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Edited Transcript of ZX earnings conference call or presentation 21-Nov-19 1:00pm GMT

Q3 2019 China Zenix Auto International Ltd Earnings Call

Fujian Province Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of China Zenix Auto International Ltd earnings conference call or presentation Thursday, November 21, 2019 at 1:00:00pm 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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* John Sheehy

* 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 Third 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. 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 2019 Third Quarter Financial Results Conference Call. My name is Kevin Theiss, and I am Zenix Auto 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-looking 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 this conference call as well as the 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 report to the SEC and its annual report to shareholders, in press releases and other written materials and in oral statements made by 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 statements 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 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 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 then he will review the 2019 third quarter and 9-month 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.

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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 2019 third quarter.

In the third quarter of 2019, China's economic growth continued its downward trend as GDP growth grew at 6% compared with 6.2% in the second quarter and 6.4% in the first quarter of 2019. Chinese exports were 3.2% lower than September, and there was softness in freight shipments. And for the 9 months ended September 2019, Chinese exports to the United States declined by 10.7% from a year earlier, in dollar terms. Uncertainty due to the trade issues with the United States has affected business investment in China as well.

In the current sluggish economy, the Chinese Purchasing Managers' Index, PMI, a gauge of Chinese factory conditions, was at 49.8 in September and declined to 49.3 in October. Below the 50 level, economic growth is not characterized as in an expansion stage according to National Bureau of Statistics. The index has stayed below the 50 mark for 6 straight months, and Chinese manufacturing activity fell to an 8-month low in October 2019.

Overall automobile sales in September 2019 reported the 15th straight month of reduced sales. Demand in the commercial vehicle market was restrained as the government's stricter emission standards, the National VI, began implementation in July. The locations are primarily large Tier 1 cities that have considerable air pollution problems and choose to adopt this standard earlier than they internationally. The National VI standard is expected to be mandated across China in mid-2020.

Dealers are focusing sales on their current National V vehicle inventories, which has affected the production of new OEM vehicles. According to data reported by the China Association of Automobile Manufacturers, during the third quarter of 2019, unit production and sales of commercial vehicles in September 2019 were up 4% and 1.9% year-over-year. In August of 2019, production and sales of commercial vehicles deceased by 0.9% in production. The sales were down 2.8% year-over-year. In July 2019, the production and sales of commercial vehicles were down 12.7% and 6.4% year-over-year. For the first 9 months, the production and sales of commercial vehicles were down 2.1% and 3.4% year-over-year. CAAM data indicated that 2019 third quarter sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 2.6% overall compared with the same quarter in 2018. This included a 4.1% decrease in the truck segment and an 8.4% decease in the much smaller (inaudible).

In this environment, our 2019 third quarter revenue was RMB 531.9 million, USD 74.4 million, representing a 27.2% year-over-year decline. Our sales in the Chinese OEM market decreased by 33.5% year-over-year as a number of our key OEM customers reduced their vehicle production and their orders to us in the third quarter. Our aftermarket sales decreased by 15.3% year-over-year, and our international sales declined by 24.5%. International unit sales decreased by 28.6% year-over-year, primarily as demand weakened for Southeastern Asian countries as high material costs affected the company's pricing.

Sales of aluminum wheels accounted for 9.4% of third quarter revenues compared to 8.7% in the same quarter a year ago. Aluminum wheel operations continued to run at a high utilization rate. We remain confident that aluminum wheel sales will increase market shares in both the OEM and domestic aftermarket. Their lightweight and performance enhance vehicles' fuel efficiency.

Third quarter gross margin was RMB 32.9 million, USD 4.6 million, and the gross margin was 2 -- 6.2%. The decline in unit sales and selling prices on a year-over-year basis led to the decrease in the overall gross profit margins.

To improve our operational efficiency, we reduced our selling and distribution expenses by 17.7% year-over-year, and administrative expenses declined by 39.5% year-over-year. Research and development is important to maintain our industry leadership, though we again modestly increased our investments to develop new metal alloys and wheel design to attract sales.

As of September 30, 2019, Chinese autos (sic) [Zenix Auto] had bank balances and cash fixed bank deposits with a maturity period over 3 months and pledged bank deposits of RMB 1,293.4 million or USD 181 million. This total compares to the total bank borrowings of RMB 558 million or USD 78.1 million.

