Good day, ladies and gentlemen. Thank you for standing by, and welcome to CBAK Energy Technology second quarter and first half of 2021 earnings conference call. Currently, all participants are in the listen only mode. Later, we will conduct a question and answer session, and instructions will follow at the time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I'll turn the call over to Thierry Li, Investor Relations Director of CBAK Energy. Mr. Li, please proceed.
Thank you, operator. Hello everyone. Welcome to CBAK Energy second quarter and first half of 2021 earnings conference call. We released results earlier today. The press release is available on the company's IR website at ir.cbak.com.cn, as well as from Newswire services. A replay of this call will also be available in a few hours on our IR website. On the call with me today are Yunfei Li, who is our Chief Executive Officer; Mrs. Xiangyu Pei, who is our Chief Financial Officer; Mr. Xiu Junqian, our General Engineer; and Mr. Ding, our interpreter. 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 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 obligation to update any forward-looking statements except as required under applicable laws. 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 in English. Go ahead, Mr. Li.
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Thank you, hello everyone. Thank you for joining our earnings conference call today.
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We are very pleased with our solid financial performance for the first half of 2021. Thanks to the robust sales growth for uninterruptible power supply batteries, net revenues grew to $5.9 million in the second quarter and $15.3 million in the first half of 2021, up 27% and 33% year-over-year, respectively. Reflecting the strong market appeal for our industry-leading battery products and our effective business strategy execution, our gross margin increased by 16.6% from the prior year to 19.2% in the first half of this year. During the first half of 2021, we continue to leverage our advanced research and development capabilities to innovate our products, which then help us broaden product applications. With additional capital raised from new financing, we are well positioned to execute our business plan, such as capacity expansion.
Moreover, we made a strategic consolidation across the supply chain for great synergies. I'd like now to share with you more information on these recent developments, which have furthered our mission to become a leading innovative energy storage solution provider and lithium-ion battery producer in China.
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First, let me dive into the remarkable strides that we have made for product innovations during this period and our future development plans.
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We have successfully developed the special 26650 battery, especially for ultra-low temperature applications. This new battery is designed to operate in temperatures as low as -40 to -50 degrees Celsius, and discharge at a maximum C- rate of 60C at room temperature. On top of positive test performance results, the special 26650 battery is highly attractive for products used in extremely low temperature conditions, such as in China's northern region, harsh weather conditions, as well as for the aviation and aerospace industries. At this point, our clients have all given very positive initial responses, and we are anticipating mass production of the special 26650 battery at the end of this year, as well as expecting its meaningful contribution to production volume in coming years.
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Meanwhile, we are actively developing a series of large cylindrical batteries for the LEV market. The batteries for light electric vehicles have a capacity of nearly four times that of regular batteries and 20% lower in cost, making this product a perfect solution for the LEV market. We aim to be a major battery supplier for top LEV manufacturers and expect growing traction among an expanding customer base with our high price to performance ratios and strong ability to adapt to customer needs.
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We were capable of broadening use scenarios by the support of our high quality and dependable battery products. Earlier this year, we started cooperating with Chengdu Raja New Energy Automotive Technology Corporation to jointly develop a batteries swapping project for food delivery and the logistics industries, as well as an uninterruptible power supply project for traffic lights. As delivery services are becoming an increasingly indispensable part of life, the batteries swapping project aims to provide solutions for delivery riders that suffer from more battery weight, as well as inconveniences and risks in charging. The UPS project for traffic lights, on the other hand, keeps roads safe by ensuring the traffic light stays on during power outages. So far, our cooperation with Raja went well, and we will provide updates in the following quarters should there be any new progresses.
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In addition, we also focus our R&D efforts on developing next-generation batteries to enable EVs faster acceleration and longer ranges in driving. The batteries will have lower loss rate and lower costs, and present a huge opportunity in EV market. Our strong research and development capabilities are driven by continuous product innovation. Our product development roadmap is led by the new generation of technologies and market potential in the clean energy sector. We have established partnerships to develop hydrogen fuel cell and solid-state batteries, and these initiatives will allow us to maintain the mid-long-term industry advantages through technological innovation.
