CBAK Energy Technology, Inc.

Good day, ladies and gentlemen. Thank you for standing by, and welcome to CBAC Energy Technologies' second quarter and first half 2023 earnings conference call. Currently, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Tied Li, Investor Relations Director of CBAC Energy. Mr. Li, please proceed.

Thank you, operator, and hello, everyone. Welcome to CBAC Energy's second quarter and first half of 2023 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer, Mrs. Yuna Pei, our Chief Financial Officer, Mr. Xiu Juntian, our General Engineer, and Jennifer, our interpreter. We released our results earlier today. The press release is available on the company's IR website at IR.CBAG.com.cn as well as from Newswire Services. Like a record, it will also be available in a few hours on our IR website. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. forward-looking statements involved inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public firings with the SEC. The company doesn't assume any obligations to update any forward-looking statements except as required under applicable laws. Also, please note that unless otherwise stated, All figures mentioned during the conference call are in U.S. dollars. With that, let me now turn the call over to our CEO, Mr. Yunfei Li. Mr. Li will speak in Chinese and I will translate his comments into English. Go ahead, Mr. Li. Thank you, Jerry. Thank you, and hello, everyone. Thank you for joining our earnings conference call today. Please continue.

In the first half of 2023, Li battery's upstream market was full of uncertainty. Due to the impact of the strong price fluctuations in key raw materials, our overall business was affected. However, we still made good progress in core business and Li battery sales. In the first half of the year, our battery business reached $5,184 million, which is a 27.2% increase. The battery consumption in the energy field is up to $4,676 million, which is a 17% increase. The battery consumption in the light electric vehicle field is up to $312 million, which is a 309.9% increase. The battery consumption of the car was 1.96 million yuan, which increased by 6.454 times in the same period last year. The efficiency of our battery business reached 12.8 percent, which increased by 3.4 percent. We noticed that because a large number of customer orders were concentrated for a few years, the sales of the second generation showed growth and stagnation. But we expect this trend will not last long. The company's performance of the following two seasons and the whole year's revenue is still expected to be higher. Our battery business performance will continue to stabilize. With the gradual expansion of brand influence and the constant increase in R&D strength, we have continuously received orders from leading enterprises from all over the world. In the future,

The first half of 2023 witnessed considerable macro uncertainties over the upstream market for lithium batteries. Due to price fluctuations of lithium carbonate, which is an essential raw material of lithium batteries, our overall business was somewhat affected That said, we still made meaningful progress in our primary business, the sales of lithium batteries. In the first half of 2023, our battery business generated revenues of $51.84 million, an increase of 27.2% year-over-year. Among these revenues, $46.76 million came from batteries used in energy storage applications, up 17% year-over-year. while $3.12 million came from batteries used in light electric vehicles, a surge of 309.9% year-over-year. Moreover, revenues from batteries used in electric vehicles reached $1.96 million, an impressive increase of 6,454 times compared to the same period last year. In the first half of 2023, the gross margin of our battery business reached 12.8%, up 3.4 percentage points year over year. Since a significant number of clients were expected to place orders over the second half of the year, our revenue growth in the second quarter was relatively flat. As we see, that won't be the case going forward, and we have high expectations for our revenues over the next two quarters and the full year 2023. Our battery business will remain solid, As we gradually expanded our brand influence and continuously elevated our R&D capabilities, we have received orders from an array of leading companies worldwide. Looking ahead, we will activate our capacity and provide high-quality products for new and existing clients alike, further propelling our revenue growth over the long run. First of all,

Let me introduce you to the recent business development of our company. As of July 31, 2023, our main production base in Dalian and Nanjing, and our subsidiary Li battery material supplier Haichang, have received and have not yet paid the order amount of 1.1 billion yuan. In the past, we have disclosed the customer orders in the past, On July 31, 2023, we have reached about 54.16 million yuan in collaboration with the world's largest REV manufacturer, Jinpeng Group. Currently, the cooperation between Dramihai, which previously disclosed that it is the leading enterprise in the global variable market, is very smooth. Our cooperation order has reached 48.05 million yuan. At the same time, since we and Yicang Technology reached a three-year strategic cooperation in July this year, we have also continued to receive orders from Yicang. The current order amount has reached 5.42 million yuan. Considering that the mobile storage business of Yicang customers has just started, we expect that Yicang's order amount in the future will continue to increase as time and other businesses continue to open. First off, I would like to introduce the recent developments in our business. As of July 31, 2023, we have recorded RMB 1.1 billion in the combined value of orders we have received.

