TIANJIN, China, via ETELIGIS INC., 04/15/2015 – – China Auto Logistics (the "Company" or "CALI") (NASDAQ: CALI), a top seller in China of luxury imported automobiles and a leading provider of auto-related services, reported today that despite important favorable developments in its Auto Sales and Financing Services businesses in the year ended December 31, 2014, several factors contributed to a substantial full year loss and a going concern opinion included in the Company’s Report of Independent Registered Public Accounting Firm.
The full year loss attributable to shareholders in 2014 of $26,863,297, included interest expense of $6,657,368, depreciation and amortization of $2,623,825, and an impairment loss of $3,003,809 relating to the Airport International Auto Mall (the “Auto Mall”) acquired by the Company in November, 2013, and a goodwill impairment charge of $16,041,383 relating to the acquisition. The 2014 full year loss was incurred on net revenue of $402,269,611, which was down 12.4% from a year earlier. In 2013, the Company reported full year net income attributable to shareholders of $524,260.
According to the Company, a primary contributor to the 2014 operating loss was a decrease in sales, in part due to the slowdown in China’s economy and continuing competition in luxury auto sales. In addition, as noted above, the Company recorded sharp increases in interest expense and depreciation stemming from the acquisition of the Auto Mall. Payments made during the year for the acquisition also contributed to a working capital deficit in 2014 of $7,298,690.
The Auto Mall currently is primarily being utilized as a showroom for a still early stage used car joint venture with Car King China. The joint venture had a cumulative loss of $1.8 million as of December 31, 2014 and, starting in the third quarter of 2014, the Company has not recorded any rental income related to this property. Based on the estimated future discounted cash flow generated from the Auto Mall, the Company recorded an impairment loss of $3,003,809 during the year ended December 31, 2014, which represents the excess of the carrying value of this property over its fair value.
As of December 31, 2014, the Company performed an impairment test on its goodwill for its Sales of Automobiles and Auto Mall Automotive segments. Due to the significant vacant space not being rented out at the Airport International Auto Mall, the continued loss from Car King Tianjin, the Company’s actual operating profits and cash flows being lower than expected during fiscal year 2014, and the estimated fair value being less than the carrying value for the Auto Mall Automotive unit, the Company recorded an impairment loss on goodwill of $16,041,383 related to the Auto Mall Automotive unit for the fiscal year 2014. As of December 31, 2013, no indication of goodwill impairment existed.
Reflecting the extent to which non-operating items contributed to the fiscal year 2014 loss, EBIDTA (earnings before interest, depreciation, taxes and amortization) for 2014, excluding the impairment loss on the Auto Mall of $3,003,809 and the impairment loss on the goodwill of $16,041,383, was a loss of $831,912 compared with income of $2,959,752 a year earlier.
– Net revenues in the year ended December 31, 2014, consisted primarily of Sales of Automobiles (97.86% of revenues) which were down 12.55% from $450,143,413 a year earlier to $393,669,010 in 2014.
– While the cost of revenue in 2014 declined 12.06%, year over year gross profit decreased 35.23% to $4,440,147, as revenue declined at a faster pace than the cost of revenue.
– Reported net revenues for 2014 excluded revenues from the Company’s 40% interest in Car King Tianjin which is accounted for under the equity method of accounting. The Company believes Car King Tianjin has become one of the largest used car dealers in Tianjin. For the full year, net sales of the early stage joint venture were $3,430,914, but it continued to generate losses. The Company’s share of the net loss in 2014 was $660,759 which is included in the net loss of the Airport Auto Mall Automotive Service segment.
– The decline in Sales of Automobiles reflected a 22.74% decline in volume from 4,837 automobiles sold a year earlier to 3,737 units in 2014. However, after a long decline in the average selling price of the Company’s automobiles, the average unit selling price per automobile rose 11.70% in 2014 to approximately $105,000, reflecting the Company’s strategy to focus on high end luxury sales, where it believes it may be possible to achieve higher margins.
Nevertheless, due to strong competition, net profit margin remained relatively low, as the Company sought to maintain its industry leadership via competitive pricing. The gross margin on auto sales in 2014 decreased to 0.02% from 0.09% a year earlier and the reserve for slow moving inventory increased to $810,000 from $192,000. Excluding these reserves, the comparative gross margin in 2014 would have been 0.17% and 0.13% a year earlier. The Company does not anticipate that the gross margin excluding inventory reserves will drop any further in the future.
