David Rudnick - Account Manager Huang Jiadong - Chairman and Chief Executive Officer Edmund Hen - Chief Financial Officer

Howard Flinker - Flinker & Company

Good morning. My name is Ray, and I will be your conference operator today. At this time, I would like to welcome everyone to the China Ceramics' First Half 2018 Earnings Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. David Rudnick, you may begin your conference.

Thank you, Ray. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China. Welcome to China Ceramics’ first six months of fiscal 2018 earnings conference call. With us today are China Ceramics’ Chairman and Chief Executive Officer, Mr. Jiadong 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 may be discussed in the call. Forward-looking statements involve risks and uncertainties and include among others those regarding revenue, operating expenses, other income and expense, taxes and future business outlook. Actual future 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 of 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. And now, it’s my pleasure to turn the call over to China Ceramics' Chairman and CEO, Mr. Jia Dong Huang, and China Ceramics' CFO, Mr. Edmund Hen. Gabriel -- will be translating for Mr. Huang. Mr. Huang, you may proceed.

[Foreign Language]

Thank you, David. On behalf of the company, I'd like to welcome everyone to our first half fiscal 2018 earnings conference call.

[Foreign Language]

For the first half of 2018, we experienced top line growth of 6% as stronger market position enable us to increase our average selling price of 17% compared to the same period a year ago. However, we also experienced a 9% contraction in our sales volume after period of -- for six months of last year due to strategic decision to be more selective and [indiscernible]. We were able to implement three price increases over the last 18 months due to our reputation for high-quality products as well as the modest equipment and operating conditions. This pricing increase enabled us to achieve our recent utilization of our product capacity given the current market environment.

[Foreign Language]

During the six months ended June 30, 2018, we utilized production facilities capable of producing 21.1 million square meters of ceramic tiles for the first half of 2018 and the company's effective annual production capacity of 61.5 million square meters. In order to generate cash flow, we have entered into a contract to reach out an annual production line in our Hengdali facility that has the capacity to produce 10 million square meters of ceramic tiles. As we have in past quarters, we maintained the reduced utilization of existing plant capacity, based on the current market environment in order to keep operating costs low. And we will bring additional capacity online as the business environment improves.

[Foreign Language]

From the second half of 2018, we intend to continue to strategically target second tier cities, where we forecast development activities, they will be careful about extending credit to customers consistent with the general tightening of customer credits in our sector. Further, various pollution regulations applicable to our sector could cause the exit of smaller, less well capitalized competitors which we believe will ultimately give us the opportunity to increase our market share. Although we anticipate that business was slow in the second half of 2018, we believe that our business is sustainable since real estate development is vital for China's continued urbanization, which is a key element of government policy to achieve domestic economic growth.

[Foreign Language]

With that, I'll turn over the call to company's Chief Financial Officer, Mr. Edmund Hen, who will discuss the company's first half 2018 earnings results in more detail. Thank you.