In the third quarter of 2019, the company recorded net cash inflows from operating activities of RMB 146.3 million, USD 20.5 million, and had capital expenditures of RMB 6.7 million, USD 0.9 million, for the purchase of property, plant and equipment.

The central government has implemented growth policies to stimulate the economy, tax cuts, less stringent regulations. These are monetary policies that have (inaudible) back to improve the business environment. A full or partial resolution of the U.S.-China trade issues will improve business confidence by mitigating risks and lessening uncertainty.

Now let me go over the third quarter results for 2019. Revenue for the third quarter was RMB 531.9 million, USD 74.4 million, compared with RMB 730.4 million for the third quarter of 2018. The decrease in revenue on a year-over-year basis was mainly due to reduced production by some of the company's' key OEM customers in China, namely JAC, Foton, Yutong and Sinotruk, and softer demand from international sales.

Sales to the Chinese OEM market decreased by 33.5% year-over-year to RMB 291.4 million, USD 40.8 million, in the third quarter of 2019 compared to RMB 438.4 million in the same quarter of 2018. Total unit sales in the OEM market decreased by 28.1% year-over-year during the full -- the third quarter of 2019.

Aftermarket sales in China decreased by 15.3% year-over-year to RMB 185 million, USD 25.9 million, in the third quarter of 2019 from RMB 218.4 million in the quarter of 2018. Total unit sales in the aftermarket decreased by 7.4% year-over-year as the softer economy affected the logistics sector. Lower selling prices in the aftermarket also contributed to the revenue decline.

International sales decreased by 24.5% year-over-year to RMB 55.5 million, USD 7.8 million, in the third quarter of 2019 compared to sales of RMB 73.6 million in the third quarter of 2018. Total international unit sales decreased by 28.6% year-over-year in the third quarter of 2019 mainly due to continued weak demand in Southeastern Asian countries and the high material costs affecting the company's pricing competitiveness.

In the third quarter of 2019, domestic OEM sales, domestic aftermarket sales and international sales contributed 54.8%, 34.8%, and 10.4% of revenue, respectively.

Sales of tubed steel wheels compared -- comprised 45.5% of 2019 third quarter revenue compared to 45.1% in the same quarter in 2018. Tubeless steel wheel sales represented 41.2% of 2019 quarter revenue compared to 42.5% 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 9.4% of the third quarter revenue as compared to 8.7% in the same quarter a year ago.

Third quarter gross profit was RMB 32.9 million, USD 4.6 million, compared to RMB 88.7 million in the same quarter in 2018. Gross margin was 6.2% compared with 12.1% in the third quarter of 2018. Despite the improved margin in international sales, the decline in overall unit sales and selling prices on a year-over-year basis led to the decrease in the overall gross margin.

Selling and distribution expenses decreased by 17.7% to RMB 34.5 million, USD 4.8 million, from RMB 41.9 million in the third 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 revenue, selling and distribution costs were 6.5% in the third quarter of 2019 compared to 5.7% in the same quarter a year ago.

Research and development, R&D, expenses increased by 10.6% to RMB 14 million, USD 2 million, compared to RMB 12.6 million in the third quarter of 2018. R&D as a percentage of revenue was 2.6% in the third quarter of 2019 compared to 1.7% in the same quarter a year ago. Despite the sluggish market, the company continued to commit to new product development.

Administrative expenses decreased by 39.5% to RMB 31.3 million, USD 4.4 million, from RMB 51.8 million in the third quarter of 2018. This decrease is mainly due to a onetime loss of RMB 18.5 million or USD 2.7 million on the disposal of an obsolete production line at Lang Fang steel wheel factory in the third quarter from 2018. As a percentage of revenue, administrative expenses were 5.9% compared to 7.1% of revenue in the third quarter of 2018.

Net loss and total comprehensive loss were RMB 40.3 million or USD 5.6 million in the third quarter of 2019 compared to a net loss and total comprehensive loss of RMB 15.1 million for the third quarter of 2018.

Basic and diluted losses per ADS were RMB 0.78, USD 0.11, in the third quarter of 2019 compared to basic and diluted loss per ADS of RMB 0.29 in the third quarter of 2018.

In the third quarter of 2019, the company recorded net cash inflows from operating activities of RMB 146.3 million, USD 20.5 million. Days sales outstanding, DSO, was at 56 days in the third quarter of 2019 in comparison with 54 days during the full year of 2018. The company had capital expenditures of RMB 6.7 million, USD 0.9 million, for the purchase of property, plant and equipment in the third quarter of 2019.

