China Automotive Systems, Inc.

Greetings, and welcome to China Automotive Systems' third quarter 2020 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kevin Thies, Investor Relations.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2020 Third Quarter Conference Call. Joining us today are Mr. Quizu Wu, Chief Executive Officer, and Mr. Jay Lee, Chief Financial Officer of China Automotive Systems. They will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements. forward-looking statements represent the company's estimates and assumptions only as of the date of this call. As a result, the company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading risk factors in the company's form 10-K annual report for the year ended December 31, 2019, as filed with Securities and Exchange Commission on May 14th 2020 and in other documents filed by the company from time to time with the Securities and Exchange Commission. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial conditions may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales to slow down our regional and national economic growth, weaken liquidity and financial condition of our customers, or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in certain regions where we conduct business, cause our business to suffer in ways that we cannot predict, and materially and adversely impact our business, financial condition, and results of operations. A prolonged disruption or other further of unforeseen delay in our operations of the manufacturing, delivery, and assembly process with any of our production facilities could continue to result in delays in the shipment of products to our customers, increased costs, and reduced revenue. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call, whether as a result of new information, future events, or otherwise. On this call, I will provide a brief overview and summary of the financial results for the third quarter and first nine months of 2020. Management will conduct a question and answer session. The following 2020 third quarter and first nine months financial results are unaudited and are reported under U.S. GAAP. For the purposes of today, I will review the financial results in U.S. dollars. We will begin with a review of the recent dynamics of the Chinese economy, the automobile industry, and China automotive market position. In the third quarter of 2020, China's economy rebounded as GDP growth was 4.9%, a significant increase over the 3.2% in the second quarter of 2020, but much lower than the 6% growth in the third quarter of 2019. 0.7% compared with the same periods a year ago. The Chinese economy has continued to recover from the severe disruptions caused by the impact of the COVID-19 pandemic. After widespread business closures and travel bans in the first quarter of 2020, China was among the first countries to ease the transportation lockdown and travel restrictions, and the Chinese economy began to reopen in the second quarter of 2020. excuse me, government incentives to promote continued economic growth included higher physical spending, more approved infrastructure projects, and lower lending rates to help stimulate renewed economic activities. However, data from the National Bureau of Statistics show that the total retail sales in China grew by a paltry 0.9% in the third quarter of 2020 and declined by 7.2% for the first nine months of the year. compared with the same periods in 2020. I'm sorry, in 2019. Industrial production was up 6.9% in the month of September, but increased only 1.2% for the nine-month period. Six asset investments increased by 0.8% in the first nine months of 2020 as well. For the third quarter end of September 30, 2020, the sale, retail, passenger cars in China grew by 7.9% year over year, according to the China Passenger Car Association. A more detailed breakout by the China Association of Automobile Manufacturers, CAAM, showed that passenger car sales in the month of July 2020 rose by 8.5% year over year, with sedan sales up by 4.6%. The sale of MPVs was reduced by 0.7%, SUV sales rose by 14%, and crossover vehicle sales increased 8.5% in July 2020. Export sales of passenger cars declined by 25.9% in the month of July year over year. In August of 2020, CAM reported a 6% year over year increase in passenger car sales, with passenger car sedan sales up 5.8% year over year. MPV sales were 1.1% higher. SUV sales rose by 6.5%, and sales into the smaller market for crossover vehicles increased by 17.2%. Export sales of passenger cars decreased by 18.7% in August year over year. For the month of September 2020, passenger car sales increased by 8% year over year, with passenger car sedan sales up 3%. MPV sales decreased by 12.3%, SUV sales rose by 16% and crossover vehicle sales improved by 25.5% year-over-year. Export sales of passenger cars increased by 14.7% in September on a year-over-year basis. For the first nine months of 2020, CAM reports that passenger car sales declined by 12.4% year-over-year, with passenger car sedan sales 16% lower than the same period last year. SUV sales were down 5.5%. MPV sales were reduced by 32.7%, and crossover vehicles decreased by 7.9%. Export sales of passenger cars for the first nine months of 2020 declined by 11.1% compared with the first nine months of 2019. Given this industry background, in the third quarter of 2020, our net sales increased by 13.5%. to 114.1 million compared to 100.5 million in the third quarter of 2019. Higher sales of our advanced hydraulic steering products in China combined with increased export revenues from North America offset lower domestic sales of our electric power steering products, EPS. Net EPS sales were $14.3 million compared with $16 million in the third quarter last year. Our sales volume declined in some markets in the third quarter of 2020, and our average selling price in North America decreased, which combined with lower sales of our EPS products generated lower gross profit. However, we generated $19.8 million in positive operating cash flow in the third quarter of 2020 and $51.2 million in the first nine months of 2020. Our total cash and cash equivalents in pledged cash deposits were $113.5 million as of September 30, 2020, and we repurchased approximately 322,000 shares of common stock in the third quarter of 2020. We continue to