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Going ahead, we will continue expanding our operations in China and establish our foothold in the global market through an increased investment in R&D and the company's technical advantages in cylindrical batteries.
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A strategic capacity expansion in the growing addressable market. With continued new product developments and increasing customer demand and orders, we are ramping up our production capacities. Two major projects are underway, the first being the Dalian Plant expansion, mainly for products used in energy storage sector. We plan to invest RMB 15 million, which is equivalent to $7.4 million, to add the additional product line in our Dalian Plant. The new production line has an annual capacity of 0.4 GW, and is expected to be completed by the end of 2021. The total annual capacity in Dalian Plant will increase to 2 GW in 2021. This expansion allows the Plant to produce an additional 100,000 units of model 26650 batteries per day. Nanjing Plant will be established in two phases to mainly produce products for the EV and LEV market.
In phase I, we plan to invest a total of RMB 17 million, which is around $11 million, in a 10,000 sq m space to develop a production line with an initial capacity of 0.7 GW. Both projects are on the right track of expansion and we are pleased with the progress. The $17 million we raised in February supports our business expansion strategies and accelerates the product to go to the market.
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Through a strategic consolidation across the industry supply chain, we are pursuing remarkable synergies, which will further drive the company's future growth and expansion. As a part of this strategy, we decided to buy 81.56% of Hitrans' equity interests via our subsidiary, Dalian CBAK Power Battery Corporation. Hitrans is a leading developer and manufacturer of ternary precursors and cathode materials in China, and is one of CBAK Energy's key suppliers. In the production of lithium-ion batteries, the cost of cathode materials accounts for about 40% of the total cost. We believe this acquisition for a reliable raw material supply will place Hitrans as a strategic and complementary addition to fuel the continuous expansion of CBAK's production and unlock potential for cost control. It will complement CBAK Energy's business portfolio, forming an innovative ecosystem across all our businesses.
This move will also advance the company in diversifying product strategy and support continued improvement iterations to maintain our market competitiveness. This transaction is still subject to certain closing conditions and is expected to complete in the third quarter of 2021. Above all, our goal is to build an innovative ecosystem-based solution to power electric storage facilities and electric vehicles. We are moving forward to drive profitable growth as we increase our investment in expanding our capacities and R&D capabilities. Our innovations further strengthen our existing product portfolio and drive growth in our addressable market with new products. We are confident in taking our business into new areas that will better serve our customers. By leveraging our core competencies and deploying new products, we are well-positioned to ensure rapid growth in the battery market.
Let me turn the call over to our CFO, Xiangyu Pei, who will provide details on our financial performance.
Thank you. Thank you, Mr. Yunfei Li and Thierry Li, and thank you, everyone, for joining our call today. I will now go over our key financial results for the second quarter and first half of 2021. For the full details of our financial results, please refer to our earnings press release. Our solid financial performance demonstrated a strong market resonance to our high quality and reliable batteries. Compared to the same period of last year, our net revenues increased 27% year-over-year to $5.9 million in the second quarter of 2021, and 33% to $15.3 million, primarily driven by growing demand in batteries and our ability for uninterruptible supplies. Fueled by the increase in the sales volume, our cost of revenues grew to $4.8 million in the second quarter and $12.4 million in the first half, up 6% and 10% year-over-year, respectively.
Compared to the revenue growth, we still generated positive operating leverage of 21% and 23%, respectively, reinforcing our confidence in our growth strategies. Driven by higher sale volume and cost management efforts, our profitability also increased. Gross profit was $1.1 million in the second quarter and $2.9 million in the first half, an increase of 1,148% and 899% year-over-year, respectively. Also, on a year-over-year basis, our gross margin also increased by 1,670 basis points to 18.6% in the second quarter and 1,660 basis points to 19.2% in the first half of the year. The margin increase is primarily driven by higher utilization of plant capacity and optimization of manufacturing engineering. Total operating expenses were $3.8 million in the second quarter and $5.7 million in the first half of the year, increased 283% and 79% from the previous year, respectively.