Thank you, Mr. Huang. I'll now move on to a more detailed discussion of our financial results for the six months ending June 30, 2018. Our revenue for the six month ended June 30, 2018, was RMB 255.6 million or $55.9 million, an increase of 5.7% from RMB 236.5 million for the same period of 2017. The increase in revenue was primarily due to the 17.1% increase in the average selling price, or ASP, of the company's ceramic tiles products to RMB 28.1 or $4.4 in the first half of 2018 that's compared to RMB 24 for the same period of 2017, partially offset by the 9.3% decrease in sales volume to 12.7 million square meters of ceramic tiles in the first half of 2018 from 14 million square meters of ceramic tiles in the first half of 2017. Gross profit for the six months ended June 30, 2018, was RMB 44.8 million or $7 million as compared to gross loss of RMB 7.4 million for the first period of 2017. The gross profit margin was 12.6% for the six months ended June 30, 2018. That's compared to negative 2.2% total margin for the same period of 2017. The increase in gross profit margin was primarily due to the 16.7% increase in ASP of the company's ceramic tiles, and the decrease in depreciation expense resulting from the write-down of fixed assets at December 31, 2017. Other income for the six months ended June 30, 2018, was RMB 7.1 million or $1.1 million, as compared to RMB 7.1 million for the same period of 2017. For the six months ended June 30, 2018, other income consists of RMB 7.1 million or $1.1 million. The company received by leasing out one of the production lines from its Hengdali facility pursuant to an eight-year lease contract. Selling and distribution expenses for the six months ended June 30, 2018, were RMB 5.7 million or $0.9 million as compared to RMB 5.8 million for the same period of 2017. The year-over-year decrease in selling and distribution expenses was primarily due to an RMB 0.1 million decrease in travelling expenses. Administrative expenses for the six months ended June 30, 2018, were RMB 10.5 million or $1.6 million as compared to RMB 9 million for the same period of 2017. Net debt expenses for the six months ended June 30, 2018, was RMB 106.4 million or $16.7 million as compared to no bad debt expense for the same period of 2017, primarily due to the write-off of bad debt due to uncollectable debt associated with our customers. The company recognized a loss allowance for expected credit loss on its financial assets, primarily on its trade receivables, which are subject to impairment under IFRS 9, Financial Instruments, first effective for the current accounting period. The company believes that it has undertaken appropriate measures to resolve its bad debt expense. The company will continue to review each of its customers for credit quality as well as assiduously test its accounts receivable balances in each upcoming fiscal year. Net loss for the six months ended June 30, 2018, was RMB 71.9 million or $11.3 million as compared to net loss of RMB 5.8 million for the same period of 2017. The increase in net loss was mainly due to the RMB 106.4 million or $16.7 million of bad debt expense incurred for the six months ended June 30, 2018. Loss per basic and fully diluted share for the six months ended June 30, 2018 on both a basic and fully diluted basis were RMB 17.23 or $2.71, as compared to basic both a basic and fully diluted loss per share of RMB 2.07 for the first half of 2017. Turning to our balance sheet. As of June 30, 2018, we have cash on bank balances of RMB 6 million or $0.9 million as compared with RMB 2.3 million as of December 31, 2017. As of June 30, 2018, our inventory term was 109 days as compared to 95 days as of December 31, 2017. The increase in inventory turnover days was primarily due to the 9.3% decrease in our sales volume in the first half of 2018 as compared to the same period 2017. The company believes that the currency challenging economic environment has, in general, caused a lower turnover than normal, and the company will make a continuous effort to deplete its slow-moving stocks. Our trade receivables turnover, net of value added tax, as of June 30, 2018, was 221 days compared to 206 days as of December 31, 2017. The increase in trade receivables turnover days was primarily due to a continued difficult economic environment, which has prompted us to offer extended credit terms to certain customers resulting in a higher trade receivables turnover figure than normal. Our trade payables turnover, net of value added tax, was 50 days as of June 30, 2018 compared with 32 days as of December 31, 2017. The average turnover days was within the normal credit period of one to four months granted by our suppliers. In terms of our plants utilization and capacity, for the six months ended June 30, 2018, we utilized plant capacity capable of producing 21.1 million square meters of ceramic tiles, annually out of a total annual production capacity of 61.5 million square meters. Our annual production capacity has been effectively reduced from 76 million square meters of ceramic tiles to 61.5 million square meters of ceramic tiles due to an eight-year contract to lease out one of the production line from its Hengdali facility that we entered into in March 2016 and the disposal of a 4.5 million square meters capacity kiln at the end of 2016. Our Hengdali facility has an annual production capacity of 32.7 million square meters. And we utilized production capacity capable of producing 14 million square meters of ceramic tiles for the six months ended June 30, 2018. Our Hengdali facility has an annual production capacity of 28.8 million square meters, not including our leasing out 10 million square meters of production capacity to a third-party. We utilized annual capacity capable of producing 7.1 million square meters of ceramic tiles in the six months ended June 30, 2018. We review the level of capital expenditures throughout the year and make adjustments subject to market conditions. Although business conditions are subject to change, we anticipate a modest level of capital expenditure for the remainder of 2018, other than those associated with minimal upgrades, small repairs and maintenance of equipment. Moving on to our business outlook. For the six months ended June 30, 2018, our revenue rose 5.7%, primarily due to an increase in our average selling price, attributable to our decision to raise prices on our products three times beginning in April of 2017, with our most recent increase occurring in April of 2018. Consequently, the average selling price of our ceramic tile products increased by 17.1% for the first six months of 2018 as compared to the same period of 2017. However, our strategy to select and secure more qualified accounts led to a contraction in our sales volume from 9.3% to 12.7 million square meters of ceramic tiles from 14 million square meters of ceramic tiles for the same period of 2017. Looking ahead to the second half of 2018, and based on the information currently available to us, we expect expand market conditions to become very challenging due to a slowing domestic economy and high inventory in certain second tier cities. There is also relatively high amount of mortgage debt, overdevelopment occurring in some areas and a high number of government regulations intended to crude prices, especially in third and fourth tier cities, which could limit the launch of new projects. However, there are also efforts to build demand in some cities where housing purchase restrictions on second homes could be loosened and there is also a portion of outdated city center housing stock that could lead to rebuilding and renovation. We typically receive orders from customers one or two months in advance of production on a rolling basis. However, due to potentially difficult market conditions for the second half of 2018, there has been a decreased demand for our products. And as of June 30, 2018, we do not have any backlog. The company believes that the reduction in backlog related to a general slowdown in the construction industry in China as customers are differing order and/or are waiting to start new projects. We anticipate that the reduction in backlog may result in a decrease in sales volume and revenue in the second half of 2018. Under normal circumstances, our backlog is an indicator of revenues that might be expected in the next period, though it is subject to change as a result of unforeseen business conditions and events, including credit payment terms. In our view, China's urbanization trend, where hundreds of millions of people will move from rural areas into China's cities, will continue into the foreseeable future and will favor a sustainable building materials sector. We are becoming ever more focused on consolidating property developer sector and are looking to work with larger developer across variety of projects. Also, our sector is viewed to have excessive production capacity and government mandates to convert to cleaner and more expensive field resources could ultimately result is smaller, less well capitalized competitors exiting the space. We believe that we have a competitive advantage in our sector due to our extensive product platform, customization capabilities, marketing expertise and reputation to quickly and expertly meet our customers' needs. This business outlook reflects the company's current and preliminary views, which are subject to change and is subject to risks and uncertainties, as well as risks and uncertainties identified in the company's public filings. At this time, we would like to open up the call to any questions pretending to our first half 2018 financial results. Operator, please?