but have yet to fulfill across our two main battery production facilities based in Dalian and Nanjing, together with Hytrans, our subsidiary that supplies lithium battery materials. Regarding client initiatives already announced, as of July 31, 2023, our collaboration with Jingpeng Group, the largest LEV manufacturer around the world, has brought Earth orders amounting to roughly RMB 54.16 million We also made great progress in our partnership with PowerOAK, the world's leading portable power station manufacturer, and Blue TTI, the brand owned by PowerOAK, which has brought us orders totaling around RMB 48.05 million. In addition, since we entered into the three-year strategic partnership with eCHARM this July, we have received multiple orders from eCHARM totaling approximately RMB 5.42 million. Since eCharm is still early in its outdoor portable energy storage business, we expect orders placed by it to steadily increase over time alongside its business expansion. Also, for the cooperation with Daihatsu Motors, as we noted before, we have taken in orders with a total value of around RMB 3.65 million so far. Mr. Cui, please go ahead.

To briefly introduce and update the situation of our customers, I would also like to introduce the progress we have made in the field of R&D. First of all, I must mention the case of NaCl battery. In the second phase, we held a NaCl battery release conference on the opening day of our company's investors. We introduced our NaCl battery products to investors, the media, and customers. Our 32140 large-piston NaCl battery is the first large-piston NaCl battery model that can be mass produced in the current industry. We are also the world's first company to mass-produce large-volume NaCl battery. The battery was released and received the attention of industry personnel, investors, and the recognition of our company's research capabilities and large-volume battery manufacturing capabilities. As of now, due to the company's accumulated mass production capabilities, we have received many customers' demand for this NaCl battery sample. After the subsequent production is released, orders will be received one after another. In addition to this, the listed company of A Group, Huabao New Energy, and its mother company, Jekyll & Hyde, have also signed a strategic contract with Zongbi New Energy. Huabao Xinneng wants to pay 25 million yuan for the development and customization of a more energy-efficient nanoparticle battery. Both parties have agreed that the production time of this customized battery is also included in the current supply of hundreds of billions of yuan. Currently, we have sent out the product customized by Huabao Xinneng to A-Yang. When A-Yang receives customer confirmation, After confirming and passing through the required stage, the product will be ready for mass production. And in terms of Li battery R&D, the company has also made a breakthrough. We are already in the required stage for a series of batteries of the 46 model that are highly concerned about the industry and the capital market. It is estimated that at the end of this year, it will be able to be mass produced. According to the initial release model, it is 46115 and 46157. Those are the latest developments in our client initiatives. Let's move on to the R&D. First, I would like to talk about our development of sodium ion batteries. In the second quarter of 2023,

We launched our sodium battery at our corporate open day, fully showcasing the company's sodium battery products to investors, media, and clients. Our Model 32140 Large Synergical Sodium Battery marks the first model of its kind industry-wide that can be mass produced on a large scale. We are also leading the industry worldwide by pioneering the mass production of large synergical sodium ion batteries. Immediately upon its launch, Model 32140 garnered high visibility among professionals, investors, and stakeholders from other industries. Our R&D capabilities and production capacity for large cylindrical batteries have been warmly applauded. Up until now, empowered with mass production capabilities, we have received requests from numerous clients for samples of this sodium battery. We expect orders to meaningfully increase following our production ramp-up. In addition, we entered into a strategic cooperation agreement with Asia listed company, Shenzhen Holotech Energy Company Limited, the parent company of Jackery, a leading global portable power supplier. Holotech will invest RMB 25 million to tailor the research, development, and production of a more advanced sodium ion battery. with an agreed target time for mass production and potentially hundreds of millions RMB worth of products to be supplied. Currently, we have delivered the prototype A of this customized product. Upon receiving Holotech's confirmation of the quality and performance of prototype A and subsequent approval through the prototype B stage, the mass production will proceed as scheduled. Moreover, We make breakthroughs in the research and development of lithium batteries. We are currently in the phase of prototype B development of the series 46 lithium batteries, which has attracted immense attention from investors and peers alike. We expect mass production of our series 46 batteries to be available by the end of the year. And the models to be rolled out will be model 46115 or 46157. Depending on market dynamics, we will also assess the potential to mass-produce the Model 46-AOO. Next year, we will ramp up the production of our Series 46 batteries.