We increased our research and development expenses by 171% year-over-year to $1 million in the second quarter, and 124% to $1.7 million in the first half of the year. The increase was primarily due to the expiration of Chinese government COVID-19 relief policy aimed to alleviate corporations' social insurance burdens and an increase in talent in R&D. In addition to that, the company increased the research expenditure into new models of batteries for light electric vehicles, electric vehicles, and batteries for ultra-low temperature environments. The sales and marketing expenses were $0.5 million in the second quarter and $0.8 million in the first half, an increase of 435% and 288% year-over-year respectively. Our general and administrative expenses were $2.3 million in the second quarter and $3.7 million in the first half, up 209% and 996% respectively.
Apart from the aforementioned expiration of Chinese government's COVID-19 relief policy, the increase in G&A expenses was also a result of increased employees of the new plant construction in 2019. As the Nanjing phase project and additional product line in Dalian will be completed and in production by Q4 of 2021, we expect to ramp up the production with customer orders and generate sustainable revenues. We continue to manage and improve customer relationships and the quality of our customers. Our recovery of doubtful accounts was $0.1 million in the second quarter of 2021 compared to $0.2 million in the same period of 2020. In the first half of 2021, the recovery of doubtful accounts was $0.3 million, compared with a provision for doubtful accounts of $0.4 million in the prior year.
Our change in fair value of warrants was $5.8 million in the second quarter and $34.2 million in the first half year, compared to both nil in the prior year. Supported by record growth in revenue, improved gross margin, the positive change in fair value of warrants, we were able to generate net income of $2.7 million in the second quarter and $32.3 million in the first half, compared to net loss of $1.2 million and $3.6 million in the same period of 2020. As Mr. Li mentioned earlier, in February, we successfully raised $17 million in a direct offering of ordinary shares to finance our business plan and working capital. As of June 30, 2021, our cash and cash equivalents reached $33.3 million compared to $11.7 million as of December 31, 2020.
With strong cash position and an improvement in financial results, we remain confident that we are on the right path for accelerated growth. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.
Our first question comes from the line of Carl Berkensfield from American Trust. Please go ahead.
Good evening management there. Does CBAK business involve sensitive technology that might cause the Chinese government to terminate its export listing status in the U.S.? I have a few more questions to ask.
Thank you. Thanks for the question. I'm translating your question to our management associates this moment. Thank you.
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Thanks very much for the answering. Actually as the director mentioned, actually what we are dealing with is the industry of the new energy. In this term, all the relevant technologies are open to the public around the world. Actually there is nothing related to the sensitive technologies. Also, on the other hand, the Chinese government is giving the largest support to the development of the new energy and the relevant development of the business globally. We don't have to worry about any sensitivities in terms of technology. Thank you. We will have another director to also add some more information for your reference. Thank you.
Thank you. Thank you for putting all my investors at ease. I have other questions here.
Just a moment. Sorry. Just a moment, because we have another manager to add more information in this term.
Okay, great. Thank you.
Thank you.
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Okay.
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Also, additional information for your reference, actually in August 11, the Chinese Central Committee, the Central Government issued a very important file. In this file, there are several key points are taken into key considerations and monitorings in terms of the cross-border business. They are like big data, FinTech, cloud computing and the relevant business. We have to say, the new energy, what we are dealing with now is not included in those businesses which are under very strict monitoring of the Chinese Central Government. That's also additional information for our reference to we could totally be relieved from any government level monitoring or sanction. Thank you.
Thank you very much for putting us at ease here. Who are CBAK's direct competitors, peers in each business segment, the battery materials, electric cars, LEV, the batteries for ultra low temperature applications?
[Foreign language], thank you. Thanks for your question.
Domestic and foreign.
