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spk01: Good day, ladies and gentlemen, and welcome to the China Automotive Systems fourth quarter and fiscal year 2021 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.
spk05: Thank you. Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2021 fourth quarter and full year 2021 conference call. Joining us today are Chairman Chen and 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 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 heading risk factors in the company's form 10K annual report for the year ended December 31, 2020, as filed with the Securities and Exchange Commission, and for the year end December 31, 2021. And in other documents filed by the company from time to time to 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, the slowdown in regional and national economic growth, weakened liquidity and financial conditions 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 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, 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, excuse me, in summary of the fourth quarter and four-year results for the period ending December 31, 2021. Management will then conduct a question and answer session. The following 2021 fourth quarter financial results are unaudited, and the year results are audited, and all results 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, the automobile industry, and China automotive's market positions. China's GDP growth slowed to 4% in the fourth quarter of 2021 compared with a year ago. A number of concerns affected the growth rate in the fourth quarter, including lower real estate and construction activities, new outbreaks with COVID-19 causing supply interruptions, and lower retail spending. Manufacturing slowed as momentary power shortages arose, and supply of automobile computer chips was unable to meet demand. In this challenging environment, Chinese automobile sales declined year-over-year each month in the fourth quarter of 2021. According to statistics from the China Association of Automobile Manufacturers, CAAM, passenger vehicle sales in October were down 5% year-over-year, November sales by 4.7%, and down by 7.1% in December compared with 2020. Chinese commercial vehicle sales declined at a higher rate each month. Sales of commercial vehicles in October declined by 29.7% year-over-year, with truck sales down by 31.8%. In November, commercial vehicle sales were down by 30.3%, with truck sales down 31.9%. In December 31, sales decreased by 20%, with truck sales declining by 21%. Reflecting the auto industry headwinds, our sales in the fourth quarter of 2021 declined but by only 5.2% to $138.8 million from $146.5 million in the fourth quarter of 2020. Fourth quarter income from operations rebounded to profitability compared to a loss a year ago. We reduced our selling expenses and the significant decline in general and administrative expenses in the fourth quarter of 2021 was due to a one-time non-recurring expected credit loss provision of $6.4 million related to a customer's bankruptcy reorganization proceeding in the fourth quarter of 2020. Net income attributed to the company's common shareholders was $5 million or diluted net income per share of 16 cents. in the fourth quarter of 2021 compared to a net loss in the fourth quarter last year and a net loss in the third quarter of 2021. For the full year, CAM statistics reveal that overall sales of automobiles in China grew by only 3.8% year over year. Sales of Chinese passenger vehicles were 6.5% higher in 2021 than in 2020, as sedan sales rose by 7.1%, SUV sales increased by 6.8%. MPV sales were 0.1% higher, and crossover vehicle sales grew by 0.8%. Sales in the commercial vehicle markets declined by 6.6% in 2021, as the bus industry sales increased by 12.6%, but the larger truck market declined by 8.5%. Full-year 2021 sales of commercial vehicles were impacted by the government-mandated national implementation of the more expensive and stricter National Six Emission Standard in July of 2021. This new emission standard created a significant pre-buy of National Five vehicles, followed by a downturn in sales of new trucks in the second half of 2021. R&S sales in 2021 increased by 19.3% to $498 million, As our passenger vehicle steering gear sales increased by 26.5% year over year, our sales to commercial vehicle markets suffered a decrease of 16%. North American revenues grew by 10.4%, and our Brazilian operations also had strong growth. Sales to our carry automobile customer grew by 90.2%. Our advanced hydraulic product sales rose by 3%. 