China XD Plastics Company Limited
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Good day, and welcome to the China XD 2017 Second Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Han Jie. Please go ahead.

[Anna Bin:]

Thank you all for joining us for the China XD Plastics Second Quarter 2017 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and the Chief Executive Officer; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Dr. Kenan Gong, General Manager of the Dubai Subsidiary; and Mr. Rujun Dai, General Manager of the Heilongjiang Subsidiary. Earlier today, China XD Plastics issued a press release announcing the second quarter 2017 results. Before management's presentation, I would like to refer to the safe harbor statements in connection with today's conference call and to remind our listeners that the management's prepared remarks during the call may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. All statements other than statements of historical fact contained are forward-looking statements, including, but not limited to

[Jie Han:]

[Foreign language]

[Anna Bin:]

We were able to generate a significant top line growth in the second quarter of 2017 as compared to the same period last year as the generally positive macroeconomic conditions in our sector continued from last year. As reported by the China Association of Automobile Manufacturers, for the first six months of 2017, auto production increased 4.6% relative to the same period last year, and we believe that our cutting edge technologies, expanded production capabilities, new geographical positioning and the major new projects will be able to capitalize on this trend.

[Jie Han:]

[Foreign language]

[Anna Bin:]

Our strategic initiative to expand our operations into new growth geographies continued to see significant revenue contributions from the South China and the Central China regions in the second quarter, largely contributable due to the continued ramp of our new state-of-the-art Sichuan manufacturing facility. Our Sichuan facility now has 50 production lines with 216,000 metric tons of annual production capacity.

[Jie Han:]

[Foreign language]

[Anna Bin:]

We are very pleased with the recent official signing of investment agreements with the Management Committee of Harbin Economic - Technological Development Zone with respect to the industrial project for 300,000 metric tons of biological composite materials, the industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics and the industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory. This follows the signing of a definitive agreement with the People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and the additive manufacturing and the 20,000 metric tons of functional masterbatch.

[Jie Han:]

[Foreign Language]

[Anna Bin:]

Our new facility in Dubai also extends our specialized high-tech products into an important overseas market. We plan to complete the installation of 45 production lines with 12,000 metric tons of annual production capacity by the first quarter of 2018, and to complete the installation of an additional 50 production lines with 13,000 metric tons of annual production capacity by the second quarter of 2018. This will bring the total annual production capacity in our Dubai facility to 25,000 metric tons. The Dubai facility will target high-end products for overseas markets and will, ultimately, enable more active inroads into the markets of Europe, the Middle East, Russia and other overseas markets.

[Jie Han:]

[Foreign Language]

[Anna Bin:]

We believe our substantial production increase and geographical expansion via our Sichuan facility solidifies our core automobile sector business. Further, our new investment agreements to undertake major expansion projects will lead to a wider range of product capabilities and a further diversified customer base. In our view, this represents a further evolution of the company into a multifaceted chemical engineering company that augments our existing capabilities and enables us to engage numerous new verticals. We believe that these strategic initiatives form a platform for sustainable growth for the next several years and well positions us for opportunities presented by China's new economy. We are excited by this period of dynamic growth and this next evolution of the company. With that, I will now turn the call over to Taylor Zhang, our Chief Financial Officer, to walk you through our financials.

[Zhang Dahe:]

Thank you, Mr. Han, and thank you everyone for joining the call today. Before we review the numbers, let me remind you that all figures that are discussed are for this reporting period, the second quarter of 2017, unless as stated otherwise. Additionally, any year-over-year comparison is to the second quarter of 2016 and any sequential comparison is to the first quarter of 2017. So let's go to our second quarter results. Revenues were $313.6 million for the second quarter of 2017 compared to $277.1 million for the same period of 2016, representing an increase of $36.5 million, or 13.2%. The year-over-year increase was primarily due to a 17% increase in sales volume and 1.8% increase in average RMB selling price of our products. The increase in revenues in the second quarter of 2017 was driven by growth in demand for our products in the domestic China market, our efforts to expand our customer base attributable to our new plants in Sichuan and our efforts to increase overseas sales. We achieved sales increases of 166.2% in Central China, 76.7% in Southwest China, 49% in South China, and 22.1% in North China, 7.7% in East China and 5.1% in Northeast China as compared to the same period of last year. Overseas sales resumed in the second quarter of 2017 and were $33 million in the period compared to $35.7 million in the same period last year, representing a decrease of $2.7 million or 7.6%. The overseas customer has an outstanding balance of $65.1 million, of which a balance of $31.9 million was overdue as of June 30, 2017. The overseas customer has made payments of $42.5 million in the first half of this year, and we expect to collect the outstanding balance in the third quarter of 2017. Premium products, namely Polyamide 66, Polyamide 6, Plastic Alloy, PLA, POM and PPO, in total accounted for 81.4% of revenues in the second quarter of 2017 compared to 80.8% for the same period of last year. The company continued to shift its product mix from traditional polymer materials to higher-end products, thanks to

[Operator:]

[Operator Instructions] We will take our first question from GHC Capital, Glenn Krevlin.

