Antelope Enterprise Holdings Ltd (AEHL) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the second half and fiscal year-end 2019 earnings conference call. (Operator Instructions) I would now like to hand the conference over to your speaker today, David Rudnick. Go ahead, please.

Thank you, Carla. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China. Welcome to China Ceramics' Second Half and Fiscal Year-end 2019 Earnings Conference Call. With us today are China Ceramics' Chief Executive Officer, Mr. Meishuang Huang and Chief Financial Officer, Mr. Edmund Hen.

Before I turn the call over to Ms. Huang, I would like to address forward-looking statements that may be discussed on the call. Forward-looking statements involve risks and uncertainties that include, among others, [reported] 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 and 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 to speak as of their respective dates.

And now, it's my pleasure to turn the call over to China Ceramics' CEO, Ms. Meishuang Huang; and China Ceramics' CFO, Mr. Edmund Hen. [Sarah Bao] will be translating for Ms. Huang.

Ms. Huang, you may proceed.

[Interpreted] Thank you, David. On behalf of the company, I would like to welcome everyone to our second half and fiscal year-end 2019 earnings conference call.

During the second half of 2019, we continued to experience challenging market conditions as we did in the same period of 2018. However, as the result of a 15% average price decrease of our products in October 2019, our revenue increased modestly in the second half of 2019 due to a robust increase in our sales volume.

For fiscal year 2019, we utilized production facilities capable of producing 12.4 million square meters of ceramic tiles per year out of our effective total annual production capacity of 51.6 million square meters of ceramic tiles. Consistent with our practices in past quarters, we maintained a reduced utilization of existing plant capacity based on the current market environment to keep our operating costs low. We intend to bring additional capacity online as the business environment improves.

In December 2019, a novel strain of coronavirus was reported in Wuhan, China, which the World Health Organization has declared a global pandemic. The pandemic disrupted supply chains and affected production and sales across a range of industries in China as a result of quarantines, facility closures, travel and logistics restrictions and related public health orders. Consequently, we have experienced a significant adverse effect on our business from the pandemic in the first 4 months of 2020. Although our manufacturing plants are now fully operational, our production was halted due to the pandemic for most of the month of February. The disruption of normal business activity has resulted in a reduced demand for our products evidenced by a high number of purchase order cancellations, which have resulted in reduced sales.

However in the long term, we believe that our building materials sector will continue to benefit from growth in the real estate sector due to continued urbanization and its importance to China's domestic growth. Further, we believe that local governments will take measures to stimulate property sales and pent-up consumer demand for residential properties due to the coronavirus will ultimately benefit our building materials sector.

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 second half of 2019 earnings results in more detail. Thank you.

Thank you, Ms. Huang. I will now move on to a more detailed discussion of our financial results for the 6 months ending December 31, 2019.

Our revenue for the 6 months ended December 31, 2019, was RMB 150.2 million or USD 21.4 million, a 5.3% increase from RMB 142.6 million or USD 20.8 million for the same period of 2018. The year-over-year increase in revenue was due to the 25.5% increase in our sales volume to 6.3 million square meters of ceramic tiles for the second 6 months of 2019 compared to 5 million square meters of ceramic tiles for the same period of 2018, offset by the 16% decrease in average selling price to RMB 24 or USD 3.41 for the second 6 months of 2019 from RMB 28.6 or USD 4.05 for the same period of 2018. Gross profit for the 6 months ended December 31, 2019, was RMB 66 million or USD 9.4 million compared to a gross loss of RMB 46 million or USD 6.7 million for the same period of 2018. The gross profit margin was 44% as compared to 32.3% gross loss margin for the same period of 2018.

Other income for the 6 months ended December 31, 2019, was RMB 7.5 million or USD 1.1 million, the same totals as for the same period of 2018. Other income primarily consists of rental income, the company received by leasing one of the production lines from Hengdali facility pursuance to end next year lease contracts.

Selling and distribution expenses for the 6 months ended December 31, 2019, were RMB 5.6 million or USD 0.8 million, a slight increased RMB 5.3 million or USD 0.8 million for the same period of 2018.

