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Edited Transcript of ZX earnings conference call or presentation 30-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 China Zenix Auto International Ltd Earnings Call

Fujian Province Mar 30, 2017 (Thomson StreetEvents) -- Edited Transcript of China Zenix Auto International Ltd earnings conference call or presentation Thursday, March 30, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Junqiu Gao

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

* Kevin Theiss

* Martin 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 Fourth Quarter Full Year 2016 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Kevin Theiss of investor Relations. Please go ahead.

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Kevin Theiss, [2]

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Thank you for joining us today, and welcome to Zenix Auto's 2016 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, the 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 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 also make written or oral forward-looking statements in its periodic reports to the SEC and 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 in certain cost or expense items as a percentage of our revenues.

In particular, readers should consider the risks outlined under the heading Risk Factors in our most recent annual report on Form 20F 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 statement, except as required under applicable law. All information provided in the press release, script and any attachments are, as of this date, Zenix Auto undertakes no obligation to update such information, except as required under applicable law.

Mr. Cheung will provide a brief overview, and then he will review the 2016 fourth quarter and fiscal year financial results. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, fourth quarter financial results are unaudited and fiscal year results are audited. Numbers 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 begin your opening remarks.

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

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Thank you, Kevin. So let me start with a discussion on the performance 2016 fourth quarter. The fourth quarter of 2016 experienced continuing (inaudible) economics, with the Chinese GDP annual growth was at 6.8% according to the National Bureau of Statistics. This growth rate is slightly higher compared with both the first and second quarters of 2016.

According to data reports by the China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2016, Sales of commercial vehicles, excluding gasoline-powered electric vehicles, increased by 15.7% year-over-year. The truck market rebounded, with 21.4% growth, led by a 69.5% increase in heavy-duty truck sales.

Trucks benefited from new highly enforced anti-overloading regulation driving the sale of medium- and heavy-duty trucks; higher infrastructure spending and an increase in replacement units of old trucks.

However, the bus markets, not including electric vehicles, experienced a decline, with the heavy- and medium-duty bus segments recording an 18.6% and 13.2% decline, respectively.

Revenue for the fourth quarter ended December 31, 2016, was RMB 591.9 million or USD 85.3 million compared with RMB 587.5 million for the fourth quarter of 2015. The increase in revenue on a year-over-year basis was mainly driven by a renewed growth in truck sales in China, especially for the heavy- and medium-duty trucks, as our OEM sales increased by 20.4%. Offsetting the increase in truck sales is a 15.5% decline in bus sales in the fourth quarter.

Our sales of aluminum wheels continue to gain traction as it accounted for 7.9% of fourth quarter revenue as compared to 4.7% in the same quarter a year ago.

We continued to invest in our research and development activity, as research and development expenses increased by 65.1% to RMB 23.5 million or USD 3.4 million compared to RMB 14.3 million in the fourth quarter of 2015. R&D as a percentage of revenue was 4% in the fourth quarter of 2016 compared to 2.4% in the same quarter of 2015. For the 2016 year, we also increased our R&D investment by 65.1% to RMB 84.6 million or USD 12.2 million as we develop new wheel designs and wheels with new materials to improve the performance and quality. We also expand our portfolio of aluminum wheels to make them applicable to more vehicle models.

With our new steel and aluminum wheels, we have the potential to capture additional market share in the domestic -- Chinese domestic market. We also believe our aluminum wheels will create export opportunities in the future.

We continue to focus on our financial strength, balance sheet and cash flow generation. As of December 31, 2016, our bank balances and cash was RMB 896.8 million or USD 129.2 million, with fixed bank deposits with a maturity period over 3 months at RMB 290 million or USD 41.8 million. We generated 12-month cash inflows from operating activities of RMB 179.2 million or USD 25.8 million compared with capital expenditures to purchase of property, plant, equipment of only RMB 15.1 million or USD 2.2 million. We continued to use our cash flows to provide the resources to improve our operation and enhance our competitiveness.

Our growing line of advanced tubeless steel wheels, combined with our expanding lines of aluminum wheels, have positioned us to take advantage of growth in the Chinese commercial vehicle market, with higher sales our production is becoming more efficient, and combined with our efforts -- our cost controls, we believe our gross margins will rebound in the future. We expect to continue to generate significant positive cash flow from operations along with much reduced capital expenditures, and our capacity is adequate for the near future.

