China Automotive Systems, Inc.

Greetings and welcome to China Automotive Systems' second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Kevin Thies, Investor Relations. Thank you, sir. You may begin.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2021 Second Quarter Conference Call. Joining us today are Mr. Kui-Zhu 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 translations. 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 the forward-looking statements due to a number of factors, including those described under the setting risk factors in the company's Form 10-K Annual Report, for the year end of December 31, 2020, as filed with the Securities and Exchange Commission, 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 condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales, the slowdown in regional and national economic growth, weakened 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 the 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 operation. A prolonged disruption or any further unforeseen delay in our operation of the manufacturing delivery, and assembly process within any of our production facilities could continue to result in delays in the shipment of products to our customers, increased costs, and reduced revenue. Company Express 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 second quarter and first six-month results of the period ended June 30, 2021. Management will conduct a question and answer session. The following 2021 second quarter and first six months financial results are unaudited and are reported using U.S. GAAP accounting. For the purposes of our call today, I'll review the financial results in U.S. dollars. We will begin with a review of the recent dynamics of the Chinese economy, automobile industry, and China Automotive's market position. Our net sales rose by 45% year-over-year in the second quarter of 2021, following a year-over-year 77% rise in the first quarter of 2021. For the six months of 2021, our net sales increased by 60.1% year-over-year to $250.9 million. Our advanced hydraulic steering products and products grew by 43.9% year-over-year in the second quarter of 2021, to $97.4 million. Net sales in electric power steering, ETS, increased almost 50% year-over-year to $23.2 million and represented 19.2% for total sales. The Chinese economy continues to expand from the impact of the COVID-19 pandemic in 2020. GDP grew by 7.9% year-over-year in the second quarter of 2021. down from the 18.3% in the first quarter of 2021, but still solid economic growth. GDP for the first half of 2021 was 12.7% higher than a year ago. According to statistics from the China Association of Automobile Manufacturers, CAAM, Chinese automobile sales in annual rose by 8.6% year-over-year, led by a 10.8% increase in passenger views. In May, automobile sales declined by 3.1%, with a 12.4% decrease in June. When six months ended June 30, 2021, CAM reported that Chinese automobile sales grew 25.6% year-over-year, with passenger vehicle sales from approximately 10 million units, representing a 27% gain ahead of last year. As sedan sales increased 26.2%, MPV unit sales were up 25.2%, and SUV sales grew by 28.6%. In the first six months of 2021, new energy vehicles, NEV, sales were approximately 1.2 million units, representing a 201.5% year-over-year growth. The sale of NEV passenger vehicles increased by 217.4%, to 1.1 million units, and NEV commercial vehicle unit sales reached 66,000 units, up 61.5%, in the first six months of 2021. In the first six months of 2021, the sales of Chinese domestic branded vehicles, our main market, increased by 46.8% year-over-year to 4.2 million units, taking a 42% market share up 5.7%. For the first six months of 2021, commercial vehicle sales in China increased by 20.9% year-over-year, with bus sales rising by 39.7%, and the much larger truck market up 19.4%, according to CAAM statistics. The traditional bus market benefited from the phasing out of generous EV subsidies, and truck growth was partially generated by a significant pre-buy of National 5 emission-compliant vehicles before the stricter National 6 emission standards are nationally mandated in July 2021 for diesel engines. Additionally, truck sales benefited by stronger anti-overloading enforcement and new infrastructure projects. These growth percentages partially reflect comparisons to the lower than normal sales in the first half of 2020, caused by the COVID-19 disruption in China and abroad. Each of our operating units achieved double-digit growth, except our sales to the commercial vehicle market, which had a slight downturn in the second quarter of 2021. Exports to our Tier 1 customers in North America grew by 179.8% as the auto market there rebounded and