Next, I will explain the situation of our production capacity and future deployment. Considering the breakthroughs in the development of the company and the number of supply and demand, In the end of 2025, I also want to specifically highlight our production capacity and geographic landscape. In view of our R&D breakthroughs and the overwhelming incoming orders that have already exceeded our supply,

we are actively planning for capacity expansion. First off, our Nanjing facility currently boasts a production capacity of 0.7 GWh, and we expect it to advance to 2 GWh by the end of the year. In the meantime, our Nanjing Phase 2 project is under construction, potentially adding a production capacity of 2 GWh for us in 2024, elevating the overall capacity of our Nanjing facilities to 4 GWh. By 2027, with our 19 Phase II programs gradually completed and all the production lines in place, we expect the overall capacity to hit 20 GWh. Next, our Dalian plant currently has a production capacity of 1 GWh, and we expect it to move up to 1.4 GWh by the end of the year. Meanwhile, we will start building the production lines of our series 46 batteries. potentially adding a production capacity of 5.6 GWh for Series 46 by the end of 2025, and further expanding our Series 46 capacity by 9 GWh by 2027. By then, the overall capacity of our Dalian facilities will be elevated to 16 GWh. Thank you very much.

At the same time, we are looking for opportunities to set up the production line for that battery. Additionally, we have been seeking to scale up our sodium battery production lines. At present, our sodium battery production capacity is 0.5 GWh.

and we have 10 gigawatt-hours in the pipeline over the long run. We expect to achieve full production of sodium batteries in 2026. Fei Zonglin, please go ahead.

At the beginning of the market, I would like to say a few words about the market. Currently, we are working closely with the European family giant, Feistman, to supply global giants with outdoor mobile storage. Currently, we will continue to focus on family storage and outdoor mobile storage. It is expected that these two industries will become the key areas of company performance. At the same time, with better low-temperature performance, fast-release performance advantages, at the same time, cost-efficient power supply, the mass production and production of lithium-ion batteries, more and more small-power market customers using lithium-ion batteries, and customers who require low-temperature, fast-charging, low-temperature performance have shown great interest in our NaCl battery products. We have received a lot of requests for samples from customers in the small power market. At present, the company's NaCl production capacity has been unable to meet the needs. With the expansion of subsequent production capacity, we will continue to deliver more samples.

Next, let me talk through our marketing strategy for business development. We are in close cooperation with Fiasman Group, a leading European provider of residential energy storage, and we are the key supplier to the global leader of outdoor portable energy storage. Going forward, we will further advance both our residential and outdoor portable energy storage business. And these two segments will become the company's major revenue and values. In the meantime, with our mass production and capacity ramp up of sodium ion batteries, owing to their superior performance at low temperatures, superb fast charging and discharging capabilities, and excellent cost efficiency, more and more clients in a small size power battery market that currently use lead acid batteries as well as clients with demand outstanding fast charging and low temperature performance have taken great interest in our sodium battery products. We have received numerous requests for samples from clients in the small sized power battery market and the energy storage sector. At present, the demand for our sodium ion batteries have exceeded our supply. With the capacity ramp up soon afterward, we will deliver more samples for going ahead to expand our market share.

In general, we are a top player in multiple funds, including the mass production, geographic landscape of capacity, and sample delivery of sodium ion batteries.

as well as regarding the significant efforts we have actively taken to advance the series 46 lithium batteries. Looking ahead, we will make strides in the residential and outdoor portable energy storage segments and firmly build upon our ages in the series 46 lithium batteries and sodium ion batteries, further preparing business growth in the power market. We remain positive about our expectations for the second half of this year and the years ahead, Now let me turn the call over to our Interim CFO, Yuna Pei, who will provide details on our financial performance.