[Glenn Krevlin:]

Taylor, I was wondering if you could give us some sense of what total capital spending will be this year. And maybe give us a sense, you've got so many expansions and new projects, just give us some sense of how capacity is going to come online over the next 2 years by the different projects that you've spoken to on this call?

[Zhang Dahe:]

Okay. Glenn, thank you for the question. I will answer your question about the CapEx for the year and also -- then I'll give further question to my team in China about the capacity on its schedule. Is that okay? So the CapEx for this year, basically, split between Dubai and our Sichuan company. For Dubai, we budgeted approximately $95 million and for our Sichuan sub, that's for the new project, we anticipate approximately $375 million. Now I'll translate your -- second part of your question. [Foreign Language]

[Jie Han:]

[Foreign Language]

[Zhang Dahe:]

Glenn, Jie Han just provided a detailed breakdown of capacity on our schedule. So for the biodegradable projects, we have one each in Sichuan and Harbin. Each is 300k. So we anticipate the production will start early 2019. The 1/3 of the capacity will be online and sequentially, in 2020 and 2021, 1/3 in each year will contribute to the capacity. And secondly, for our 3D printing projects, we -- because of the it's more sophisticated and it take a little time to develop and build infrastructure, we anticipate that we'll come online in the second half of 2018, little later compared to the biodegradable projects. So similar capacity on its schedule, we are anticipating 1/3 will be in 2019 and 1/3 in 2020 and the remaining in 2021. For the masterbatch projects, we expect we'll come online in the second half of 2019. And the last one is the 1,000k engineering plastic [Indiscernible] facility. We expect that will come online, will be completed in the third quarter of 2018.

[Operator:]

We will move to our next question, which comes from the line of Bloomberg, [Jong Walen]. Your line is open for questions. You can go ahead with your question. Thank you.

[Unidentified Analyst:]

[Technical Difficulty]

[Operator:]

We'll then move to our next question. It comes from the line of [Peter Salis]. Your line is open please go ahead.

[Unidentified Analyst:]

Everybody seems to be dropping on these calls. I'm going to take three pieces. Glenn was asking about the investment in Heilongjiang. If -- what kind of volume and margins can you -- do you expect to generate from that project, say, 2020?

[Zhang Dahe:]

So Peter, so my answer to -- our Chairman's answer to Glenn about capacity is -- you agree on that, right?

[Unidentified Analyst:]

Yes.

[Zhang Dahe:]

You are referring to the production volume we anticipate for 2020.

[Unidentified Analyst:]

No, I'm just saying -- here's what I'm trying to understand. The -- if I take, how much -- if I can figure out what you're doing in your current business in Heilongjiang and Sichuan, I'm trying to understand what these two new projects mean, plus Dubai. I mean, as I look at things -- I mean, as I look at where the company is and I start to add up all these things you're doing, I'm looking at $5 billion in revenues and $10 a share in earnings. And I'm trying to understand what the pieces are.

[Zhang Dahe:]

Peter, can I rephrase your question in this way? Basically, you want to get a picture of the -- put it in volume, maybe I can, because we have provided you with the anticipated capacity we think we're going to have. So maybe we can get you some information such as the production utilization we expect and then the margin range expect. Is that fair?

[Unidentified Analyst:]

Then, I mean, the same thing on the new project in Sichuan. And now Dubai, you spent a lot of money in Dubai. It's very expensive production. So far you have just one difficult customer. Can you talk about when you are still talking about adding more capacity, can you talk about what your plans are for Dubai?

[Zhang Dahe:]

Okay. Let me get the answer for the production volume and also margin first. And then we will let our GM, Dr. Gong from Dubai, to give you more details on our plan on the Dubai facility. All right?

[Unidentified Analyst:]

Okay.

[Zhang Dahe:]

[Foreign language]

[Jie Han:]

[Foreign language]

[Zhang Dahe:]

Peter, here's the answer from our Chairman Han because of our Dr. Gong is actually traveling on an airplane. So Chairman Han will answer -- will give you an answer on the Dubai expansion plan. So regarding the production volumes, so basically we expect the -- both plants, Sichuan and Heilongjiang, will reach the normal production stage with the optimal production utilization in the time frame of 2 to 3 years. So our normal utilization ratio is about 80%. In terms of margin -- so we have the breakdown by the different product category. For biodegradable materials, we expect the margin will fall into the range of 22% to 30%. And for the 3D additive manufacturing or 3D printing materials, we expect the margin will be between 50% to 65%. Obviously, this is not a volume business, but a very high -- very [height] business. And for our Dubai business, the products you focus is alloy plastics, similar to 3D printing. It's a very small volume. But it's a very high value-added and high-margin products. We expect in 2018 we'll be able to produce more locally. And so the total design capacity will be 25K and with margin approximately 40% to 45%. And I will go back. And Chairman Han will give us some information about the market development plan. [Foreign Language]