While the large Chinese truck market demonstrates strong growth in the fourth quarter, we believe there are several drivers that will continue to propel growth over the next few quarters. The Chinese government approved a number of new infrastructure projects, such as more investment in public housing and spending to expand the national railway system.

Increased property development in 2016 should continue in 2017 and strengthen the demand for trucks, especially in the heavy-duty to medium-duty segments. The anti-overloading regulations should continue to help drive larger truck sales as well.

The increasingly more stringent emissions standards, as the National 5 became the new on-road standard, as well as the Tier 3 emission standards for off-road vehicles beginning in 2017, is generating a solid replacement cycle for old clunker vehicles. We believe that we are well positioned to capture that opportunities.

Now let me go over the fourth quarter results for 2016. Revenue for the fourth quarter ended December 31, 2016, was RMB 591.9 million or USD 85.3 million from RMB 587.5 million for the fourth quarter of 2015. The increase in revenue on a year-over-year basis was mainly driven by renewed growth in truck sales in China, especially for the heavy and medium trucks. Aftermarket sales in China decreased by 13.5% year-over-year to RMB 248.4 million or USD 35.8 million in the fourth quarter of 2016 from RMB 287.2 million in the fourth quarter of 2015.

So the unit sales in aftermarket increased by 14.2% year-over-year, while pricing increased slightly. The aftermarket wheel segment remains weak, as the logistic base truck market remains sluggish and price competition stays intense.

Sales at the Chinese OEM market increased by 20.4% year-over-year to RMB 255.7 million or USD 36.8 million in the fourth quarter 2014 (sic) [ 2016 ] compared to RMB 212.3 million in the same quarter of 2015. Total unit sales in the OEM market increased by 13.2% year-over-year as a result of strong truck sales, particularly heavy- and medium-duty trucks, during the fourth quarter of 2016.

International sales decreased slightly by 0.2% year-over-year to RMB 87.8 million or USD 12.6 million in fourth quarter of 2016 compared to sales of RMB 88 million in the fourth quarter of 2015. Total unit sales in the international sales increased by 3.1% year-over-year in the fourth quarter of 2016. So the weaker economic environment in our main market, Southeast Asian -- Southeast Asia, negatively affected overall sales.

In the fourth quarter 2016, domestic aftermarket sales, domestic OEM sales and international sales contributed 42%, 43.2% and 14.8% of revenue, respectively.

Sales of tubed steel wheels comprised 52.4% to 2016 fourth quarter revenue compared to 53.9% in the same quarter in 2015. Tubeless steel wheels sales represented 35.4% fourth quarter revenue compared to 36.5% in the same quarter of 2015.

Tubed and tubeless steel wheels sales remained the main sources of revenue for the company. However, sales of aluminum wheels increased and accounted for 7.9% of the fourth quarter revenue as compared to 4.7% in the same quarter a year ago.

Fourth quarter gross profit decreased by 21.3% to RMB 88.8 million or USD 12.8 million compared to RMB 112.9 million in the same quarter in 2015. Gross margin was 15% compared with 19.2% in the fourth quarter of 2015. The decrease in gross margin on a year-over-year basis was mainly driven by the price depreciation of raw materials, namely steel, which outpaced China Zenix wheel price increase.

Selling and distribution expenses increased by 0.7% to RMB 45.4 million or USD 6.5 million from RMB 45.1 million in fourth quarter of 2015. As a percentage of revenue, selling and distribution costs were 7.7% in the fourth quarter of 2016 compared to 7.7% in the same quarter a year ago.

R&D expenses increased by 65.1% to RMB 23.5 million or USD 3.4 million compared to RMB 14.3 million in the fourth quarter of 2015. R&D as a percentage of revenue was 4% in the fourth quarter of 2016 compared to 2.4% in the same quarter of 2015.

Administrative expenses decreased by 9.6% to RMB 34.4 million or USD 5 million from RMB 38.1 million in the fourth quarter of 2015, mainly due to effective cost control measures, partially offset by the increase of office building depreciation in the aluminum wheel production facility. As a percentage of revenue, administrative expenses were 5.8% in the fourth quarter of 2016 compared to 6.5% of revenue in the fourth quarter of 2015.

Net loss and total comprehensive loss for the fourth quarter of 2016 was RMB 11.6 million or USD 1.7 million compared to net profit and total comprehensive income of RMB 8.6 million in the same quarter of 2015.