pandemic closed. As previously announced, we have been selling more EPS products into the electric vehicle producers, including Great Wall, Cherry Auto, Beijing Auto, and JAC Motors. The outlook continues for approximately 200,000 of our EPS units to be supplied to the EV market alone in 2021. Our gross profit increased by 102.6% year over year to $15.8 million with a gross margin of 13.1%, higher than the 9.4% reported for the second quarter of 2020. Total operating expenses increased 18.9% year over year. Income from operations was $119,000 compared to a loss of $5.2 million in the second quarter of 2020. A combination of net other income, financial income, and equity in the income of affiliated companies helped generate net income attributable to parent companies' common shareholders of $3.2 million, compared with a loss of $4.1 million in the second quarter of 2020. In the first quarter of 2021, we introduced our new proprietary EPS system, which integrates and communicates with the vehicle's main data to create lane keeping assist, automatic parking assist, lane centering, and traffic jam assist functions as part of the company's advanced driver assistance system, known as ADAS, or more commonly referred to as autonomous driving system. To further our ADAS capabilities, in June 2021, we also announced our plan to purchase the 40% interest and sentient ad a swedish automotive technology company specializing in software development and hardware design for advanced steering functions vehicle motion control and autonomous drive sentient currently holds 10 patents and the software functions for steering vehicle motion control and autonomous driving can be integrated with its proprietarily designed hardware solutions including power facts that's the sw ECU, motor, and housing, and complete steering gear systems. Sentient's motion control technology has been tested and demonstrated on EPS, angle overlay systems, steer-by-wire, and fully autonomous vehicles at NHTSA level 3 to 5. Sentient's products have been in production since 2013 to provide drivers a superior steering experience. In July of 2021, we announced that we entered into the OTOP, which is off-tool, off-process phase for a new steering system developed for Alfa Romeo, a leading European brand. This new steering system will be for Alfa Romeo's first luxury compact plug-in hybrid SUV model, the 2021 Tonnelli, which features the company's first plug-in hybrid powertrain. Approximately 100,000 annual units are expected to be ordered for this new CAAF steering system. The OTOP and Alfa Romeo is CAAF's second project in Europe, and also the first project with a high-end brand under the Stellantis Group of Vehicles. Also, we are proud that our wholly-owned subsidiary, Hubie Henlong Automotive Systems Group Limited, received the ISO 26262 colon 2018 ASIL-D certification. This is automotive safety integrity level from SGS TUV. SGS is recognized as the world's leading inspection, verification, testing, and certification company, classifying both software and hardware components with different safety risks. ISO 26262-2018 ASIL features safety standards from A to D. with D being the highest and most stringent safety standard. Our D certification distinguishes us from many other peer companies. Our strong financial strength provides the resources to support the development of new technologies to enhance future growth and shareholder value. Our total cash and cash equivalents and pledge cash was $117.3 million as of June 30, 2021. Total parent company stockholders' equity rose to $312.2 million at June 30, 2021 from $303.2 million at the end of 2020. We have financial strength, a large customer base, and a growing portfolio of advanced technology to further build our company and shareholder value. Now let me review the financial results in the second quarter of 2021. Net sales increased by 45% to $120.6 million in the second quarter of 2021. compared to $83.2 million in the second quarter of 2020. Net sales of traditional steering products and parts increased by 43.9% to $97.4 million for the second quarter of 2021, compared to $67.7 million for the same period in 2020. Net sales of electric power steering EPS products rose 49.7% to $23.2 million from $15.5 million for the same period in 2020. EPS product sales were 19.2% of the total net sales for the second quarter of 2021 compared with 18.6% for the same period in 2020. Export sales to North American customers rose 179.8% to 31.9 million in the second quarter of 2021 compared with 114.4 million, I'm sorry, compared with $11.4 million in the second quarter of 2020. Gross profit rose by 102.6% to $15.8 million compared to $7.8 million in the second quarter of 2020. Gross margin in the second quarter of 2021 was 