First Quarter 2016 Financial Results
- Revenue was RMB 134.2 million (US$ 20.8 million), down 36.0% from the first quarter of 2015
- Earnings per share on a basic and fully diluted basis were RMB 0.28 (US$ 0.04) and RMB 0.26 (US$ 0.04), respectively, as compared to basic and fully diluted earnings per share of RMB 0.14 in the first quarter of 2015
"As anticipated, our first quarter 2016 revenue was substantially down from the year-ago period reflecting the currently challenging market conditions in our sector in China. However, despite a 41% contraction in sales volume compared to the first quarter of 2015, we were able to report a reasonable level of cash flow in the first quarter. In addition, a decrease in our cost of sales including lower depreciation expenses enabled us to achieve improved profitability as compared to the year-ago quarter," said Mr. Jiadong Huang, CEO of China Ceramics.
"In the first quarter, we maintained a reduced utilization of existing plant capacity based on the market environment in order to keep our operating costs low. We utilized production facilities capable of producing 13 million square meters of ceramic tiles per year out of a total annual production capacity of 72 million square meters. We will bring additional capacity online as the business environment improves. Although sales volume in the first quarter was lower than in past periods, we saw sound demand for our higher margin ceramic tiles which sustained the average selling price of our products."
"We believe that while China's urbanization and demographic trends are sustainable, occasional volatility will occur due to imbalances in housing supply and demand. We continue to believe that the operating environment for the rest of the year will be challenging due to abundant real estate still in inventory and unsold. However, once the current inventory of real estate properties is worked through the sales channels, we expect that a rebound in the construction and building materials sectors will materialize," concluded Mr. Jiadong Huang.
Business Outlook
In the first quarter of 2016, we experienced a substantial contraction in our sales volume compared to the first quarter of 2015 due to the effects of a slowdown in China's real estate and construction sectors. In the first quarter of 2016, the Company's sales volume was 4.1 million square meters of ceramic tiles, a decrease 41.4% as compared to sales volume of 7.0 million square meters of ceramic tiles in the year-ago quarter. We view the current quarter's decrease in sales volume as due to difficult macroeconomic and real estate conditions in China as evidenced by an increase in unsold housing, a reduction in new construction and a decrease in residential properties sold in recent months. However, the average selling price for our products increased from the first quarter, which we believe is attributable to our strong brand name and quality of our products and service. In the first quarter, the Company's average selling price per square meter was RMB 32.8, an increase of 10.1% as compared to an average selling price to RMB 29.8 per square meter of ceramic tile in the year-ago quarter.
We expect the currently challenging market conditions to continue for the rest of 2016 as housing construction has recently recorded its first-ever declines. Further, as of the end of the first quarter, the number of homes that remain unsold rose 7.4% year-over-year. However, we believe that in the long-term the economic fundamentals for growth are still in place, as the real estate and construction sectors continue to be essential to China's economy. Over the last two years, the Chinese government has taken a variety of actions to stimulate the real estate sector. The most recent measure was the lowering of the reserve requirement ratio for banks of 50 basis points in February 2016 to stimulate the economy as well as to spur mortgage lending. Prior actions include cutting interest rates six times since November 2014, reducing the minimum mortgage down payment for first-time buyers and lowering the minimum capital ratio for fixed asset investments which would help property developers. However, there is no assurance that the Chinese government will continue to adopt these or similar measures.
We typically receive orders from customers two months in advance of production on a rolling basis. We enter into a dealership agreement with customers and a sales or purchase contract each time a customer places an order. As of March 31, 2016, our backlog was approximately RMB 136.2 million (US$ 21.1 million), which represents the next two months of revenue as of the end of the first quarter. This compares to a backlog of two months' revenue of RMB 165.6 million as of March 31, 2015, a year-over-year decrease of 17.7%. Under normal circumstances, our backlog is an indicator of revenues that might be expected in the next quarter, though it is subject to change as a result of unforeseen business conditions and events including credit payment terms.
In our view, the real estate and construction sector will continue to exhibit sound fundamentals long-term due China's urbanization trend and a shift towards a more consumer-led economy. Government support for both affordable and senior housing is also expected to generate opportunities for real estate companies. We believe that our ability to offer our customers' a wide breadth of customized products that include new roofing products gives us a competitive advantage as does our state-of-the-art manufacturing facilities.