During the third quarter of 2019 and 2018, the weighted average number of ordinary shares was 206.5 million, and the weighted average number of ADSs was 51.6 million.

I will now review the 2019 first 9 months results highlights. Revenue for the first 9 months ended September 30, 2019, was RMB 2,000.2 million or USD 279.8 million compared with RMB 2,454.2 million in the first 9 months of 2018.

Sales in the Chinese OEM market decreased by 24.3% year-over-year to RMB 1,086.2 million or USD 152 million and represented 54.3% of revenue. Aftermarket sales decreased by 6.2% year-over-year to RMB 694.6 million, USD 97.2 million, in the first 9 months of 2019 and represented 34.7 million (sic) [34.7%] of total revenue. International sales decreased by 21.5% year-over-year to RMB 219.4 million, USD 30.7 million, and represented 11% of revenue.

Tubed steel wheel sales for the first 9 months ended September 30, 2019, decreased by 20.4% compared with the same period in 2018 and accounted for 45% of the revenue. Tubeless steel wheels sales decreased by 18.4% from the same period a year ago and accounted for 42.1% of revenue. Aluminum wheel sales decreased by 16.2% from the same period a year ago and accounted for 8.8% of revenue. Off-road steel wheel sales increased by 22.7% and accounted for 2.2% of revenue.

Gross profit for the first 9 months ended September 30, 2019 was RMB 211.8 million, USD 29.6 million, compared with RMB 298.9 million during the same period in 2018. Gross margin was 10.6% compared with 12.2% in the same period last year.

Net loss and total comprehensive loss for the first 9 months end June 30, 2019, was RMB 34.5 million, USD 4.8 million, compared with net profits and total comprehensive income of RMB 5.6 million (sic) [RMB 5.2 million] during the same period of 2018.

Basic and diluted losses per ADS for the first 9 months ended September 30, 2019, were RMB 0.67, USD 0.09, compared with the basic and diluted earnings per ADS of RMB 0.10 during the same period in 2018.

Now I will go over some key balances -- balance sheet highlights. As of September 30, 2019, Zenix Auto had bank balances and cash of RMB 980 million, USD 137.1 million, and fixed bank deposits with a maturity period over 3 months of RMB 290 million or USD 40.6 million. Pledged bank deposits were RMB 23.4 million, USD 3.3 million. Total bank borrowings were RMB 558 million, USD 78.1 million. Total equity attributable to owners of the company was RMB 2,504.1 million or USD 350.3 million.

Okay. That rounds out my presentation, and we are ready for questions.

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Kevin Theiss, [4]

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Okay. Melissa, please start the question and answer.

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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 John Sheehy, private investor.

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John Sheehy, [2]

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Can I ask what is the deposits paid for acquisition of property, plant and equipment of CNY 87 million?

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Unidentified Company Representative, [3]

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(foreign language)

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [4]

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[Interpreted] Thanks for your question, John. For the further -- it represents a further investment in our aluminum factories, CNY 87 million basically. It's for the further improvement of our production line plus some interest expenses within (inaudible).

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John Sheehy, [5]

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And what is the balance sheet item amount due to a shareholder of RMB 16 million?

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Unidentified Company Representative, [6]

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(foreign language)

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

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[Interpreted] It's an amount when the company acquired foreign exchanges, our shareholder, our major shareholder lend to some of the foreign exchanges to settle some of the foreign bills that we need to pay in U.S. dollars with the foreign exchanges.

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John Sheehy, [8]

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Okay. And then you had strong second quarter sales and weak third quarter sales related to the change in the emission standards. When do you expect conditions to normalize?

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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)

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Unidentified Company Representative, [13]

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[Interpreted] Okay. The third quarter, the market condition has been difficult for the commercial vehicles business sector. And commercial vehicle market as a whole sold about 92.6 million units in the third quarter. That represented a 2.2% year-over-year decline.

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Unidentified Company Representative, [14]

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(foreign language)

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Unidentified Company Representative, [15]

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[Interpreted] The only price [power] in the third quarter is heavy-duty truck sales, which amounted to 23 -- 230,000 units -- 233,000 units. That represent a 3.8% year-over-year increase. However, as the medium-duty, light-duty and the bus business -- overall, those markets all suffer a year-over-year decrease.

