation rather than highway transportation. (foreign language) So the third factor is the previous policy enacted or implemented by Ministry of Transportation, the circular number 921 and it has -- it's -- after completing its mission after 2 years. And so during these 2 years, a number of disqualified vehicles have been replaced or terminated from the vehicle market. And also, during this time, the change of the freight capacity, we're seeing the freight capacity has reached its maturity. (foreign language) On the positive side, for 2019, we also see some marked policy changes, for instance, the government are rolling out more monitoring policy to incentivize or to mobilize more infrastructure projects. And due to the increased amount of infrastructure projects, we're seeing more construction-related trucks are needed for this market dynamics. (foreign language) The other thing, as you mentioned, the emission change -- the forthcoming emission change for the -- overall vehicles -- commercial vehicles is going to have -- also have some positive effect to the market, for example, the National VI Emission Standard coming in will replace lots of incumbent National III engines. A lot of vehicles are still running on the National III engines. (foreign language) To give you some data points, for instance, the National III emission standards -- the trucks only meet the National III emission standards. These group of vehicles are totaled around 2 million units by now in the marketplace. And government, especially the Ministry of Transportation has already put out the mandate by the end of 2020, out of that 2 million vehicles, 1 million needs to be removed from the market. (foreign language) In summary, we're seeing both favorable factors as well as some headwinds coming into 2019 and looking forward to 2020. However, we see that given the size of the economy and the existing growth momentum, we're seeing the overall heavy-duty truck sales will still stay above 1 million units per year. (foreign language) Okay, this is our view for the next 2 years.

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William R. Gregozeski, Greenridge Global LLC - Research Analyst [5]

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Okay. As far as the aluminum sales, you had nice growth in 2018. Where do you see that going in 2019?

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Unidentified Company Representative, [6]

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(foreign language)

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Unidentified Company Representative, [7]

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(foreign language) As we mentioned, 2018 was a strong growth for us in the aluminum category -- aluminum wheel category, it's mainly attributable to the favorable government policy, circular number 921 and that policy specifically targeting the areas of overloading and practice being used among a lot of vehicle drivers. And as a result of that and also the policy is talked about the -- to increase the payload, but not increase the vehicle weight. So there is a lot of changes in the space where OEM has been stepping up on the design side to reduce the vehicle weight. And so all these are giving us a strong tailwind to grow our aluminum wheel sales in 2018. (foreign language) However, due to the policy effective and due to the favorable gross momentum generated by the policy has tapered off and also the size of the -- our aluminum product sales has grown significantly. And so we're foreseeing 2019 and 2020 is -- may not be able to repeat the similar growth rate now given the base is so large now. (foreign language) So to give you a number, 2018, our total aluminum wheel sales was 300,000 units, and only a few years ago we started this. So this is -- you can see the base has grown so much. So we're seeing 2019 and '20, for this kind of base, it’s hard to repeat the growth rate. However, we see the general trend is still towards lighter vehicle weight, same or even better payload. And so OEMs are definitely still going to use the aluminum product. So we'll see -- continue to have healthy growth rate in 2019 and 2020. (foreign language) Another factor affecting 2019 aluminum product sales, as you know, the most end customers for the -- our downstream customers for the aluminum wheel product are pretty much in either heavy-duty trucks or in the new energy or electric power bus market. And so those are the 2 buckets of applications for the aluminum products. In 2018, in the aluminum bus market, government has scaled back significantly on the subsidy. And the subsidy was the main driver for the prior 3 years, gained most of growth for the EV bus. So 2019, those subsidy are slashed significantly. (foreign language) That is -- overall, we still see this healthy growth in 2019 and 2020 and just the curve is going to be flatter than 2018 and earlier.

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William R. Gregozeski, Greenridge Global LLC - Research Analyst [8]

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Okay. Gross margins fell quite a bit this year, and you talked about being able to raise prices because of the passing of the steel long. Do you think you guys can get it back to around 15%? Or is that too much of a jump for this year?