Basic and diluted loss per ADS in the fourth quarter of 2016 were RMB 0.23 or USD 0.03 compared to basic and diluted earnings per ADS of RMB 0.17 in the same quarter of 2015.

In the fourth quarter 2016, the company recorded net cash outflows from operating activities of RMB 41.4 million or USD 6 million. Capital expenditures for the purchase, property, plants and equipment in the fourth quarter were RMB 3.7 million or USD 0.5 million. Deposits paid for acquisition of property, plant and equipment in the fourth quarter were RMB 2.7 million or USD 0.4 million.

During the fourth quarter of 2016 and 2015, the weighted average number of ordinary shares were 206.5 million and the weighted average number of ADSs was 51.6 million.

Now let me review the 2016 full year results. Revenue for the year ended December 31, 2016, was RMB 2,249.5 million or USD 324 million compared with RMB 2,445.8 million in 2015.

Aftermarket sales decreased by 14.5% to RMB 1,021.3 million or USD 147.1 million in 2016. And it represented 45.4% of total revenue.

Sales to the Chinese OEM market increased by 5.2% to RMB 856.7 million or USD 123.4 million. And it represented 38.1% of total revenue.

International sales decreased by 15% to RMB 371.5 million or USD 53.5 million compared to last year and represented 16.5% of total revenue.

Tubed steel wheel sales in 2016 accounted for 54.6% of revenue compared with 56.1% in 2015. Tubeless steel wheels sales accounted for 36.4% of revenue compared with 37.5% in 2015. With the increased in market acceptance, aluminum wheel sales accounted for 4.6% of revenue in 2016 compared with only 1.1% in 2015.

Gross profit for year 2016 was RMB 387.5 million or USD 55.8 million compared with RMB 363.8 million in 2015. Gross margin increased to 17.2% in 2016 from 14.9% in 2015. Net loss and total comprehensive loss of full year 2016 was RMB 25.9 million or USD 3.7 million compared with net loss and total comprehensive loss of RMB 28.6 million in 2015.

Basic and diluted loss of ordinary share and per ADS for the full year ended December 31, 2016, were RMB 0.13 or USD 0.02 and RMB 0.5 or USD 0.07, respectively.

Now let's quickly go over some highlights of our balance sheet and cash flow statements. As of December 31, 2016, Zenix Auto had bank balances and cash of RMB 896.8 million or USD 129.2 million and fixed bank deposits with a maturity period over 3 months of RMB 290 million or USD 41.8 million. Total bank loans were RMB 558 million or USD 80.4 million.

Total equity attributable to owners of the company was RMB 2,537.6 million or USD 365.5 million.

For the fiscal year ended December 31, 2016, the company recorded cash inflows from operating activity of RMB 179.2 million or USD 25.8 million. Capital expenditures for the purchase of property, plant and equipment for the first 9 months were RMB 15.1 million or USD 2.2 million. Deposits paid for acquisition of property, plant and equipment for the 9 months were RMB 14.5 million or USD 2.1 million.

Now that wraps up my presentation. Kevin?

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Kevin Theiss, [4]

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Okay. Operator, we're now ready for questions.

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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 ], a private investor.

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Unidentified Participant, [2]

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Could you share some more comments on the different performance of OEM sales, which are very strong, and aftermarket sales, which have been weaker? Do the low aftermarket sales reflect low vehicle usage? Or do aftermarket sales just normally lag OEM sales by 2 to 3 years after the wheels wear out?

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Unidentified Company Representative, [3]

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[Foreign Language]

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer and Director [4]

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[Foreign Language]

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Unidentified Company Representative, [5]

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During the fourth quarter, OEM -- overall OEM market has experienced robust growth due to 2 contributing factors. First is the emission change per ministry of transportation. And also the other factor is an anti-overloading policy and regulation, has contributed to the growth.

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

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[Foreign Language]

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Unidentified Company Representative, [7]

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Okay. In particular, the anti-overloading policy and regulation has affected the OEM sales. And as now the most challenging regulation forbidden truck drivers to overload their vehicle, which led to more -- higher demand for more vehicles in the OEM market. However, this new policy also negatively affecting the aftermarket. Reason being is in the past, as truck driver tend to -- a common practice is they tend to overload the truck and -- which caused a higher wear and tear on the wheels. And that gives a huge aftermarket replacement opportunity. And then this new policy is taking those away. So the truck driver, the wear and tears of truck used wheels, are dramatically decreased, at least in the fourth quarter. That being said, we're seeing less replacement traffic during the quarter.