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Unidentified Company Representative, [16]

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(foreign language)

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Unidentified Company Representative, [17]

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[Interpreted] The sectors closely correlated with our aluminum wheel product is the new energy commercial vehicle sector. Due to the government policy of reduction in the subsidy for the new energy, namely electric vehicle business, our aluminum wheel sales also suffer a major headwind during the third quarter.

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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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[Interpreted] On the OEM side of our business, the biggest detractor during the quarter was JAC. They are -- they had a difficult quarter in terms of sales, and it affected our supply business. And the other company, SAIC HONGYAN IVECO, HONGYAN IVECO has been one of our customer for a number of years. And due to the intensified competition, mostly triggered by price -- massive price reduction of competitors, we lost some market share within HONGYAN IVECO.

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Unidentified Company Representative, [20]

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(foreign language)

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Unidentified Company Representative, [21]

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[Interpreted] On the aftermarket -- onto the aftermarket business, in the month of August, there was a major accident, took place in the city of Wuxi in Jiangsu province. There was a truck -- an overloaded truck caused a bridge collapse, and there was -- there were 3 casualties, basically pedestrians walking under the bridge. And due to this major accident, these people, the 3 deaths, and Chinese central government then called for a more stringent overloading policy. And that new dynamics in the aftermarket, new policy has affected our aftermarket product sales as well.

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Unidentified Company Representative, [22]

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(foreign language)

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Unidentified Company Representative, [23]

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[Interpreted] In facing such market condition, we have made a cautious decision to lower our selling price -- our product price for both steel wheel and aluminum wheels.

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Unidentified Company Representative, [24]

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(foreign language)

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Unidentified Company Representative, [25]

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[Interpreted] Unfortunately, the fourth quarter outlook is not going to be any better. And so it's going to be a continuation of the third quarter. And we will continue to monitor the market. We are going to prioritize market share. And as a result of that, we will make necessary adjustment on the pricing to stay competitive in the marketplace.

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Unidentified Company Representative, [26]

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(foreign language)

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Unidentified Company Representative, [27]

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[Interpreted] On the aluminum wheel product side, we have seen a couple of new players entering the market. They have been extremely aggressive on pricing. Some of the price -- some of the product price have been reduced to as low as RMB 550 per -- and the unit price has dropped to RMB 550. And -- but overall, we see a number of players in the RMB 600 range competing in the marketplace. However, our price has -- prior to adjustment, our price has been around RMB 1,000. So that put us in a disadvantageous competitive situation. So we will make adjustment accordingly to continue to compete and stay -- control our market share.

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Unidentified Company Representative, [28]

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(foreign language)

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Unidentified Company Representative, [29]

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[Interpreted] I hope that answer your question.

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John Sheehy, [30]

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Yes, that's very helpful. Thank you for the detailed information. My last question is, can you share any information about your plans to get a new listing for Zenix' shares or any other steps that you could take to benefit the public shareholders?

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Unidentified Company Representative, [31]

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Okay. Thank you. (foreign language)

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Unidentified Company Representative, [32]

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(foreign language)

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [33]

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Thanks, John. So this is a very important issue for us, for the management. And I think over the past quarters and over the -- a few number of telephone conference and conversations, I think we've indicated the seriousness that we are studying or researching the possibility of going back to some of the recognizable stock exchanges. And it has been going on. I can assure we've been talking to lawyers and some of the financial practitioners in the market as well.

Actually, there are not that many choices for us to go for it. And provided with the current situation with our performances, and we need to have certain adjustments and certain -- carry on further research and study to see which market is the best for us to go forward. But it's an ongoing process, and we don't have a concrete plan so far for the time being. But it's something that is very important for us and to the shareholders as well.

And for the share price, I think it's also very important for us as well. And the management also recognizes the importance of the share price. Definitely, the share price is pretty depressed for the time being, and it's not reflecting what has been happening within the company. The market is tough. Going forward, the operational environment is not easy for us. But the management is looking at various ways to support the share price, and hopefully, that we can get back to a meaningful level. And I can assure you that the management is thinking it quite seriously now.

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Operator [34]

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

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Kevin Theiss, [35]

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Yes. Thank you for participating today. Martin, do you have any final comments?

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Ngai Lam Cheung, China Zenix Auto International Limited - CFO [36]

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All right. And that's pretty much it is right now. Thank you for participating in 2019 third quarter financial results conference call. And we look forward to speaking with you again, and we wish you all a good day. Thank you.

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Unidentified Company Representative, [37]

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(foreign language)

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Operator [38]

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