– Financing Services revenues in 2014 increased 7.39% year over year to $7,403,202, with the gain accounted for by increased interest income. However, this included a 24.87% decline in fee income. Consequently, the gross margin in this business declined from 62.87% a year earlier to 43.3%. This was primarily a consequence of (as previously reported) a reutilization in the first half of 2014 of the Company’s working capital following the creation of Car King Tianjin and the Airport Mall acquisition. In the second half of 2014, however, the Company was able to obtain short term financing and better manage its working capital. Consequently, the Company was able to reinstitute its previously reduced temporary credit service, which enabled it to generate additional fee income that it anticipates will continue in the future. Reflecting anticipated future growth in Financing Services, the Company reported that receivables related to Financing Services grew $33.2 million year over year to $101.8 million in 2014. As of April 10, 2015, the Company had aggregate credit lines of approximately $166 million and, going forward, believes it will be able to obtain additional credit lines to support the Financing Services business on an “as needed” basis.
– As noted above, the sharp increases in interest, depreciation and amortization costs in 2014 related to the acquisition of the Auto Mall and bank loans for working capital. (Additional information is available in the attached financial tables and in the Company’s 2015 Annual Report on Form 10-K filed with the SEC.) As of December 31, 2014, the Company had a working deficit of $7,298,690 compared to working capital of $16,012,695 a year earlier, with the decrease primarily attributable to the second payment made related to the Auto Mall acquisition in the amount of $16.3 million and interest payments on the short term borrowings. Under the terms of the acquisition financing agreement, there are two more installment payments of $19.5 million each (including principal and interest) payable in November 2015 and 2016. The Company plans to finance these payments through its operating cash flows and bank loans, and believes it will likely require outside financing to do so as cash flows may be insufficient. However, the Company provides no assurance that it will be successful in obtaining any loans on terms acceptable to the Company.
– Operating expense in 2014 increased 566.94% year over year primarily due to the impairment loss on the Airport Auto Mall, which reflects the excess of the carrying value of the property over its fair value and the impairment loss on the goodwill. The Company continues to believe that the long term prospect for the property – – which is in the heart of the Tianjin Free Trade Zone – – is bright.
Mr. Tong Shiping, Chairman and CEO of the Company, stated, “Early in 2015 the economic climate and new government restrictions continue to hamper our progress, and it is difficult to predict when we will see substantial improvement. Nevertheless, we remain optimistic, as are many observers, about continuing growth in luxury auto sales and related auto services in China, and our leadership role in this niche.”
He continued, “Our goals in 2015 are to continue to stick to our payment schedule on the acquisition, while continuing to pursue more profitable further growth in Financing Services as well as via other promising opportunities such as national expansion of retail luxury auto sales in cooperation with Tianjin Binhai.”
Conference Call Invitation
The Company will discuss 2014 results during a live conference call and webcast on Thursday, April 16th at 8:30am Eastern Time. This will follow distribution of a news release with the Company’s 2014 results on Wednesday, April 15, 2015.
To participate in the call, interested participants should call 1-888-203-7337 when calling within the United States or 1-719-457-2080 when calling internationally. Please ask for the China Auto Logistics 2014 Investor Conference Call. Conference ID: 2183792. There will be a playback available until 4/23/15. To listen to the playback, please call 1-877-870-5176 when calling within the United States or 1-858-384-5517 when calling internationally. Use the Replay Pin Number: 2183792.
About China Auto Logistics Inc.
China Auto Logistics Inc. is one of China’s top sellers of imported luxury vehicles. It also provides a growing variety of "one stop" automobile related services such as short term dealer financing. Additionally, in November, 2013, it acquired the owner and operator of the 26,000 square meter Airport International Auto Mall in Tianjin for $91.4 million, with plans to develop the auto mall, among other things, as the flagship site for a joint venture with Car King (China) Used Car Trading Co., Ltd. In August, 2014, the Company also announced a Strategic Cooperation Agreement with a leading auto dealer leasing and development company (Binhai) to greatly expand its high end imported auto business via the purchase and construction of new auto malls throughout China coupled with a new e-commerce platform. In November, 2014, it launched a retail auto sales operation with Binhai.
Information Regarding Forward-Looking Statements
Except for historical information contained herein, the statements in this press release are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, product demand, market competition, and risks inherent in our operations. These and other risks are described in our filings with the U.S. Securities and Exchange Commission. We do not undertake any obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.
DGI Investor Relations Inc.
SOURCE: China Auto Logistics