7.6% in our electric power steering EPS revenue increased 86%, including a 53.1% gain in our Henlong KYB subsidiary in 2021. EPS sales represented 23.2% of total revenues compared with 14.8% a year ago. Great Wall, Cherry Auto, Beijing Auto, and JAC Motors began using our EPS products in 2021. We introduced a new proprietary EPS product in 2021, 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 systems, ADAS. This system is an industry milestone for the first time a Chinese domestic steering producer drove the entire product development cycle in-house. To further enhance our MEV products, we purchased a 40% interest in Sweden's Sentient AB, a world leader in steering and vehicle control software and hardware, specializing in advanced steering functions, vehicle motion control, and the fast-growing autonomous driving market. To enhance our position in the European NEV markets, we introduced new steering for Alfa Romeo's first luxury plug-in hybrid SUV, the model 2021 Tonali. Sophisticated technology in European vehicles present new targets for advanced NEV steering products. Our wholly-owned subsidiary, G.B. Henlong Automotive Systems Group, received the ISO 26262 2018 ASIL D, which is the automotive safety integrity level certification from SGS TUV. ISO 26262 2018 ASIL safety standards range from A to D, with D being the most stringent safety standard. RD certification, provides further evidence to our technology proficiency and separates us from many peer companies. Net sales were 19.2% higher year-over-year in 2021. Gross margin increased to 14.5%, with greater sales of advanced hydraulic and especially EPA product sales. We returned a profitable operation compared with a loss last year, as operating expenses grew by only 4.6%, despite a nearly 10% increase in research and development spending. Net cash flow from operating activities was $28.3 million in 2021, and total cash and cash equivalents, pledged cash, and short-term investments were $161.3 million, or approximately $5.23 per share. Our EPS product line sales grew as more technologies were added, and Sentient AD will add even more advanced technology to enhance the capabilities of our NAD products in the future. The Chinese economy and automobile industry still have challenges ahead, but passenger vehicle sales have risen in the first two months of 2022. Banks have lowered rates, and government policies are now more growth-oriented. We will use our strong financial resources and advanced products to grow our market presence with global OEMs and markets around the world. Now let me review the financial results in the fourth quarter of 2021. In the fourth quarter of 2021, net sales decreased by 5.3% to $138.8 million, compared to $146.5 million in the same quarter of 2020. The net sales decrease was mainly due to a change in the product mix and lower demand for automobiles in the fourth quarter of 2021 compared with the fourth quarter of 2020. Gross profit was $19.7 million in the fourth quarter of 2021 compared to $22.8 million in the fourth quarter of 2020. Gross margin in the fourth quarter of 2021 was 14.2% compared to 15.6% in the fourth quarter of 2020. primarily due to lower sales volume and a change in product mix. Gain on other sales was $1.8 million in the fourth quarter of 2021 compared to $1.4 million in the fourth quarter of 2020. Selling expenses were $3.4 million in the fourth quarter of 2021 compared to $5.6 million in the fourth quarter of 2020. Selling expenses represented 2.4% of net sales in the fourth quarter of 2021 compared to $3.8 percent in the fourth quarter of 2020. General and administrative expenses, G&A expenses, were $7.6 million in the fourth quarter of 2021 compared to $14.3 million in the same period in 2020. G&A expenses represented 5.5 percent of net sales in the fourth quarter of 2021 compared to 9.8 percent of net sales in the fourth quarter of 2020. The significantly higher G&A expenses in the fourth quarter of 2020 were mainly attributable to a one-time non-recurring expected credit loss provision of $6.4 million related to a customer's bankruptcy reorganization proceeding. Research and development expenses, R&D, were $9.9 million in the fourth quarter of 2021 compared to $8.3 million in the fourth quarter of 2020. R&D expenses represent 7.1% of net sales, in the fourth quarter of 2021 compared to 5.7% in the fourth quarter of 2020. Higher R&D expenses were mainly related to higher investments in EPS and NEV products. Income from operations was $0.6 million in the fourth quarter of 2021 compared with a loss from operations of $4 million in the fourth quarter of 2020. Increase in the income from operations in the fourth quarter of 2021 was mainly due to a 25.9% year-over-year decrease in total operating expenses as both selling and G&A expenses declined significantly. Interest expense was $0.5 million in the fourth quarter of 2021 compared to $0.4 million in the fourth quarter of 2020. Financial expense was $1.5 million in the fourth quarter of 2021 compared with $2 million in the fourth quarter of 2020. Loss before income tax expense and equity in earnings of affiliated companies was $0.4 million in the fourth quarter of 2021 compared to a loss of $5.7 million in the fourth quarter of 2020. Income tax expense was $0.7 million in the fourth quarter of 2021 compared to an income tax expense of $1.9 million for the fourth quarter of 2020, mainly due to a change in the valuation allowance recognized in the fourth quarter of 