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Thanks very much for your question. Our director is going to give you the answers from the three main aspects. The first one is the storage energy as one of the key pathway for our business. The other one is also the transportation. The third one is the ultra-low temperature. Our director just gave the answer for the first point, that is the storage energy. In terms of the storage energy, domestically or globally, there are two competitors.
The two competitors are both from China. The first one is [N on-English content] , the other one is [N on-English content] . Though we have the two main competitors, our output or shipment is larger than them in terms of quantity. Also our business, the CBAK's business is largely connected to the global market, and we have many Fortune 500 partners and customers and key accounts, for example, Schneider. With the solid foundation of the global key accounts, we are surpassing the two main competitors as I just mentioned in terms of output and business. Thank you. This is for the first one in terms of energy storage. We are going to share with you about point 2. [Foreign language].
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For the second one that is about the power or electric power driven transportation. That is mainly actually LEV as we shared before. In this term globally or domestically, there are two main competitors.
The first one is the [N on-English content] , the other one is [N on-English content]. Also, the two are actually local, they are business in China. Comparing to them, our more main competitiveness is that first one, our product is more easy to use or to be stored, because we are producing the cylindrical battery, that is the lithium iron phosphate. Comparing to the competitors prismatic batteries, it is more easier to use or to being stored. Because we are using the lithium iron phosphate and also its design, we are safer than the competitors' products. Our main competitiveness is flexibility and safety. Thank you. We are moving on to the third point. [Foreign language].
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The third one is the ultra-low temperature application. Our main or key markets, first one is the extreme cold areas in the American area and also in European area. Also the other key market is in the north part of China, which is very cold, especially in winter. We are facing these main markets, and also our technology developed by ourselves. We could say currently has no fierce competitors in this term, domestically or globally. Thank you.
Great. My next question and the last question is actually my next to last question.
Yes。
The CBAK has announced numerous business partnerships and investments in factories and new products. What is the capital expenditures required to meet the commitments in 2021? How much has CBAK invested so far? How much does it plan to invest? What are the expected sales or revenues that they expect to get from this additional investment in their growth?
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[Foreign language] Thanks very much for the explanation. As you may already heard from the previous introduction, we have put into the construction the plants in Nanjing and plants in Dalian City. Now we have invested almost RMB 100 million, and we plan in this year to invest another around RMB 50 million-RMB 100 million. We expect the two factories are going to be put into the operation in the third or at least the fourth quarter of this year. We expect to generate the revenue or profits in the next year, in 2022, when the two factories' capacity are put into the full usage during a certain time of operation. Thank you.
OK. My final question is, does the company have a plan to raise capital again? What's the estimated size of the raise? When will it be used and for what purpose?
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[Foreign language] Thanks very much for the Director Pei detailed explanation. In terms of the final question, actually, as we mentioned, the Nanjing and Dalian plants is going to be put into the operation at around the third and the fourth quarter of this year. That is going to be the phase 1 plants. With the phase I plants in Nanjing and Dalian are going to be put into the operation. We could say currently, according to our calculation, the fund raised before have been enough to cover our phase II construction and operation in both Nanjing and Dalian.
We expect to do more analysis about the quality of our products, capacities, and also the acceptance of the market of our products manufactured from the two new factories in Nanjing and Dalian. With all this data to be collected at the two factories put into the operation, we could understand how the phase II in Nanjing's factory is going to be expanded and how much fund needs to be raised. Basically, we will need the two factories to be put into the operation and collect more information through the operation and give you all this data you are interested in. Thank you.
Thank you very much for supplying me with full disclosure and a concise description of your intentions. Thank you.
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Thank you. Our next question comes from the line of Howard Yu from Leadin Capital. Please ask your question.
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Thanks very much for your question. We have a question about that when reading the report issued that CBAK have established a cooperation, a partnership with JAC by sign an agreement. According to this agreement, it's going to be a three years partnership to develop new products. The question is about how much revenue could be generated through this cooperation. Also, if there is any further commitment in this agreement for the partnership, like the financial commitment. Third one is that in terms of the IP for the co-designed or developer products, who is going to be the owner of the IP? Thank you.