prioritize on maintaining our strong balance sheet. Total parent company stockholders' equity was $289.6 million as of September 30, 2020. We have confidence that business conditions will continue to increase in China as the domestic government further stimulates the economy and consumers become more confident in its growth sustainability. The domestic demand and pricing environment should improve in 2021 compared with 2020. We look forward to foreign economies stabilizing and improving even as the COVID-19 pandemic continues. Let me review the results for the third quarter of 2020. In the third quarter of 2020, net sales were at 13.8% to $114.4 million, compared to $100.5 million in the same quarter of 2019. The increase in net product sales was mainly due to a change in the product mix and higher domestic sales volume of the company's hydraulic products, combined with increased sales to North American customers. Net product sales to North America grew by 9.8% to $37 million, compared to $33.8 million in the same quarter of 2019. Net product sales for the company's electric power steering, EPS, products worth $16.7 million or 14.6% of net sales. Gross profit was $13.6 million in the third quarter of 2020 compared to $17.3 million in the third quarter of 2019. Gross margin was 11.9% compared to 17.2% for the same period of 2019, mainly due to higher unit costs for EPS and export products compared to the third quarter last year. Selling expenses were $3.8 million in the third quarter of 2020, compared to $3.6 million in the third quarter of 2019. Selling expenses represented 3.3% of net sales in the third quarter of 2020, compared to 3.6% in the third quarter of 2019. General administrative expenses, G&A, were $5.1 million in the third quarter of 2020, compared to $4.4 million in the same quarter of 2019. The increase was primarily due to higher office expenses. G&A expenses represented 4.5% of net sales in both the third quarter of 2020 and the third quarter of 2019. Research and development expenses, R&D, were $6.1 million in the third quarter of 2020 compared to $6 million in the third quarter of 2019. R&D expenses represent 5.3% of net sales in the third quarter of 2020 compared with 6% in the third quarter last year. The lower R&D percentage was mainly due to more strict cost controls over R&D expenditures. Net financial expense was $2.3 million in the third quarter of 2020, compared to net financial income of $1.6 million in the third quarter of 2019, which was mainly due to foreign exchange losses compared with foreign exchange gains in the last year's third quarter. Income from operation was $0.1 million in the third quarter of 2020 compared to income from operations of $4.4 million in the same quarter of 2019. The lower income from operations was mainly due to reduced gross profit and lower gross margin in the third quarter of 2020. Loss before income taxes, expenses, and equity in earnings of affiliated companies was $2.3 million in the third quarter of 2020. compared to income before income tax expenses and equity in earnings of affiliated companies of $5.3 million in the third quarter of 2019. The loss before income tax expense and equity in earnings of affiliated companies was mainly due to lower gross profit and lower income from operations in the third quarter of 2020 compared with the third quarter of 2019. Net income attributable to parent companies common shareholders was $2.4 million in the third quarter of 2020 compared to net income attributable to parent companies, common shareholders of $4.3 million in the third quarter of 2019. Diluted earnings per share were 8 cents in the third quarter of 2020 compared to diluted earnings per share of 14 cents in the third quarter of 2019. Weighted average number of diluted common shares outstanding was 31,113,374. in the third quarter of 2020 compared to 31,492,035 shares in the third quarter of 2019. I'll provide a brief summary of the nine-month results. Net sales for the first nine months of 2020 were 271.2 million compared to 315.5 million in the first nine months of 2019, reflecting the impact of the COVID-19 pandemic in the automobile industry in China and globally. Nine-month gross profit was $32.6 million compared to $46.6 million in the corresponding period last year. Nine-month gross margin was 12% compared to 14.8% for the corresponding period in 2019. For the nine months into September 30, 2020, gain on other sales amounted to $2.9 million compared to $4.9 million for the corresponding period in 2019. Loss from operations was $4.1 million, compared to income from operations of $8.1 million in the first nine months of 2019. Net loss attributed to parent companies' common shareholders was $1.8 million, compared with net income attributable to parent companies' common shareholders, $8.2 million in the corresponding period last year. The alluded loss per share was $0.06 in the first nine months of 2020, compared to the alluded earnings per share of $0.26 for the corresponding period in 2019. Net cash provided by operating activities was 52.7 million in the first nine months of 2020 compared with net cash provided by operating activities of $4.1 million in the first nine months of 2019. Payments to acquire property, plant, and equipment were $8.9 million compared with $23.6 million in the first nine months of 2019. Approximately 322,000 shares of common stock were repurchased during the third quarter of 2020. And the company expects to repurchase more shares in the future, depending upon market conditions. Now, a few highlights of the balance sheet. As of September 30, 2020, total cash and cash equivalents in pledged cash deposits were $113.5 million. Total accounts receivable and notes receivable were $209 million. Accounts payable including notes payable were $201.4 million. And short-term loans were $44.6 million. Total parent company stockholders' equity was $293 million as of September 30, 2020, compared to $289.3 as of December 31, 2019. Business outlook. Management has increased its revenue guidance from $360 million to $390 million for the full year 2020. This target is based on the company's current views when operating the marketing conditions, which are subject to change. Operator, with that, we are ready for the Q&A.

Thank you, sir. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.