2021. Net income attributable to parent company's common shareholders was $5 million in the fourth quarter of 2021 compared to a net loss attributable to the parent company's common shareholders of $3.2 million in the fourth quarter of 2020. The net loss in the fourth quarter of 2020 was mainly due to a one-time non-recurring $6.4 million expected credit loss provision for a customer's bankruptcy reorganization, net of minority interest. Diluted income per share was $0.16 in the fourth quarter of 2021, compared to diluted loss per share of $0.10 in the fourth quarter of 2020. The weighted average number of diluted shares outstanding was $30,853,822 in the fourth quarter of 2021, compared to $31,851,776 in the fourth quarter of 2020. Now we'll review the full year 2021 highlights. Net sales increased by 19.3% to $498 million in 2021, compared to $417.6 million in 2020. The increase was mainly due to recovery in net sales in the first half of 2021 from the COVID-19 pandemic's impact on automobile sales in China and North America. In 2021, sales of hydraulic products increased by 7.6 year-over-year, while total sales of EPS systems increased by 86% year-over-year. EPS sales represented 23.2% of total revenue in 2021, compared with 14.8% in 2020. Net sales of vehicle steering systems to the companies North America and customers increased by 10.4% year-over-year in 2021. Gross profit in 2021 increased by 30.4% to $72.1 million, compared to $55.3 million in 2020. The gross margin increased to 14.5% from 13.3% in 2020, mainly due to changes in the product mix. Gain on other sales amounted to $4.4 million, generally consistent with $4.3 million in 2020. Selling expenses were $18.3 million in 2021, compared to $14.5 million in 2020, mainly due to higher transportation expenses. Selling expenses represented $3.7 million in net sales in 2021 compared to $3.5 million in 2020. G&A expenses declined 11.6% to $24.4 million in 2021 from $27.6 million in 2020. The decrease is mainly due to a decreased provision of allowance for DAFO accounts related to one customer's bankruptcy reorganization in November 2020, which was partially offset by higher personnel costs. G&A expenses represented 4.9% of net sales in 2021 compared to 6.6% of net sales in 2020. R&D expenses were $28.2 million in 2021 compared to $25.7 million in fiscal year 2020. The increase was primarily due to a higher investment in EPS products. R&D expenses were 5.7% of net sales in 2021 compared to 6.2% of net sales in 2020. Income from operations was $5.5 million in 2021 compared to a loss from operations of $8.1 million in 2020. The income was mainly due to a 30.4% increase in gross profit with an offsetting impact of a 4.6% increase in total operating expense in 2021. The loss in 2020 was primarily due to lower net sales and a one-time not recurring expected credit loss provision related to a customer's bankruptcy reorganization. Interest expense was $1.4 million in 2021, a slight decline from the $1.6 million in 2020. Net financial expense was $2.4 million in 2021, compared with $4.9 million in 2020, primarily due to a decrease in foreign exchange losses. Income before income tax expenses and equity and earnings of affiliated companies was $8.4 million, compared to a loss before income tax expenses and equity and earnings of affiliated companies of $12.2 million in fiscal year 2020. The change is primarily due to generating income from operations and lower net financial expenses in 2021. Net income attributable to parent company shareholders was $11.1 million in 2021 compared to net loss attributable to parent company's common shareholders of $5 million in 2020. The loss in 2020 was mainly due to the lower sales and a one-time loss. now recording $6.4 million expected credit loss provision from a customer's bankruptcy. Net of minority interest. Diluted net income per share was $0.36 in 2021 compared to diluted loss per share of $0.16 in 2020. The weighted average number of diluted common shares outstanding was $30,855,431 in 2021 compared to $31 million 77,196 in 2020. Next, we'll review a few balance sheet items. As of December 31, 2021, total cash, cash equivalents, pledged cash, and short-term investments were $161.3 million. Total accounts receivable, including notes receivable, were $210.3 million. Accounts payable, including notes payable, were $228 million. And short-term bank loans, were $47.6 million. Total company stockholders' equity was $320 million as of December 31, 2020, compared to $303.2 million as of December 31, 2020. Net cash flow from operating activities was $28.3 million in 2021, compared with $57.4 million in 2020. Cash paid to acquire property, plants, and equipment and land use rates was $9.3 million in 2021, compared with $15.8 million in 2020. The business outlook. Management provides revenue guidance for fiscal year 2022 of $510 million. This target is based on the company's current views on operating the market conditions, which are subject to change. With that operator, we're ready to begin the Q&A session.
