China Automotive Systems, Inc.

Good day, ladies and gentlemen, and welcome to the China Automotive Systems Third Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Kevin Thies. Sir, the floor is yours.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2021 Third Quarter Conference Call. Joining us today are Mr. Jay Lee, Chief Financial Officer of China Automotive Systems. He 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 from those contained in the 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, 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 Commissions. 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 deteriorating market outlook for automobile sales. The slowdown of regional economic growth, weakened liquidity, and financial condition of our customers are other factors that we cannot see. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, causing uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict, and materially adversely impact our business financial condition and results of operations. A prolonged disruption or any further unforeseen delay in our operations 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. increase costs, and reduce 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 third quarter and first nine-month results for the period ended December 30, 2021. Management will then conduct a question and answer session. The following 2021 third quarter and first nine 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'll begin with a review of the recent dynamics of the Chinese economy, automobile industry, and China automotive's market position. Chinese passenger car sales declined by 13% year-over-year, and commercial vehicle sales declined by 24% year-over-year in the third quarter of 2021, according to statistics from the China Association of Automobile Manufacturers, CAAM. Auto sales in the U.S. also declined by approximately 13% year-over-year in the third quarter of 2021. As a major player in the Chinese auto parts segment, our revenue was affected by the auto market headwinds, but our business only decreased by 5.3%. 4% year-over-year in the third quarter of 2021. Our sales decrease reflected weaker demand in China and the widespread shortage of automobile semiconductor chips. Our sales to the large auto markets were uneven in the third quarter of 2021. Net sales of our traditional hydraulic steering products declined by 19.3% year-over-year to $78.8 million, while net sales of our newer EPS models declined by 76.2% year-over-year to $29.4 million and represented 27.2% of total net sales versus 14.6% of total net sales in the third quarter last year. Net sales to the Chinese commercial vehicle market declined by 34% year-over-year in the third quarter of 2021. Our net sales to our customer, Xiangyang Brilliance Jubei, grew slightly. While net sales to Cheryongville another major auto manufacturer in China, were $7.9 million compared to $3.2 million, a 144.6% increase year-over-year. Net sales into North America decreased by 16.2% year-over-year, while sales in Brazil increased by 157% year-over-year. In the third quarter of 2021, the cost of products sold declined by 9.1% year-over-year as our gross margin grew to 15.5%, compared with 11.9% in the third quarter of 2020. When the first nine months of 2021 ended September 30th, according to statistics from CAAM, automobile sales rose 8.7%, with passenger vehicle sales up 11%, and commercial vehicle sales rose 0.5%, due to a 26% increase in bus sales, partially offsetting a 1.6% decline in the larger truck market sales. New energy vehicle sales rose 185.3% in the first nine months of 2021. For the first nine months of 2021, our net sales increased by 32.4% year-over-year to $359.2 million. Gross profit increased by 60.8% year-over-year to $52.4 million. And gross margin increased to 14.6% compared to 12% for the corresponding period in 2020. We are encouraged by our growth of our EPS products, even as we continue to upgrade our traditional hydraulic products. Our EPS products are contributing a higher percentage to our total sales, and we believe that trend will continue. We are especially pleased with our sales into the Chinese electric vehicle market, where we expect to sell over 200,000 EPS units in 2021, including to EV producers Great Wall Cherry Auto, Beijing Auto, and JAC Motors. And we added more technology to a new proprietary EPS product earlier in 2021. These technologies integrate and communicate with the vehicle's main data to create Lane Keeping Assist, LKA, Automatic Parking Assist, APA, Lane Centering, LCK, and Traffic Jam Assistance, TJA functions as part of the company's Advanced Driver Assistance Systems, ADAS, or more commonly referred to as Autonomous Driving Systems. In Europe, we also entered into the OTOP, Off-Tool, Off-Process phase for a new steering system for Alfa Romeo's first luxury compact plug-in hybrid SUV model, the 2021 Tonali. This is the company's first plug-in hybrid powertrain, and the expectation is for orders approximately approximately 100,000 annual units. The Alfa Romeo project is the company's second in Europe. To further our technology base, especially for vehicle control and autonomous driving, we are purchasing 40% of Sweden's Cessna AB. This high-technology company specializes in software and hardware design for advanced steering functions. Cessna's products for motion control have been in production since 2013 and has been tested on EPS, angle overlay systems, steer-by-wire, and fully autonomous vehicles. That's the NHTSA Level 3 to 5. We believe that segment acquisition is a key to advancing our autonomous driving products into the marketplace. Also, our wholly-owned subsidiary, Hubei Headlong Automotive Systems Group, received the highest-rated safety designation, the ISO 430. 