[Operator Instructions] Your first question comes from the line of Howard Flinker. Your line is open. Please ask your question.

Hello, everybody. Edmund, your sales dimensions something that I calculated and I want to correct -- on a check to see if this is correct. The way I see it, if you exclude the receivable write-off, which is not a cash write-off, your cash inflow was RMB 40 million or $6.4 million for the six months. Is that correct? Depreciation was the reversal of receivable minus loss. Is that correct?

Yes. You are correct. If you do not count -- that is our cash inflow from operations.

That's $1.50 a share or ¥9.7 million, correct, in six months?

Yes. Approximately like that.

Yes. Okay. And you and I have talked about the company's closing because of the environmental restrictions. Do you think that in the last two years more than 50% of the competitors have gone out of business?

I think so in Fujian province. There're a lot of provinces …

And then Jiangxi

Jiangxi

Jiangxi. Right. I suppose some competitors have gone out of business too. Is that correct?

Yes. We do notice it.

Is it as many our bigger percentage in the Jiangxi as in Fujian or not yet?

I think Fujian has more significant -- in Fujian Province.

Could it be as high as 65% in Fujian?

I think it's about 50%.

About 50%. Okay.

It's not for sure. So it's just …

No, no. I know -- I know it's a guess. And finally, the Government of China changed the taxes recently and also the necessary contribution to retirement and pensions. Is that going to put more pressure on some of these weaker competitors?

Yes. They will come for the pressure in the coming years.

So the reduction in industry-wide capacity in Fujian, and maybe even Jiangxi, could be more than 50% correct?

This is only an estimate.

Yes. But there is -- the pension expense is going to add more pressure to competition. Correct? More kind of pressure.

Correct.

All right. So now -- it could be bigger than 50%. We'll see without fee.

Yes.

Okay. All right. I suggest next time -- you mentioned, because most people don't bother to calculate what the cash inflow was, because that's a very large number for a company like yours. And you might point that out more clearly next time.

Yes. We may do that.

Okay. [Foreign Language]

Thank you.

Welcome.

[Operator Instructions] Your next question comes from the line of James [indiscernible]. Your line is open. Please ask your question.

Thank you for this conference call. My question is, can you tell us something about what has happened between June 30th and now, which is almost three months? Has there been any backlog?

We -- because at the end -- from June, we have changed our strategy a bit. So we did not have [indiscernible] we only chose to quality customer to do direct business with them. So from the June 30 to now, I can only say that we do have some good revenue, but that is a little bit lower or slower than the same period of last year.

You mean it's slower to collect your receivables?

One, the revenue growth. So revenue growth is much lower than we thought.

Okay. What about the cash situation? I see that relative to a year ago there's more cash on hand now which is good. That was as of June 30th. Can you tell us anything about the cash on hand now?

The cash on hand is approximately the same. There is no too much difference. I mean, well, we maintain it about the same level.

Okay. Well, I'm certainly glad that you're able to raise prices by as much as you have. And that you have returned to profitability. But, I guess, as you say the situation is still challenging in China, if it ever becomes non-challenging, which typically, I guess, it will eventually, that should be very good for you. But for now, I'm glad that you're profitable.

Thank you. Thank you [indiscernible]. Thank you very much.

[Operator Instructions] There are no further questions at this time. You may continue sir.

Thank you. Thank you very much everyone. On behalf of the entire China Ceramics' management team, we want to thank all of you for your interest and participation on this call. This concludes China Ceramics' first half 2018 earnings call. Thank you all very much.

This concludes today's conference call. You may now disconnect. Thank you for participating.