Good day, ladies and gentlemen. Thank you for standing by. And welcome to CBAT Energy Technology's Second Quarter and First Half 2023 Earnings Conference Call. Currently, all participants are in a listen only mode. Later we will 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 Thierry Li, Investor Relations Director of CBAT Energy. Mr. Li, please proceed..

Thank you, operator. And hello, everyone. Welcome to CBAT Energy's second quarter and first half of 2023 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer; Mrs. Xiangyu Pei, our Chief Financial Officer; Mr. Xiujun Tian, 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.cbat.com.cn as well as from news wire services. [Technical Difficulty]. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve 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 filings 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 US 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..

[Foreign Language] Thank you. And hello, everyone. Thank you for joining our earnings conference call today. [Foreign Language] 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 this 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 it, 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 [Technical Difficulty] capacity and provide high quality products for new and existing clients alike, further propelling our revenue growth over the long run.

[Foreign Language] First off, I'd like to introduce the recent developments in our business.

As of July 31, 2023, we have recorded RMB 1.1 billion in a 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 Hitrans, our subsidiary that supplies medium battery materials.

Regarding client initiatives already announced, as of July 31, 2023, our collaboration with JinPeng Group, the largest LEV manufacturer around the world, has brought us 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 BlueTTi, the brand owned by PowerOak, which has brought us orders totaling around RMB 48.05 million.

In addition, since we enter into the three year strategic partnership with Echom this July, we have received multiple orders from Echom totaling approximately RMB $5.42 million. This Echom is still early in its outdoor portable energy storage business, we expect orders placed by it to steadily increase over time alongside business expansion.

Also, for the cooperation with diverse models, as we noted before, we have taken in orders with a total value of around RMB 3.65 million so far. [Foreign Language] Those are the latest developments in our client initiatives. Let's move on to the R&D. First I'd 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 cylindrical sodium battery marks the first model of this kind industrywide that can be mass produced on a large scale.

We're also leading the industry worldwide by pioneering the mass production of large cylindrical 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 battery 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 Hello Tech Energy Co., Ltd., the parent company of Jackery, a leading global portable power supplier.

Hello Tech will invest RMB 25 million for us 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 Hello Tech'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 made 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 have 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 46110, 46115 or 46157.

Depending on market dynamics, we will also assess the potential to mass produce the Model 46800. Next year, we will ramp up the production of our Series 46 batteries. [Foreign Language] 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 gigawatt hour, and we expect it to advance to 2 gigawatt hour by the end of the year.

In the meantime, our Nanjing phase 2 project is under construction, potentially adding a production capacity of 2 gigawatt hour for us in 2024, elevating the overall capacity of our Nanjing facilities to 4 gigawatt hour.

By 2027, with our Nanjing phase 2 programs gradually completed and all the production lines in place, we expect the overall capacity to hit 20 gigawatt. Next, our Dalian plant currently has a production capacity of 1 gigawatt hour and we expect it to move up to 1.4 gigawatt hour 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 gigawatt hour for Series 46 by the end of 2025 and further expanding our Series 46 capacity by 9 gigawatt hour by 2027. By then, the overall capacity of our target facilities will be elevated to 16 gigawatt hour.

[Foreign Language] Additionally, we have been seeking to scale up our sodium battery production lines. At present, our sodium battery production capacity is 0.5 gigawatt hour. And we have 10 gigawatt hour in the pipeline over the long run. We expect to achieve full production of sodium batteries in 2026.

[Foreign Language] Next, let me talk through our marketing strategy for business development. We're in close cooperation with Viessmann 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 businesses, and these two segments will become the company's major revenue avenues.

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 the small sized 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 deliver more samples for going ahead to expand our market share.

[Foreign Language] In general, we are a top player in the industry on multiple fronts, 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 aegis in the Series 46 lithium batteries and sodium ion batteries, further propelling business growth in the power market. We remain positive about our expectations for the second half of this year and the years ahead.

[Foreign Language] Now, let me turn the call over to our interim CFO, Xiangyu 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, marked by sustainable growth and increased profitability. Thanks to our product strength and optimized operating efficiency, our gross margin rose to 15.4% compared with 11.0% for the same period last year.

As we progress year-over-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 $42.4 million in the second quarter and $84.8 million in the first half, representing a decrease of 24.7% and 37.8%, respectively, from that same period in 2022.

This decline was primarily attributable to a decrease in sales of the battery business and Hitrans, an indirect majority-owned subsidiary engaged in the production and sale of battery raw materials. During the first half of 2023, our battery business had 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. That decline was primarily driven by the price volatility of lithium cabinets, 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 price stabilize.

Cost of revenues were $38.5 million 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 battery 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 37.12%, respectively, from the 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 administrative 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 in the first half compared to $1.2 million in the same period of 2022. Our change in fair value of warrants were $0.04 million in the same quarter and $0.12 million in the first half compared with $2.13 million and $3.76 million, respectively, in the same period of the prior year.

As a result, our net loss attributable to shareholders of CBAT Energy were $2.6 million in the second quarter and $4 million in the first half compared to the net income attributable to shareholders of CBAT Energy of $0.8 million and $1.2 million, respectively, in the same period of 2022. This concludes our prepared remarks.

Let's now open the call for questions. Operator, please go ahead. Thank you..

[Operator Instructions]. And our first question comes from the line of Brian Lantier with Zacks Small Cap Research..

I was wondering if I could ask a couple of follow up questions.

First on the Shangqiu 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 in the past? And then I'll follow up with additional questions. [Foreign Language].

[Foreign Language] Yes. Shangqiu battery plant, I would like to give you more detail about this. As you know, the production capacity of our Dalian plant is significantly insufficient. We cannot meet the demand of our customers. That is why we decided to rent this Shangqiu battery manufacturing plant.

It is a state-owned battery plant and we share the same products and the equipment devices in this plant 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..

If I could ask one follow-up question on the battery gross margins. They appeared as though they've gone from 11% last year to 15.4% this year. Was that due to a shift in mix toward some of your newer products, like the 32140, and away from some of the older products, like the 21700? [Foreign Language].

[Foreign Language] There were several reasons behind the increase of gross margin. One of the most important reason is that, 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 this plant.

For our Dalian plant, it almost reached full production capacity. And for Nanjing, since the construction of the first phase of the plant 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 this 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 obvious fluctuation in the raw material price. And 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..

[Operator Instructions]. And we have a question from the line of Saiko Wu [ph] from TPG..

This is Saiko from TPG. [Foreign Language] You mentioned just now company 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?.

[Foreign Language] Actually, we made this decision based on our overall layout of our business portfolio. For example, we can take into consideration the business of our energy storage market. For 46110, the height is about 31 and the energy storage 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 [indiscernible] 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. As we know, this is a very important to the material and it has a superior energy capacity – in density – sorry, energy density.

And, currently, we are not thinking about true mass produced 46800. It is with even high total 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 development and production of 46800..

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.

[Foreign Language] Thank you, operator. And 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..