Thank you, Mr. Li, and thank you everyone for joining our call today. I will now go over our key financial results for the second quarter and the first half of 2023. For the full details of our financial results, please refer to our earnings press release. We are pleased to report strong half-year results marketed by sustainable growth and increased profitability thanks to our product's strength and optimize the operating efficiency, our growth margin for battery business rose to 15.4% compared with 11% for the same period last year. As we progress through the year, our top priorities are to accelerate sales growth and improve profitability. Our solid balance sheet gives us the flexibility to continue investing in our future by accelerating our research and development across product lines, as well as expanding our technology and business initiatives to create value for both our users and our shareholders. Turning to our financial performance, our net revenues were US dollars in the second quarter and 84.8 million in the first half, representing a decrease of 24.7% and 37.8% respectively from the same period in 2022. This decline was primarily attributable to a decrease in sales of the battery business an indirect majority on the subsidiary engaged in the production and the sale of battery raw materials. During the first half of 2023, our battery business had a strong revenue growth of 97% in the first quarter. However, during the second quarter, we began to experience a temporary slowdown in sales. Our second quarter battery sales declined by 13.5% year-over-year to $22.2 million. The decline was primarily driven by the press volatility of lithium carbonate, leading clients to hold off placing new orders during the quarter. Despite this short-term challenge, We remain confident that we will achieve strong full-year 2023 revenue growth, as many of our clients will place new orders in the second half of the year as prices stabilize. Cost of revenues was $38.5 million in the second quarter and $78 million in the first half, representing a decrease of 24% and 37.9% respectively from the same period in 2022. This decrease was primarily due to the decline in net revenues. Gross profit was $3.9 million in the second quarter and $6.8 million in the first half, representing a decrease of 29.8% and 37.4% respectively from the same period of 2022. Our operating expense rose by 42% to $7.7 million in the second quarter and 11.4% to $13.4 million in the first half. Within that, our research and development expenses increased by 29.6% to $3 million in the second quarter and decreased by 3.1% to $5.4 million in the first half. Sales and marketing expenses increased by 38% to $1 million in the second quarter and 10.3% to $1.7 million in the first half. General and administration expenses increased by 46% to $3.6 million in the second quarter and 29.2% to $6.1 million in the first half. Our operating loss amounted to $3.8 million in the second quarter compared to an operating income of $0.1 million in the same period of 2022. Operating loss was 6.7 million U.S. dollars in the first half compared to 1.2 million U.S. dollars in the same period of 2022. Our change in fair value of Lawrence was 0.04 million in the same quarter and 0.12 million U.S. dollars in the first half compared was remaining and 3.76 million U.S. dollars respectively in the same period of the prior year. As a result, 90 lots of trees suitable to shareholders of feedback energy was 2.6 million U.S. dollars in the second quarter and 4 million in the first half. compared to the net income attributable to shareholders of the best energy of 0.8 million and 1.2 million US dollars respectively in the same period of 2022. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead. Thank you.

Thank you. Ladies and gentlemen, if you have a question, please press star 11 on your telephone. You will then hear an automated message advising that your hand has been raised. If your question has been answered or you wish to remove yourself from the queue, press star 11 again. Once again, to ask a question, please press star 11. One moment, please, while we compile the Q&A roster. And our first question comes from the line of Brian Lantier with Zach's Small Cap Research.

Good evening. I was wondering if I could ask a couple of follow-up questions. First, on the Hsien-Chu lease, I was wondering if you could provide any additional details on that facility. Basically, was it operational? Do you still expect it to be operational by the end of 2023? and what type of batteries may have been produced there in the past. And then I'll follow up with additional questions. Thank you.

So your question, the first question is about the sodium and battery, right? Okay. Okay, so my first question is about, I want to know more about some specific information about lithium-ion batteries. For example, in 2023, what kind of situation will the entire operation go into? And then I also want to know, for example, what kind of related batteries are there? Let me interrupt.

Jennifer, you may have misunderstood. She wants the information about Shangqiu. We previously published the production line of Shangqiu. And he wants to know if Shangqiu is a... This battery factory itself already exists. And then it was produced in the past. Is it a human battery or a square battery or a soft pack? Is Shangqiu a name? Shangqiu, we are a city in Shangqiu, China. Will it operate in the near future? When will it be put into operation? Will it be put into operation before the end of this year? We will answer this question in a very short time.

As I mentioned earlier, the battery market in Shangqiu, because of the lack of mass production of the existing Dalian batteries, I would like to give you more detail about this.

As you know, the production capacity of our Dalian plants is significantly insufficient. We cannot meet the demands of our customers. That is why we decided to rent this Shanqiu Battery Manufacturing Plant. It is a state-owned battery plant and we share the same products and the equipment and devices in this plants is also similar to our Dalian plant. Currently, the production capacity of this plant is 100,000 per day. And we are doing some renovation and improvement in this plant. And it is expected that it will be in fully, totally normal production by the end of this year.