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Unidentified Company Representative, [9]

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(foreign language)

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Unidentified Company Representative, [10]

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(foreign language)

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Unidentified Company Representative, [11]

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(foreign language)

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Unidentified Company Representative, [12]

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(foreign language) So comparing with 2017, 2018, we had overall lower gross margin. One of the contributing factor -- one of the contributing factors were aluminum wheel price. Our aluminum wheel price has gone down in comparison to that of 2017, mainly due to the intensified or increased competition. There are some new players coming into the aluminum wheel space. And they are -- as they are relatively new, they are competing with price -- lower price. And so that affected our gross margin of the aluminum wheel in turn affecting our blended gross margin. (foreign language) And the other factor on the gross margin -- overall gross margin was sales structure has changed, product mix has changed. And actually, the sales structure has changed. In 2018 -- in 2017, the market was very hard for OEM. And so the OEM is strong and our sales to OEM, the gross margin to the OEM are relatively lower than the gross margin in the aftermarket. And going into 2018, due to the market change, the OEM sales has come down -- has came down. So aftermarket, the proportion of the aftermarket as a percentage of total revenue has increased. And due to other factor as well, so aftermarket has increased. So aftermarket -- (foreign language)

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Unidentified Company Representative, [13]

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(foreign language)

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Unidentified Company Representative, [14]

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(foreign language) So overall, 2018, the aftermarket as a percentage of revenue actually came -- went down. So their margin -- aftermarket margin is typically higher. Because of that, our blended margin also went down. (foreign language) Going into 2019, I think, we're seeing aftermarket sales will increase, and that's a favorable trend for our gross margin, mainly driven -- the growth of aftermarket was mainly driven the increase in construction project, which account for more construction-related trucks or construction-related vehicles. And those vehicles tend to more relax on the overloading or their wear and tear is more frequent than the other logistic-used vehicles, trucks. So as a result of that, aftermarket sales will continue to increase as a percentage of total sales. (foreign language) On the new product side, we introduced a new product for aftermarket in 2018. We have received very good feedback from customers. So we think this product will continue to sell strong in 2019. (foreign language) This particular new product, after we -- it become well received in -- after it become well received in the aftermarket, and we are introducing them to the OEM customers. So some of the OEM customers already are trying out this particular product. (foreign language) And the third thing we're doing for 2019 is that we're continuing to -- we'll increase our aluminum product sales. Aluminum products generally having higher gross margin than the steel product. So that will help for the blended gross margin.

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Unidentified Company Representative, [15]

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(foreign language)

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Unidentified Company Representative, [16]

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(foreign language) So anyway, we're working hard to sell this new product to the OEM market as well as aftermarket.

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William R. Gregozeski, Greenridge Global LLC - Research Analyst [17]

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Okay. Do you guys think that getting back to 15% is achievable? Or is that too much of a jump?

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Unidentified Company Representative, [18]

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(foreign language)

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Unidentified Company Representative, [19]

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(foreign language) It's highly dependent on the OEM customers, how well received or how much they've increased order of this particular product. As you know, OEM are modern buyers. So when they come in, that would significantly change the sales and mix as well as the gross margin. (foreign language) I think the other factor is the steel. As you know, steel is running at a very high level in the industry right now. So if that price has -- can gradually come down, and that will also help with the gross margin. So we're cautiously optimistic on the number you just suggested.

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Operator [20]

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Our next question comes from the line of [John Sheehy] with -- private investor.

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Unidentified Participant, [21]

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Unfortunately, the shareholders do not feel able to participate in the success of the company, now that you do not have a major exchange listing. So what options have you been considering for a new listing?

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Unidentified Company Representative, [22]

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(foreign language)

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

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Okay. So thank you, John. This is Martin. The company, I think, is very disappointed with the reasons and successful appeal with New York Stock Exchange. We were very disappointed with their decision. But yes, I think, the company still recognize the importance of the use of capital market to help the company to grow to another stage as we see the market competition is fierce, and we need to stand ourselves out to the market unless we are doing good that we are having a very good position in the market. Back to the question whether we are considering all the relisting, yes, we are proactively thinking within ourselves, internally we're discussing with high level of seriousness. With that, I think, there are several categories -- there are several factors we are considering. One is cost, the other is timing and the third is the market receptiveness. We do -- I think the company do recognize the importance and the high reputation of the U.S. capital markets, and we do also recognize the Asian capital markets, in particular, Hong Kong or China. Again, a combination of those 3 factors, we're considering. We are reaching out to some of the professionals to tab in to carry out serious research on all the viable and possible alternatives. I can't have the time -- I don't have a time table yet, but I think I can tell you that we are planning to do that. We are carrying out our research more proactively since we've received the final decision from the New York Stock Exchange.

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Operator [24]

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Thank you. Ladies and gentlemen, that concludes our time for questions. I'll turn the floor back to Mr. Theiss for any final comments.

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Kevin Theiss, [25]

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Well, thank you for joining us today, and we look forward to seeing you at a later time and at the next conference call. Martin, do you have any final comment?

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [26]

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No. Thanks for participating in the call and see you next time and talk to you next time. Thank you.

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Kevin Theiss, [27]

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Thank you.

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Operator [28]

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