Administrative expenses for the 6 months ended December 31, 2019, were RMB 9.2 million or USD 1.3 million, as compared to RMB 7.5 million or USD 1.1 million for the same period of 2018. The increase in administrative expenses was primarily due to increased start up and related expenses from our new incorporated entities.

Bad debt expenses for the 6 months ended December 31, 2019, and filed a reversal of bad debt of RMB 125.2 million or USD 17.8 million, as compared to bad debt expense of RMB 210.1 million or USD 30.6 million for the same period of 2018. We recognized a loss allowance for an expected credited loss in financial assets, primarily on our trade receivables, which are subject to impairment under international financial reporting standards. We feel like we have undertaken appropriation measures to reserve a bad debt expense going forward. We will continue to review credit worthiness of each of our customers and continuously test our trade receivables balance in each upcoming fiscal period.

Net profit for the 6 months end December 31, 2019, was RMB 183.7 million or USD 26.1 million, as compared to a net loss of RMB 246.8 million or USD 50.6 million for the same period of 2018. The increase in net income was mainly due to the increase in gross profit and the reversal of bad debt expense. Profit per basic share and fully diluted share for the 6 months ended December 31, 2019, were RMB 30.67 or USD 4.36, as compared to loss per basic and fully diluted share of RMB 75.95 or USD 11.07 for the same period of 2018.

Adjusted EBITDA was RMB 8 million or USD 1.1 million for the 6 months ended December 31, 2019. Adjusted for noncash deductions as compared to adjusted EBITDA of RMB 10.2 million for the same period of 2018.

Turning to our balance sheet. As of December 31, 2019, we had cash and bank balances of RMB 8.2 million or USD 1.2 million, as compared with RMB 9 million or USD 1.3 million as of December 31, 2018. As of December 31, 2019, our inventory term was 217 days as compared to 117 days as of December 31, 2018. The increase in inventory turnover, this was primarily due to the 27% decrease in our sales volume for fiscal year 2019, as compared to fiscal year 2018 and the reversal of an inventory impairment provision in fiscal 2019. Our trade receivables turnover, net of value-added tax as of December 31, 2019, was 194 days compared with 233 days as of December 31, 2018. The decrease in trade receivables turnover growth, primarily due to the improved collection of our trade receivables. Our payable turnover natural value-added tax was 30 days as of December 31, 2019, compared with 26 days as of December 31, 2018. The average turnover days was within the normal credit period 1 to 4 months ground by suppliers.

In terms of our plant utilization and CapEx, we utilized plants' capacity capable of producing 6.4 million square meters ceramic tiles for the 6 months ended December 31, 2019, and 12.4 million square meters of ceramic tiles for fiscal 2019, out of a total annual production capacity of 51.6 million square meters. Our Hengda facility has an annual production capacity of 22.8 million square meters. Also metals, as a result of 2 old furnaces having been put out of use at the facility. The company utilized production capacity at our Hengda facility capable of producing 2.9 million square meters of ceramic tiles for the 6 months ended December 31, 2019. Our Hengdali facility has an annual production capacity of 28.8 million square meters, which excludes our leasing out 10 million square meters of production capacity to a third party. We used and reduced -- utilized our production capacity at our Hengdali facility capable of producing 3.5 million square meters of ceramic tiles for 6 months ended December 31, 2019.

We reviewed the level of capital expenditures throughout the year and made adjustments, subject to market conditions. Although business conditions are subject to change, we anticipate modest, therefore, capital expenditures for 2020, other than those associated with minimal upgrades, small repairs and the maintenance of equipment.

Moving on to our business outlook. In an effort to bolster sales in October 2019, we decreased the pricing of our ceramic tiles product by an average of 15%. As a result, our sales volume increased by 26% in the second half of 2019, which resulted in a 5.3% increase in sales for the 6 months ended December 31, 2019, on a year-over-year basis. We view this as encouraging as it signaled a slightly improving market conditions for the 6 months period since a decrease in our product pricing affected the demand for such products. Conversely, in July 2018, we decreased the pricing of our ceramic tiles products by an average of 10% and our sales volume declined, which evidenced, deteriorating market conditions.

