Antelope Enterprise Holdings Limited (AEHL) Q4 2016 Earnings Call Transcript
Published at 2017-05-15 08:00:00
David Rudnick - Investor Relations Jia Dong Huang - Chairman and Chief Executive Officer Edmund Hen - Chief Financial Officer
Howard Flinker - Flinker & Company Zain Khan - Private Investor
Good morning. My name is [indiscernible] and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Fiscal Year End 2016 Earnings Conference Call. [Operator Instructions] Thank you. I would now turn the conference over to David Rudnick. Please go ahead.
Thank you, [indiscernible]. Good morning, ladies and gentlemen and good evening to those of you who are joining us from China. Welcome to China Ceramics’ fourth quarter and fiscal year end 2016 earnings conference call. With us today are China Ceramics’ Chairman and Chief Executive Officer, Mr. Jia Dong Huang and his Chief Financial Officer, Mr. Edmund Hen. Before I turn the call over to Mr. Huang, I would like to address forward-looking statements that maybe discussed in the call. Forward-looking statements involve risks and uncertainties and include among others those regarding revenue, operating expenses, other increment expense, taxes and future business outlook. Actual performance, outcomes and results may differ materially from those expressed in forward-looking statements. The company claims the Safe Harbor protections for such forward-looking statements as contemplated under the Private Securities Litigation Reform Act of 1995. Please refer to the documents filed by the company with the SEC specifically the most recent reports on Forms 20-F and 6-K which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We assume no obligation to update any forward-looking statements or information which speak as of their respective dates. On today’s call, we reference certain non-GAAP prevention measures. In accordance with SEC rules, we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our earnings release and financial supplements, which could be down on the Investor Relations portion of the company’s corporate website. To supplement the financial results presented in accordance with U.S. GAAP, management will make reference to, among others, earnings before interest, taxes, depreciation and amortization, which we will call by its abbreviated name EBITDA. EBITDA is a non-GAAP financial measure, reconciled from net income which the company believes provides meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found in the earnings press release issued earlier today. And now, it’s my pleasure to turn the call over to China Ceramic’s Chairman and CEO, Mr. Jia Don Huang, and China Ceramic’s CFO, Mr. Edmund Hen. Ms. Dai will be translating for Mr. Huang. Mr. Huang, you may proceed.
Thank you, David. On behalf of the company, I would like to welcome everyone to our fourth quarter and fiscal year end 2016 earnings conference call. We continued to experience challenging market conditions in both the fourth quarter and fiscal year 2016 due to macroeconomic factors that have continued to negatively impact the China real estate and building materials markets. However, excluding the impact of the impairment charges, inventory write-downs and increases in the provision for bad debt taken during the period, we were able to generate $8.4 million in EBITDA for fiscal year 2016. In addition, in order to generate sales and move inventory, beginning on October 1, 2016, we instituted a 20% reduction in the prices of slow moving products which helped to turn some of our inventory into cash. This price reduction led to a 35% increase in our sales volume in the fourth quarter compared to the same period in 2015. We are also looking for ways to operate more efficiently by running production lines concurrently with the generation of customer orders. For the full year 2016, we saw our sales volume decline by 13% due to an overall contraction in customer demand. The building materials sector in the PRC is experiencing an overall retrenchment with small players exiting our space due to competitive pressures and environmental compliance regulations. As inventories in our sector work through their distribution channels, we look to regain the relatively stable pricing that we have achieved historically and generate sales volume at our normal pricing levels. We believe that our strong customer relationships and premier products position us for a potential turnaround in the market. During the fourth quarter, we utilized production facilities capable of producing 37 million square meters of ceramic tiles per year out of the company’s effective annual production capacity of 62 million square meters. As we have in past quarters, we maintained a reduced utilization of existing plant capacity based on the current market conditions to keep our operating costs low and we will bring additional capacity online when we see an increase in demand for our products. Looking ahead to 2017, we believe that the operating environment will slowly begin to improve. Should this occur, we believe that we can leverage our market positioning to maintain our existing customers and win new customers. We expect the consolidation trend among larger property developers to continue which will benefit the company since our manufacturing scale and infrastructure enable us to effectively serve these large enterprises. In the long run, we believe that real estate is the key sector of China’s economy and that the real estate market supply and demand dynamics will stabilize to present us with sustainable growth opportunities. With that, I would like to turn over the call to the company’s Chief Financial Officer, Mr. Edmund Hen who will discuss the company’s fourth quarter earnings results in more detail. Thank you.