26262 called in 2018 ASIL-D from SGS TUV of Germany. Classifying both software systems and hardware components with different safety risks, we received a D certification, the highest, which distinguishes us from many peers. We have developed a large base of customers, growing advanced technologies, and we are strong financially. We are a leader in steering products in the large and commercial vehicle markets in China. However, our goal is to become a larger global supplier as we have a growing presence with global OEMs in North and South America, and we are developing greater penetration in the European, Indian, and African auto markets. Now let me go over the financial results in the third quarter of 2021. In the third quarter of 2021, net sales decreased by 5.4%, to $108.2 million compared to $114.4 million in the same quarter of 2020. The decrease in net product sales was mainly due to the decline in market demand as a result of the ship shortage and other overall market, auto market trends. Sales of the company's hydraulic products decreased 19.3%. Net product sales for the company's EPS products increased by 76% to $29.4 million or 27.2% of net sales compared with $16.7 million or 14.6% of net sales in the third quarter of 2020. Net product sales in North America decreased by 16.2% to $31 million due to lower sales volume compared with $37 million for the same quarter in 2020. Gross profit was $16.8 million in the third quarter of 2021 compared to $13.6 million in the third quarter of 2020. Gross margin was 15.5% compared to 11.9% for the same period of 2020, mainly due to changes in the product mix. Selling expenses were $4.8 million in the third quarter of 2021 compared to $3.8 million in the third quarter of 2020. The higher selling expenses, were mainly related to higher personnel and logistics expenses. Seven expenses represented 4.4% of net sales in the third quarter of 2021, compared to 3.3% in the third quarter of 2020. General administrative expenses, G&A, was $6.2 million in the third quarter of 2021, compared to $5.1 million in the same quarter of 2020. The increase was primarily due to the increased bad debt provision for accounts receivable. G&A expenses represented 5.7 percent of net sales in the third quarter of 2021, compared with 4.5 percent of net sales in the third quarter of 2020. Research and development expenses, R&D, were $5.7 million in the third quarter of 2021, compared to $6.1 million in the third quarter of 2020. R&D expenses represented 5.3% of net sales in the third quarter each of 2021 and 2020. Lower R&D was mainly due to reduced personnel expenses. Income from operations was $0.6 million in the third quarter of 2021 compared to net income, I'm sorry, to income from operations of $0.1 million in the same quarter of 2020. the higher income from operations was mainly due to higher gross profit and higher gross margin in the third quarter of 2021. Other income was $2.4 million in the third quarter of 2021, compared with $0.4 million in the third quarter of 2020, primarily due to higher government subsidies received in the third quarter of 2021. Financial expense net was $0.8 million in the third quarter of 2021 compared with $2.3 million in the third quarter of 2020, mainly due to lower foreign exchange losses. Income before income tax expenses and equity in earnings of affiliated companies was $1.9 million in the third quarter of 2021 compared to a loss before income tax expenses and equity in earnings of affiliated companies of $2.3 million in the third quarter of 2020. The increase of income before income tax expense and equity in earnings of affiliated companies was mainly due to higher other income and lower financial expense compared with the third quarter of 2020. Income tax expense was $2.4 million in the third quarter of 2021 compared to an income tax benefit of $0.2 million for the third quarter of 2020, which would mainly due to an increase in the valuation allowance recognized in the third quarter of 2021. Net loss attributable to parent companies' common shareholders was $0.3 million in the third quarter of 2021 compared to net income attributable to parent companies' common shareholders of $2.4 million in the third quarter of 2020. Diluted loss per share was 1 cent in the third quarter of 2021, compared with diluted earnings per share of 8 cents in the third quarter of 2020. The weighted average number of diluted common shares outstanding was 30,851,776 shares in the third quarter of 2021, compared to 31,113,374 shares in the third quarter of 2020. Now we'll go over nine-month financial highlights. Net sales for the first nine months of 2021 increased by 32.4% to $359.2 million, compared to $271.2 million in the first nine months of 2020. Gross profit for the first nine months of 2021 increased by 60.8% to $52.4 million, compared to $32.6 million in the corresponding period last year. Gross margin for the first nine months of 2021 was 14.6%, compared to 12% for the corresponding period in 2020. For the nine months ended September 30, 2021, gain on other sales amounted to $2.5 million, compared to $2.9 million for the corresponding period in 2020. Income from operations was $4.9 million, compared to loss from operations of $4.1 million in the first nine months of 2020. Net income attributable to parent companies' common shareholders was $6.1 million compared with net loss attributable to parent companies' common shareholders of $1.8 million in the corresponding period last year. Diluted income per share was 20 cents in the first nine months of 2021 compared to diluted loss per share of $0.06 for the corresponding period in 2020. Now we'll go over a few balance sheet items. As of September 30, 2021, total cash, cash equivalents, and pledged cash deposits were $115 million. Total accounts receivable, including notes receivable, were $227.3 million. Accounts payable, including notes payable, were $215.1 million. Short-term loans were $42.2 million. Total parent company stockholders' equity was $326.3 million as of September 30, 2021, compared to $319.4 million as of December 31, 2020. The Business Outlook management reiterated its revenue guidance of $495 million for the full year 2021. 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.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from William Grigzowski. Please announce your affiliation, then pose your question.