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[Foreign language] Thanks very much for the direct answer for this question. First, we have to mention that this cooperation with the JAC by CBAK is now on the right track of the R&D or demo stage. One thing we'd like to point out is that this cooperation is focusing on the development of a vehicle, and a vehicle, it generally needs at least two years for the R&D to be finished. Now we are on the right track in the process of the R&D development.
Also from the current progress, we say JAC is very satisfied with it. Also the product we are co-developing is also a hot product, that is the 4680. This product, its IP is owned by us. Also this product is not going to be only supplied to JAC, it is also only going to be provided to other vehicle manufacturers and producers. I believe that it will help us to generate the profits in the long run. Currently, we could say, in conclusion, the development or the partnership is on the right track. Thank you.
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Thanks very much for your question. From the previous introduction, we come to notice that CBAK is going to acquire a company called Hitrans, which is an upstream manufacturer for the lithium batteries. Would you like to share with us, if available, the scale or the revenue of this company, the Hitrans that we are going to acquire? After acquisition, merger and acquisition, if Hitrans is going to be integrated into CBAK's whole business map, or it is going to operate on its own. Thank you.
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[Foreign language] Thanks very much for Xiangyu Pei's very detailed explanation in this term for this question. First, that after the merger and acquisition to be finished, in terms of the general management and the finance, and also the risk management of the Hitrans is going to be integrated into the CBAK's whole management and operation management scheme. On the other hand, we are going to leave the Hitrans after merger and acquisition a certain independence in terms of the business development and business operation. That is going to be mainly administered by their previous technology team and management team for business and business operation. That is going to be a good complementary of our support and also their long years experience and technology accumulation.
In terms of the financial and finance data, because we are still in the progress of finishing the exchange and transaction with them. I think we are going to share with you the detailed data and information in the next times meeting at a conference for your reference. Thank you.
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Thank you. [Foreign language].
Thank you. Our next question comes from the line of Laura Lu from Stone Street Group. Please ask your question.
Thank you everyone. My question is about the revenue growth for different business segments. Can you tell us more about the strategy for the growth going forward? What's the rationale behind it? Is it going to be merger or launching new technologies?
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Yeah, sorry about that. Yeah. What's the rationale behind that, the growth strategy? I saw the company will do some mergers, and maybe potentially launching some new technology. What is the major one?
Thank you.
Also behind the other growth. Thank you.
Thanks for your clarification.
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Okay.
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First, because we will have another director to also answer your question, and first Irina Tian share his answer to your question is that in the long run, that is definitely CBAK is going to be focusing on the technology-driven business, and especially for the batteries, new technologies, update, and development with the merger acquisition as kind of support. This is our main strategy and rationale. Of course, we will have some niche markets, but because time limit I do not expand upon here. Thank you. [Foreign language].
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[N on-English content] Thanks very much for the further explanation and added information. Also, because as we mentioned before, we are technology-driven company, that is also our mainstream for the development. Also, that merger and acquisition, for example, the Hitrans case, is also because they are the ones could help us to provide stable supply of the key materials for our batteries. It is of great importance strategically. That's why we issued this merger acquisition case. We could say this is not just a merger acquisition. We are not just taking it as a driving force for our business. It is because it could add up to our technology-driven strategies to further strengthen our foundation in technology. Thank you.
Okay, great. Thank you. That's my question. Thank you.
Thank you.
Thank you. Our next question comes from Ricky Lu from Valuable Capital. Please go ahead.
Good evening, good morning everyone. I have a question about the EV and LEV market. At present, all major battery manufacturers are speeding up their production capacity expansion, while CBAK just decided to return to the EV and LEV market. Isn't it sort of late?
Hello, you can move on. Hello? [N on-English content].
Hello？
Hello, oh sorry.
Can you hear me now?