Thank you, Mr. Huang. I will now move on to a more detailed discussion of our financial results for the fourth quarter and fiscal year 2016. Our revenue for the fourth quarter end December 31, 2016 was RMB201.9 million or $28.3 million, a decrease of 3.1% from RMB208.3 million or $31.6 million in the fourth quarter 2015. The year-over-year increase in revenue was primarily due to a 28.2% decrease in our average selling price in the fourth quarter of 2016 to RMB22.4 or $3.2 as compared to RMB31.2 or $4.1 for the fourth quarter of 2015, partially offset by 24.8% increase in sales volume of 9 million square meters of ceramics tiles in the fourth quarter of 2016 from 6.7 million square meters in the fourth quarter in 2015. Gross loss for the fourth quarter end December 31, 2016 was RMB87.1 million or $13.2 million as compared to profit of RMB29.5 million or $4.5 million for the fourth quarter of 2015. Gross profit margin was a negative 43.1% for the fourth quarter end December 31, 2016 compared to 14.2% for the fourth quarter of 2015. The year-over-year reduction in gross profit margin was primarily due to a 28.2% decrease in the average selling price of the company’s ceramic tiles attributable to our having instituted a 20% reduction in the selling price of slow moving inventory beginning on October 1, 2016, due to challenging market conditions and an RMB59.4 million or $8.9 million write down of inventory in the fourth quarter of 2016. Other income for the fourth quarter end December 31, 2016 was RMB3.5 million or $0.5 million as compared to RMB0.1 million or $0.01 million for the fourth quarter of 2015. The year-over-year increase in other income was mainly caused by rental income of RMB3.5 million or $0.5 million the company received by leasing out one of its production lines from its Hengdali facility pursuant to an 8-year lease contract. Selling and distribution expenses, for the fourth quarter end December 31, 2016 were RMB3 million or $0.4 million as compared to RMB6 million or $0.9 million in the fourth quarter of 2015. The year-over-year decrease in selling and distribution expenses was primarily due to an RMB2.7 million or $0.4 million decrease in advertising expenses and RMB0.3 million or $0.04 million decrease in traveling and entertainment expenses. Administrative expenses for the fourth quarter end December 31, 2016 were RMB29.4 million or $4.3 million as compared to RMB6.2 million or $1 million in the fourth quarter of 2015. The year-over-year increase in administrative expenses was primarily due to an RMB24 million or $3.5 million provision for bad debt. The loss from operations before taxes for the fourth quarter of 2016 was RMB351.6 million or $52.5 million as compared to RMB406.5 million or $64.2 million of loss from operations before taxation in the fourth quarter of 2015. The year-over-year decrease in profit from operations before taxation was attributable to an impairment of non-current assets of RMB230.4 million or $34.3 million and inventory write-down of RMB59.4 million or $8.9 million and a provision for bad debt of RMB24 million or $3.5 million. In the fourth quarter of 2015 there was an impairment of non-current assets of RMB421.6 million or $66.5 million which posted a loss from operations before taxes for that quarter. Net loss for the fourth quarter of 2016 was RMB252.5 million or $52.6 million as compared to RMB411.3 million or $64.9 million of net loss for the fourth quarter end December 31, 2015. Loss per a fully diluted share for the fourth quarter of 2016 on a basic and fully diluted basis were RMB127.63 or $19.05 as compared to basic and fully diluted earnings per share of RMB161.04 or $24.88 in the fourth quarter of 2015 as adjusted for the one for eight reserve split in 2016. For the full year end December 31, 2016, revenue was RMB793.7 million or $118.3 million, a decrease of 22% as compared to RMB1,017.1 million or $160.4 million for the full year of 2015. Gross loss was RMB30.1 million or $4.5 million as compared to gross profit of RMB125.4 million or $19.8 million. Gross margin for the full year 2016 was a negative 3.8% compared to 12.3% for the full year 2015. Net loss for fiscal 2016 was RMB221.8 million or $48 million as compared to a net loss of RMB262.4 million or $57.2 million for fiscal year 2015. The loss per basic share and earnings per fully diluted share were RMB116.51 or $17.36 for the year end December 31, 2016 as compared to a loss per basic and fully diluted share of RMB141.91 or $21.92 million for the same period of 2015 as adjusted for the one for eight reverse stock split in June 2016. Turning to our balance sheet. As of December 31, 2016, we had cash and bank balances of RMB0.1 million or $0.01 million