In order to supplement and expand our current market bridge, in 2019, we announced the plans to enter the ceramic tiles market in Southeast Asia to capitalize upon the increased level of the region's new building constructions, while this climate condition mediate and ideal fits for many of our ceramic tiles products. Although this effort was temporarily held due to the coronavirus pandemic, we have redeployed this strategy with the goal to diversify our business by generating revenue outside of China. A key element of this diversification strategy is to booster our R&D efforts in order to expand our markets. Last year, we developed a new types of ceramic tiles, decided to cool temperature our building, which when fully tested, certified as planned for this summer, we target the Southeast Asia markets.

We are also focused upon diversifying our operations capacity to fill our growth. We formed a new subsidiary in [Chengdu] Future Talent, Management and Consulting Co Limited, which provides computer server consulting that includes on-site training and online problem solving to maintain computer system and Internet connectivity, engage in troubleshooting and repair as needed, and to provide overall technical support. Although we expect this subsidiary to contribute only a modest amount of revenue in 2020, we believe that this venture represents a substantial growth sector, which could lead to additional high technological opportunities.

Because of the significant uncertainties surrounding the COVID-19 pandemic, the related financial impact on the year 2020 cannot be reasonably ascertained at this time. The pandemic disrupted supply chains and further production of sales across a range of industries in China as a result of quarantines, facility closures, travel and logistic restrictions and related public health orders. Although our manufacturing capabilities have resumed normal operations, our production was held for most of the month of February, and our logistics function are still lagging due to certain regions and remained closed through April. Consequently, we anticipated that our sales order will be significantly reduced for the first 4 months of 2020 as compared to the same period of 2019.

As reported, China's economy declined 6.8% in the first quarter of 2020, following many years of high growth. Although factories across China have been restarted, many of U.S. international global market are still in lockdown and business has been -- has not yet returned to normal. It remains to be seen what economic recovery in China will look like for the rest of 2020 and what stimulus program the central government might manage.

In terms of real estate and construction sectors, the deleveraging of China property developer will continue in 2020 as occurred in 2019 due to limited borrowing and resulting cash flow issues. Also, new home sales declined by estimate 90% from a year ago during the period through the -- during the period of China's lockdown as potential buyers were not able to build properties. However, early sales data indicate that, in terms of demand has already resulted in substantial buying activities as consumers engage -- are eager to secure properties in China's major cities. In addition, some restrictive measures have been losing in different cities to suffer the housing markets. As previously noted, China's real estate sector has been resilient, all for time and has been a key driver of China's economic growth.

Notwithstanding the above references to macroeconomic challenges, we believe that the long-term fundamentals of real estate and construction sectors remain intact and these fundamentals will emerge as business transition normalizes.

China's organization chain continues to underpin this economic growth and the need for housing leads to a sustained demand for our building materials products. We believe we have a competitive advantage in our sector due to our innovation, brand name recognition and our ability to meet our customers' needs. This business outlook reflects the company's current and preliminary views, and is based on the information currently available to us, which are subject to change and subject to risks and uncertainties, as well as risks and uncertainties identified in the company's public filings.

At this point, we would like to open up the call to any questions pertaining to our second half and fiscal year-end 2019 financial results. Operator, please?

(Operator Instructions) We have a question from the line of Howard Flinker.

I don't have a question. (foreign language) I just want to wish all of you good health. I don't have anything special to say. Thank you.

Thank you. Thank you for your greetings -- Thank you very much. I hope you are doing well too.

(foreign language)

Thank you very much.

Yes. I hope your family is very healthy. Yes, stay safe. Exactly. Everybody. Thank you very much.

Stay safe. Thank you.

(Operator Instructions) And we don't have a question on queue. I would like to hand the call back to David Rudnick. David?

On behalf of the entire China Ceramics management team, I want to thank all of you for your interest and participation on this call. This concludes China Ceramics' second half and fiscal year-end 2019 earnings call. Thank you.

Thank you, everyone. You may now disconnect.

Thank you. Bye-bye.