Great. Thank you very much.

And I appreciate all the translation. That's very helpful. If I could ask one follow-up question on the battery growth margins. They appear as though they've gone from 11% last year to 15.4% this year. Was that due to a shift in mix towards some of your newer products like the 32140 and away from some of the older products like the 21700s?

This question will be answered by the audience.

Okay, thank you. Regarding the growth of our labor rate, there are several reasons. The most important reason is due to the increase in the use rate of our production capacity at Dalian and Nanjing production bases this year. Then our Dalian production base is currently close to full-fledged production. This production capacity is fully utilized. The Nanjing production base was built in 2021. At the end of 2022, As the construction of the end of 2022 is completed, the production capacity of the next two or three years will be gradually released. As our production capacity is released, the increase in the use rate will have a very big incentive effect on our cost reduction. This is an important reason for the growth of our profit margin. In addition, there is the impact of price fluctuations. Last year, uh uh uh Thank you.

Okay, there were several reasons behind the increase of gross margin. One of the most important reasons is that since this year, the production capacity of our Dalian and Nanjing production facilities have been increased, and we can achieve a very high utilization rate of these plants. For our Dalian plants, it is almost reached full production capacity. And for Nanjing, since the construction of the first phase of the plants in 2021 and the completion of the first phase at the end of 2022, now our production capacity can be released to a large extent. And these production capacity growth also become a very important driving force for the reduction of the cost. And secondly, as we know, in the second half of last year, we underwent an obvious fluctuation in the raw material price. the increase of the raw material price also has a negative impact in our cost. So the cost occupied quite a big margin in our profit margin. However, since the second quarter of this year, we have seen the decline of raw material price, and that also led to the reduction of the cost. which also contributes to the improve of the gross margin.

Thank you very much.

Have a great night.

Thank you. And as a reminder, to ask a question, please press star 11. And I'm seeing no further questions. With that, I would like to turn the call back to Mr. Yunfei Li for closing remarks.

I apologize.

I apologize. One moment, please. I do see we have a question that just came in the queue. And we have a question from the line of Fico Wu with TPG.

Hello. 你能听到我的发言吗? Hi, operator, this is Michael from TPG. Can you hear me right now?

Yes, please proceed with your question.

Yeah, I will ask in Chinese for the company. Now we have the capacity to mass-produce 46 series of batteries. I would like to ask what is the reason for the company to consider choosing 4615 or 46157 instead of 46800? How big is the possibility of 46800 battery in the future?

Okay, so you mentioned just now, the company have already have the capacity to produce 46 series lithium battery. And I'd like to know for what reason that you decided to give priority to 46115 and 46157 instead of 46800. And in the future, how big is the chance for you to mass produce 46800?

In the case of 46115, we designed a product of 25A. The height is just right for a 3U case, which is the standard height for a 3U case in the energy market. At the same time, 25A is a standard model, so it should be a standard and universal product in the market. 4161657 is a product with a higher capacity than 115. Its capacity can be increased to 30-35A. And in its low capacity version, we can make a cycle of 8,000-10,000 weeks. In this way, it should be a product that is more competitive in the domestic energy market in Europe and the United States. Based on these two products, they are all based on the iron-plated model. Therefore, if we make a larger version of the 46 series, it will help the iron-plated model to have a higher energy density. So our first step is not to choose 4680, which is a relatively smaller product with a higher height. Just now, our chairman, Chairman Yunfei, also talked about 4680. We will consider playing a role in developing our 4680 product. That's our answer.

Okay, actually, we make this decision based on our overall layout of our business portfolio. And for example, we can take into consideration the business of our energy storage markets. For 46110, the height is about 31 and the energy storage height as well as the model is more standard in the markets. And for 46157, it is a bit higher than 46115. And we can do 30 to 35 end hours. And the cycling could be 80%. 8,000 to 10,000, which we believe will well meet the market of the US and Europe. And we mainly use the material of lithium iron. And as we know, this is a very important material and it has a superior energy capacity, density, sorry, energy density. uh and the re and currently we are not thinking about a true mass produced 46800 um it is with a even high high taller height bigger height but it doesn't mean that we will not produce this at all when the time is appropriate we will also take into consideration the production the development and production of 46800 okay thank you thank you and I'm showing no further questions so with that I'll turn the call back over to Mr. Yunfei Li for closing remarks

Thank you all for participating in today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.