Yeah, we can hear you. We heard that you talking about the EV, and there are also a lot of the players have been expanding their capacity. On the other hand, maybe CBAK is just entering into this business, and then the signal lost.
Oh, OK, let me repeat the question again.
Thank you.
At present, all major battery manufacturers are speeding up their production capacity expansion, while CBAK just decided to return to EV and LEV market. Is this sort of late?
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It looks like you disconnected from the call.
Yeah.
Hello?
Hello. Sorry for the signal issue.
OK. Let me ask the question again. Sorry, maybe the signal is not good.
No problem.
At present, all major battery manufacturers are speeding up their production capacity expansion, while CBAK just decided to return to the EV and LEV market. Isn't it sort of late?
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This is the audio operator. Maybe I can repeat the question. It's about whether is it too late to enter LEV market.
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[Foreign language]. Thanks very much for the detailed explanation from director. Actually one thing we'd like to clarify it that we are not a newcomer to EV and LEV market. Actually we are back. Just like the very famous word "we are back" from this market. Years before, we strategically decided to exit the EV and LEV market. At that time, we analyzed the policies of the government and also the timing. We thought that it was not quite supportive for us to develop our business or generate profits in EV and LEV.
That's why at that time we decided to put more energy into the development of the energy storage market, which do generate profits for us to sustain our development. On the other hand, now with the continuous understanding of the market, we think it is a good time for us to re-enter or back to the EV and LEV market. We say we already have the accumulation, no matter of the technology or the experience in this term. Thank you.
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[Foreign language], Thanks. Also one thing we'd like to emphasize is that now we are back to this market.
It is because we have the strategic understanding about the market. At the first way, we would like to share with you some additional information. Previously years before we exit the EV and LEV, we were the ones taking part into the standard making up for the EV and LEV. At that time, we only had the standard for the industry. Now we have China's national level standard and we are also one part of it, of the standard making up.
Years before, we saw that EV and LEV though grew very fast, the industry is hard to make profit. That's why we decided to temporarily exit from that market, but focusing on business that can generate profits and sustain our long term development. That is our actually policy, or for the development, that is find the right business or industry to generate profit. With the profit, we can take steady steps to move forward. Following these policies, we now see the whole market after years development has been more mature.
That's why we decided to go back. We are not just back to a market to compete with those top level players, focus on AB, a big player, but they are more focusing on the A model cars. We choose another niche market, that is A00 model and also the LEV mini, the two wheels vehicles, which means we focus more on to the light type and model vehicles. We focus on different niche markets comparing to other key players. Thank you. [Foreign language]
Thank you. Ricky, do you have any follow-up questions?
Yeah. I have a second question. Does the company receive government subsidies? What's the regulation and incentives for battery space?
Sorry, the signal is not quite good. Would you like to repeat again? Thank you.
Yeah. Does the company receive government subsidies? What's the regulation and incentives for battery space?
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[Foreign language]. First, thanks very much for your question. I think maybe because we are in the new energy market, we are currently affected or impacted by the general image that Chinese government is giving a lot of subsidies or incentives for the new energy business. Actually, there is no incentive or subsidies in China on the government level to battery manufacturers. This is one thing I'd like to clarify. On the other hand, we are provincial level high-tech enterprise, we do receive some incentives from the local provincial government. This is one thing I'd like to clarify.
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[Foreign language] As we mentioned before, that we are the provincial-level high-tech company, and we do receive incentive from them. For example, that the local government give us the fund that could only be especially used for the upgrading and expansion of our production lines and our capacities. We do receive some subsidy incentives from the government for the special purpose. This is also one thing we'd like to clarify with you. Thank you.
Thank you. Ricky, do you have further questions?
Thank you. Thank you for the answers. That's all my questions. Thank you.
Thank you. Pleasure.
Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Yunfei Li for closing remarks.
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Thank you, operator. Thank you all for participating in today's call and for the support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.
Thank you all again. This concludes the call. You may now disconnect.