as compared to RMB0.5 million or $0.1 million as of fiscal year end 2015. Our short-term bank borrowings were nil as compared to RMB40.1 million or $6.2 million as of fiscal year end 2015. As of December 31, 2016, our inventory turnover was 115 days compared to 131 days as of December 31, 2015. Our trade receivables turnover was 245 days compared with 163 days as of fiscal year end 2015. The increase in trade receivables turnover days was primarily due to the difficult economic environment which has prompted us to offer extended credit terms to certain customers resulting in a higher trade receivable turnover figure than normal. In the fourth quarter of 2016, the company accrued RMB23.9 million or $3.5 million as a provision for bad debt related to the outstanding trade receivables that did not conform with the company’s credit policy. Trade payables turnover, net of value added tax, was 43 days as of December 31, 2016 compared with 70 days as of December 31, 2015. The average turnover days was within the normal credit period of 1 to 4 months granted by our suppliers. In terms of our plant utilization and CapEx, for the fourth quarter of 2016, we utilized the plant’s capacity capable of producing 37 million square meters of ceramic tiles annually out of the total annual production capacity of 62 million square meters. Our annual production capacity has been effectively reduced from 72 million square meters of ceramic tiles to 62 million square meters of ceramic tiles due to an 8-year contract to lease out one of our production lines from our Hengdali facility that we entered into March 2016. The current quarter’s utilization represents an increase in plant capacity utilization from the fourth quarter of 2015 when we utilized the plant capacity capable of producing 26 million square meters of ceramic tiles annually although business conditions are subject to change. Looking ahead to 2017, we anticipate a low level capital expenditure from the currency challenging market conditions. Looking to our business outlook, to help mitigate the effects of the continued slowdown in China’s construction sector and its effect on the company’s building materials sector, on October 1, 2016, we instituted a 20% reduction in the prices of slow moving inventory. This resulted in 34.8% increase in our sales volume to 9 million square meters of ceramic tiles compared to sales volume of 6.7 million square meters of ceramic tiles in the fourth quarter of 2015. The current quarter’s growth in sales volume was the first positive comparison to the previous comparable period after four straight quarters of the period over year ago period decline in the key metric. However, reflective of the industry-wide retrenchment, for the full year 2016, sales volume was 28.8 million square meters of ceramic tiles, a decrease of 12.9% as compared to sales volume of 33.1 million square meters for the same period of 2015. The 20% reduction in prices of slow moving inventory that we instituted was primarily the cause of a 28.2% decrease in the average selling price for ASP for all our products in the current quarter to RMB22.4 or $ 3.2 per square meters of ceramic tile as compared to RMB31.2 or $4.1 per square meter of ceramic tile in the year ago quarter. This follows a 10.7% decline in ASP in the third quarter of 2016 preceded by 11 straight quarters of moderate period over year ago period increase in this metric. The decrease in ASP in the fourth quarter was also biggest such decline in 3 years, which was then also due to an industry-wide retrenchment. We chose to discount our slow moving inventory as means to address the difficult macroeconomic and real estate conditions in China. Looking ahead to 2017, we expect challenging conditions in the short-term, but improving market conditions as the year progresses. We believe that the real estate and the construction and building materials sectors continues to be vital to sustaining China’s economic growth as it is estimated to comprise between 15% and 20% of China’s gross domestic product. The demand for home properties continues to be strong in many Tier 1 and 2 cities, both for residential use and investment purposes. Although there remains a substantial level of unsold properties of the inventories in small cities, housing sales have increased in Tier 3 and 4 cities with the occasional support of subsidies. Though this sales increase has been significantly smaller than in larger cities. Further, additional land is being made available for development to rebalance supply and demand and to dampen increases in property prices in China’s major cities. We typically receive the orders from customers 2 months in advance of production on a rolling basis. We entered