13.1% compared with 9.4% in the second quarter of 2020. The increase in gross margin was mainly due to higher net sales and increased gross profit in the company's two-by-headlong operations. Gain on other sales was $0.7 million compared to $0.8 million in the second quarter of 2020. Selling expenses increased by 46.7% to $4.4 million compared to $3 million in the second quarter of 2020. The increase in selling expenses was primarily due to higher personnel expenses. Selling expenses represented 3.6% of net sales in the second quarter of 2021, also compared to 3.6% in the second quarter of 2020. General administrative expenses, G&A, were $6.1 million compared to $4.8 million in the second quarter of 2020. G&A expenses represented 5.1% of net sales in the second quarter of 2021 compared to 5.8% of net sales in the second quarter of 2020. Research and development expenses, R&D, were $5.9 million compared to $6.1 million in the second quarter of 2020. R&D expenses represented 4.9% of net sales in the second quarter of 2021 compared to 7.3% in the second quarter of 2020. Excuse me. Our other income net was $1.5 million in the second quarter of 2021 compared to $1.3 million for the three months into June 3, 2020. Income from operations was $0.1 million second quarter of 2021 compared to a loss of 5.2 million dollars in the second quarter of 2020. Interest expense was 0.3 million dollars in the second quarter of 2020, substantially consistent with 0.4 million dollars in the second quarter of 2020. Net financial income was 0.2 million dollars in the second quarter of 2021 compared to net financial expense of 0.06 million in the second quarter of 2020. The change in net financial expense was primarily due to achieving a foreign exchange benefit in the second quarter of 2021 compared with a foreign exchange expense in the second quarter of 2020. Income before income tax expense and equity in earnings of affiliated companies was $1.5 million in the second quarter of 2021 compared to a loss before income tax expense and equity in the earnings of affiliated companies of $4.4 million in the second quarter of 2020. That income attributable to parent company's common shareholders was $3.2 million in the second quarter of 2021 compared to a net loss attributable to the parent company's shareholders of $4.1 million in the second quarter of 2020. Diluted earnings per share was 10 cents in the second quarter of 2021 compared to diluted net loss per share of 13 cents in the second quarter of 2020. The weighted average number of diluted Common shares outstanding was 30,855,406 in the second quarter of 2021 compared to 31,174,045 shares in the second quarter of 2020. Now let's go over some six-month financial highlights. Net income increased 60.1% to $250.9 million in the first six months of 2021 compared to $156.7 million in the first six months of 2020. Six-month growth profit was $35.6 million compared to $19 million in the corresponding period last year. Six-month growth margin was 14.1% compared with 12.1% in the first six months of 2020. The gain on other sales was $2 million in the first six months of 2021 compared to $1.4 million in the corresponding period last year. Income from operations was $4.3 million in the first six months of 2021 compared with the loss from operations of $4.2 million in the first six months of 2020. Net income attributed to a parent company's common shareholders was $6.4 million in the first six months of 2021 compared to net loss attributed to a parent company's common shareholders of $4.1 million in the corresponding period in 2020. Diluted earnings per share was 21 cents in the first six months of 2021 compared to a diluted loss per share of 13 cents in the first six months of 2020. Now we'll review a few balance sheet items. As of June 30, 2021, total cash and cash equivalents and pledged cash was $117.3 million. Total accounts receivable, including notes receivable, was $228.5 million. Accounts payable, including notes payable, were $220.4 million. And short-term loans were $36.4 million. Total parent company stockholders' equity was $312.2 million, as of June 30, 2021, compared to $303.2 million as of December 31, 2020. The business outlook. Management has raised revenue guidance from the full year 2021 to $495 million from $485 million. This target is based on the company's current views on operating and marketing conditions, which are subject to change. With that operator, we're ready to begin the Q&A.

At this time, we will 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 film will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. One moment while we poll for questions. Our first question comes from the line of William Regozeski with Green Ridge Global. You may proceed with your question.