[Jie Han:]

[Foreign Language]

[Zhang Dahe:]

Peter, for the marketing and strategy or plan with our Dubai plans, so since beginning, our foot has been in automotive components. Our vocation in that category was with [Indiscernible] dimensional stability, which is very important, and also some applications in electronics devices. So we understand there has been some speed bumps with the 2 customers from South Korea. We're actively resolving the issue. So in addition, we're not totally rely on any single customers. Our Dubai facility is built on a vision and plan to develop our markets in many other regions, such as Europe. So some of recent developments with the same product we have developed in Dubai, we're working with a potential customer in Spain and Russia for application in oil driven applications. So far, the results seems very promising. And we think the volume there can easily absorb the capacity of 25K we have. In addition, we also continuing progressing in the certification process with potential customer in France and in Germany. We anticipate we will be able to obtain the certification in the second or third quarter of 2018. So by then, we believe we'll have 4 to 5 really high-quality and big customers by then.

[Unidentified Analyst:]

Thanks. One last question. For all of these projects, is it reasonable to assume that you're going to finance it somewhere in the local Chinese debt market?

[Zhang Dahe:]

The project will be financed, as we mentioned in the press release, because right now we have cash, cash equivalents and [Indiscernible] of over $5 million. So there's going be a combination of debt, that we're continuing cash flow and also some debt financings too.

[Operator:]

Thank you. We'll now move to our next question. It comes from the line of GHC Capital, Glenn Krevlin.

[Glenn Krevlin:]

I just wanted to continue my other question, Taylor. On the Dubai facility, do you expect any of that to come on line in this calendar year? And the total investment in Dubai now is how much money? And then lastly, you mentioned the Sichuan project being $375 million. That's all to be spent in 2017, although it doesn't come onstream until '19, '20, and '21? So I'm little confused by that $375 million spending for this year, if I understood it.

[Zhang Dahe:]

So Glenn, let me answer you on the Sichuan project first. So the $375 million is already budgeted for the year. Obviously, there's always timing and with deploying capital into work. So that's our preliminary burden at this point. And for Dubai, as the Chairman mentioned, we're going to have the capacity of about 25k on line in the second or third quarter of next year. So right now we have some capacity. Around 3,000 are producing locally in Dubai. So that's pretty much the way we are seeing right now.

[Glenn Krevlin:]

And the total investment in Dubai is what after the money being spent this year?

[Zhang Dahe:]

The total is -- after this year is going to be slightly north of $200 million.

[Glenn Krevlin:]

But very little revenue from this year from the Dubai facility?

[Zhang Dahe:]

At this year, because Q1, we have the payment and also product quality issue. But Q2, we -- the sales resumed. So we think basically we're going to see better comps in the second half.

[Glenn Krevlin:]

And that's being produced in Dubai? Or that's being sold through Dubai, being produced in other places?

[Zhang Dahe:]

It's a combination. So for Dubai, right now it's only a couple -- less than 3,000 being produced from Dubai annually. So the majority is still produced elsewhere on behalf of Dubai for Dubai's customer.

[Glenn Krevlin:]

And then lastly, on the Sichuan plant. How much is currently being used out of the -- I think you built 300,000 potential capacity. How much is being used now?

[Zhang Dahe:]

You're talking about the Phase I, the previous project, right?

[Glenn Krevlin:]

Yes.

[Zhang Dahe:]

The previous one, we have the capacity currently in production is approximately 80,000. And early next year we're going to see more volume coming on line.

[Glenn Krevlin:]

So you are not bringing any more capacity on line this year at that facility? The plan initially was to phase it over three years. You're not adding this year?

[Zhang Dahe:]

I think we can add more capacity this year. But let me get the specific information, the number of production capacity we're going to have this year. [Foreign language]

[Jie Han:]

[Foreign language]

[Zhang Dahe:]

[Foreign language] Glenn, so for Sichuan plants, the production capacity in 2018, on an annualized basis, will be 215k.

[Glenn Krevlin:]

Out of a total of 300 eventually?

[Zhang Dahe:]

Yes. Out of the total of the [indiscernible].

[Glenn Krevlin:]

Yes, you did 80 last year, 215 this year, potentially go to 300 next year.

[Zhang Dahe:]

Yes.

[Operator:]

At this moment, we do not have additional questions. I'll pass over to your speaker for an additional or closing remarks. Thank you.

[Anna Bin:]

On behalf of China XD Plastics, we want to thank you for your interest and patience in this call. If you would like to speak with us further, please call either myself or Taylor in XD's New York office or our investor relations firm. The contact numbers for all of us are listed at the end of the press release. Thank you.

[Operator:]

This concludes today's conference call. Thank you, everyone, for your participation. You line may now be disconnected. Thank you.