into dealership agreement with customers and a sales or purchase contract each time a customer places an order. As of December 31, 2016, our backlog was approximately RMB61.4 million or $8.9 million, which represents approximately the next two months of revenue as of the end of the fourth quarter. This compares to a backlog of approximately RMB66.8 million or $10.3 million as of December 31, 2015, a year-over-year decrease of 8%. Generally, our backlog is an indicator of revenues that might be expected in the next quarter, though it is subject to change due to unforeseen business conditions and events including credit payment terms. In order to weather the current market downturn, we are operating as leanly as possible, keeping our inventory level manageable with our production of ceramic tiles occurring at the level where we expect to sell them. Our specific niche of the building materials sector is currently characterized as having excessive production capacity where a consolidation is occurring and where we believe larger market participants such as the China Ceramics will ultimately succeed. Competitive pressures over the last 2 years has led to a contraction in our sector as some smaller, less well capitalized firms who lack our advanced manufacturing capabilities and deep product platform have exited the space. Additional exit appears likely as government mandates to convert to cleaner and more expensive fuel sources to lower carbon emissions that will also pressure smaller competitors. In the long-term, we view the growth of the real estate sector and our building materials sector as sustainable since it is underpinned by urbanization which is expected to lead to a more consumption driven economy, a key objective of government policy. We believe that our branding and market presence will enable us to generate improved financial results once the building materials sector recovers. We have refocused our efforts towards cities in China where we see active real estate development and where property developers use our products as part of their finished home products. We believe we have a competitive advantage in our sector due to our comprehensive product platform, customization capabilities, marketing expertise and ability to implement operating efficiencies. Our goal for the year ahead is to continue to strategically market in regions with sound fundamentals and generate substantial sales volume until the current period of market volatility subsides. At this point we would like to open up the call to any questions pertaining to the fourth quarter and fiscal year 2016 financial and operating performance. Operator?
[Operator Instructions] The first question comes from Howard Flinker with Flinker & Company.
Could you please tell me what the effect will be on you and your local competitors of the increase in the environmental tax coming in January I believe?
What we have seen is the more and more small players to combat [indiscernible] after this Chinese New Year.
And that will go up January 1, another time will it not?
We haven’t. This is not officially important to us yet.
While other industries have told me that, that’s going to happen. So maybe you haven’t been told yet, if it does, could it affect some of your bigger competitors too?
If the new commission is passed to the industry, I think everybody will have some impact of that.
Even big guys, not just little guys?
Even big guys, but most have the most negative impact is for the small guys.
Sure. And you said there are some early signs that ‘17 could be better than ‘16, what makes you feel that?
What we found probably now is the lowest point for the economy in China. So probably from 2016 next or in 2018 the environment will be better.
Okay, those are my only questions. I will call if I have any other questions.
[Operator Instructions] At this time there are no further questions. Excuse me, you can have another question from Zain Khan [ph] with Private Investor.
Yes. My question is do you foresee the need to raise capital in 2017 is it through debt or equity and also can you – I realized you are talking about the fourth quarter 2016, can you tell us anything yet about the first quarter of 2017 which ended on March 31 and will those earnings be released?
We are working on the – as you know, we just released this fourth quarter of 2016 and really we will immediately work on the first quarter after that. As I see the last year enhancement data somewhere in June, so we – if we can of course we will release the first quarter as soon as possible.
[Operator Instructions] At this time there are no further questions. You may proceed with your closing remarks.
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.