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer and Director [8]

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[Foreign Language]

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Unidentified Company Representative, [9]

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In addition, the infrastructure-related construction has slowed down quite a bit, which led to the construction, used truck demand, had came down. And so that also affecting the wheel business.

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

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[Foreign Language]

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Unidentified Company Representative, [11]

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However, the infrastructure buildout will start to pick up in 2017. And we believe that will give a boost to aftermarket space, and then there will be more trucks in use, as well as cause more wear and tear, and in turn, pick up the aftermarket replacement business.

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

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[Foreign Language]

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Unidentified Company Representative, [13]

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In terms of product mix trending -- trend, we're seeing in regards also anti-overloading policy, the demand for the heavy-duty use wheel will be reduced. However, the lighter-weight wheel demand are increasing. So due to this trend, we see some shift of our product sales.

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer and Director [14]

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[Foreign Language]

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Unidentified Company Representative, [15]

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As many of you guys have noticed, since September 21, when the Ministry of Transportation announced the anti-overloading policy, the demand for the light-duty trucks has increased. As one of the key supplier to those light-duty truck wheels, they are procuring more aluminum wheels from us. So for that reason, we are benefiting from this new policy.

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer and Director [16]

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[Foreign Language]

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Unidentified Company Representative, [17]

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In response to the market -- the changing market dynamics, we introduced some new products in the lightweight category, it's a Bridge Arc wheel product, and it fits those customers from large OEM business, such as JAC -- yes?

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

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[Foreign Language]

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Unidentified Company Representative, [19]

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And FAW.

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Unidentified Participant, [20]

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And can you share some comments about customer reaction to aluminum wheels? And how much of your aluminum wheels sales are currently for trucks versus buses?

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Unidentified Company Representative, [21]

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[Foreign Language]

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer and Director [22]

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[Foreign Language]

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Unidentified Company Representative, [23]

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The quality of our aluminum wheels are pretty good. These are -- our aluminum product has been recognized, well received, by many bus makers. Our main customers in the bus category are probably the largest bus maker in the world. They are Yutong, King Long, Golden Dragon, Ankai. They are all our main customers. On the truck side, we recently signed a annual contract with FAW, which is very exciting for us. As you know, they are the largest -- one of the largest truck maker in China. And on the same time -- so they are going to procure some of the aluminum product from us as well. And the other customers are -- our traditional customer, JAC, as well as [ CSC ], which is the Chery-CIMC joint venture, they're all increased order for aluminum product. So overall, we remain optimistic. The -- we're seeing more adoption of aluminum product in the commercial vehicle market.

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Junqiu Gao, China Zenix Auto International Limited - Deputy CEO, Chief Sales & Marketing Officer and Director [24]

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[Foreign Language]

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Unidentified Company Representative, [25]

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With the increasing effort by the Chinese government controlling the overloading situation in China as well as introducing more new standard on a lighter-weight vehicles, we believe we are very well positioned, especially our aluminum wheel product, for that market opportunity.

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Unidentified Participant, [26]

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That's great. And my last question is can you share your 17 capital expenditure budget? And any major products that, that will cover? Any major projects that will cover?

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Martin Cheung, China Zenix Auto International Limited - CFO [27]

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Well currently, that we are planning to spend about approximately 50% of the -- our total assets in dollar terms, approximately RMB 300 million, as our capital expenditures in 2017.

John?

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Unidentified Participant, [28]

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And what projects will that cover under that budget?

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Martin Cheung, China Zenix Auto International Limited - CFO [29]

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Sorry, John. Let me correct my figures. I just calculated wrongly. Done with that. Probably, we are ready to spend about RMB 60 million, RMB 70 million for 2017. Most of them would be spent on an aluminum factory and the rest one is steel production. I would say it would be about 70%, 80% of the RMB 60 million, RMB 70 million, would be spent on aluminum factory. And the rest on the steel factory.

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Operator [30]

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(Operator Instructions) We have no additional questions at this time. I will turn the floor back to management for further remarks.

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Unidentified Company Representative, [31]

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I want to thank everyone for joining us today. And we look forward to speaking with you in the future.

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Martin Cheung, China Zenix Auto International Limited - CFO [32]

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Thank you.

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Operator [33]

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