spk01: Operator? Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask 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 Gregzowski. Please announce your affiliation, then pose your question.
spk02: Hey, guys. Did you say that sales in Brazil were up 90% in 2021?
spk04: Your question is sales in Brazil up 90%. You asked why sales up, right?
spk02: I guess I wanted to confirm that you guys said it was up 90%, and then my follow-ups were going to be, you know, how much is that in dollars, and then what are the expectations for that going forward?
spk04: Okay. This is our analyst, Bill Gretzky's question. I understand. His first question is, he heard us talk about this Brazil business, that sales have increased by more than 90%. He wants to know if this is How much is the absolute value? How much is the US dollar? Then let's talk about the future. What is the trend?
spk03: Last year, our sales revenue in Brazil was about 1.64 billion RMB. The US dollar is about 26 million US dollars. Last year, because there were new orders coming in, so the profit was relatively large. Okay. Yes, in terms of dollar, the revenue in Brazil, our revenue in Brazil, it experienced a robust growth in 2021.
spk04: In the amount, the total amount from our Brazil business in 2021 is was approximately 164 million RMB, all 26 million US dollars. That's mainly attributable to our growth and new key account. We signed some large customers. And looking into 2022, we believe we will have further growth in 2022.
spk02: Okay, great, great. Did the, on the EPS products, were the margins, did the margins continue to rise in the fourth quarter, and is that still expected to see margin improvement going through 2022? EPS 产品, 它的问题是, 我们的 EPS 产品的毛利 是不是在继续地
spk04: uh uh uh uh
spk03: Um,
spk04: Yes, the answer is yes. EPS margin will continue to improve and increase in 2022. We foresee a 20 to 30% volume increase in 2022, and mainly due to very strong demand. And so, clearly, demand outstripped the supply on the EPS product. So that gave us a good advantage in terms of pricing. And also, with the growth of the volume, we are achieving better economy of scale. So that will also help with our growth margins.
spk02: Okay, great. What is management's outlook for the 2022 year in China alone, the domestic market?
spk03: In general, there should be some growth. In the middle, there will be many challenges. On the one hand, the recent epidemic in Shanghai is more serious. Will it affect the whole country? On the other hand, the advantageous factor is that the country is also stimulating the economy, including reducing interest rates. OK. So overall, we see the overall Chinese auto market will
spk04: experienced a slight increase in 2022. Despite the volatility, which we expect there will be volatility throughout the course of a year. For example, we've already seen the news of the lockdown in this large city like Shanghai. However, we see Chinese governments are rolling out more favorable policy to stimulate the economy, such as cutting the interest rate, and there are talks about lowering the taxes, and also new policy to help with the property market. And so overall, we think the government's policy will offset the challenges and so will give us the whole auto industry a more net-net positive push for 2022. That's why we see a slight increase in 2022 from a year before.
spk02: Okay, great. And last question is, can you provide a little more detail about the 5.9 million equity and earnings of affiliated gain in the fourth quarter? Okay.
spk04: Yeah.
spk03: Okay. That gain was associated with our investment
spk04: We have announced in the past years we are, we invested in three investment funds. Some are early stage venture funds specialized in automotive space. One of the portfolio company, there are a number of company, a few companies went public last year. and they've done very well. In particular, this one company from city of Chongqing then went to the tech board. They went IPO on the tech board. And their main business is in the hydrogen technology for the automotive sector, which is a very, very hot sector. So the stock has experienced a very strong growth since their IPO, and so we are indirectly benefiting from it.
spk02: Okay, perfect. Thank you, guys.
spk04: Thank you.
spk01: Once again, if there are any questions or comments, please press star 1 on your phone at this time. There are no questions in queue at this time. Okay.
spk05: We want to thank everybody for joining us today, and please be safe, and we look forward to talking to you in the future.
spk01: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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