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spk01: Greetings. Welcome to the China Automotive Systems first quarter 2023 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. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Thies. You may begin.
spk05: Thank you everyone for joining us today. Welcome to China Automotive Systems 2023 first 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 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 risk factors in the company's form 10-K annual report for the year ended December 31, 2022, as filed with 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 a deteriorating market outlook for automobile sales. To slow down the regional, national, and international 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 impact on the overall business environment, cause uncertainties in the regions where we conduct business, cause our businesses 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 processes 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 first quarter results for the period ended March 31, 2023. Management will then conduct a question and answer session. This 2023 first quarter 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, the automobile industry, and our market position. China's GDP growth rebounded to 4.5% year over year, in the first quarter of 2023 from 2.9% growth in the fourth quarter of 2022 and compared with 4.8% in the first quarter last year. Retail sales grew by 5.8% year-over-year in the first quarter of 2023 with a surge in the month of March to 10.6% year-over-year as lockdowns and other COVID restrictions have been eliminated. Industrial production grew by 3.9% year-over-year in the month of March, increasing from 2.4% in the January-February time period. Investment in infrastructure construction grew by 8.8% year-over-year in the first quarter of 2023, and manufacturing investment rose by 7%, according to statistics from China's Bureau of Statistics. However, investment into the important property development segment declined by 5.8% year-over-year. Automobile sales in China continued to be weak in the first quarter of 2023. Passenger vehicle unit sales declined by 7.3% year-over-year. Commercial vehicle unit sales decreased by 2.9%. According to statistics from the China Association of Automobile Manufacturers, the large sedan market declined by 11.4% in units year-over-year. And the important SUV market was down by 3.4% year-over-year. Mitigating these lower growth numbers somewhat is a 9.2% year-over-year increase in the unit sales of buses and semi-trailer truck unit sales grew by 21.3%. New energy vehicle unit sales also rose by 26.2% year-over-year. In the first quarter, as new energy passenger vehicle sales rose by 25.2%, and the much smaller new energy commercial vehicle sales were 50.3% higher. In late 2022, we announced an expansion of our relationship with BYD, China's largest EV producer and a partner for 20 years. With BYD's research and development team, we have designed a new series of EPS steering products, including CEPS, DP EPS, and R EPS for all BYD's series of products. Due to our DP EPS's superior performance in noise, vibration, and harshness, our DP EPS products have been replacing higher cost R EPS by BYD, especially for BYD's high-end vehicle models, the Tang and the Han. We continue to work closely with BYD on new steering product developments. Another step expanding our international presence is that Alfa Romeo's luxury plug-in hybrid SUV model, the Tenali, is now being marketed in the U.S. beginning in 2023. Alfa Romeo is a subsidiary of Stellantis, and we have been a long-time supplier of steering to other brands under their umbrella, including Jeep, Ram, and Fiat. Beyond strengthening our presence in the European markets, Tenali sells sales in the U.S. market further expands our presence there, in addition to our production exports to Fiat Chrysler Automobiles, FCA, and Ford Motor Company in North America. Sales in North America increased by 7.6% year over year, mostly due to a higher demand from FCA, while sales in our Brazilian operation grew by 2.9% year over year. We continue to make progress with improving our proprietary EPS products to develop our own advanced driver assistance systems, ADAS, using our AP04 platform for level four autonomous driving. We continue to integrate technologies from our Sentient AB subsidiary into our products. We are also working with Sentient to provide enhanced steering to their customers. Our profitability improved in the 2023 first quarter, led by greater sales of products with higher technology content, especially our rising sales of EPS products. These sales, combined with ongoing cost control measures, generated gross margin improvement of 4.6% year-over-year in the 2023 first quarter to 15.2% from 10.8% in the year-ago same quarter. Total operating expenses declined by approximately 15.6% year-over-year in the first quarter, led by a 21.5% reduction in both selling and R&D expenses. The income per share of $0.23 in the 2023 first quarter compared with zero in the year-ago same quarter. We maintained our financial strength with cash and cash equivalents pledged cash and short-term investments of $164.3 million as of March 31, 2023, and parent company stockholders' equity was $322.8 million. Sales of our traditional products to our legacy customers in China remain steady in the first quarter. As our product portfolio of EPS has grown, so has our customer base for these products in China. We anticipate that the Chinese economy will continue to recover from the COVID lockdowns and restrictions with a resurgence of past consumer buying patterns aided by government vehicle incentives, which will benefit the automobile industry over the next several quarters. Now, let me review the financial results in the first quarter of 2023. Net sales increased by 4.3% to $142.2 million in the first quarter of 2023, compared to $136.4 million in the first quarter of 2022. The net sales increase was mainly due to the gradual recovery of the Chinese economy post COVID-19. Excuse me. Net sales of traditional steering products and parts were $94.4 million for the first quarter of 2023, which is consistent with $95.4 million for the same period in 2022. Net sales of electric power steering EPS products rose 16.6% to $47.8 million from $41 million for the same period in 2022. Henlong KYB sales of passenger vehicle EPS products surged by 24.8% year-over-year to $37.2 million. EPS product sales were 33.6% of the total net sales for the first quarter of 2023, compared with 30.1% for the same period in 2022. North American net export sales rose by 5.5% to $34.7 million in the first quarter of 2023, compared with $32.9 million in the first quarter of 2022. Steering product sales to the commercial vehicle markets declined slightly year over year in the 2023 first quarter. Gross profit. climbed by 46.9%, $21.6 million from $14.7 million in the first quarter of 2022. Gross margin in the first quarter of 2023 was 15.2% compared to 10.8% for the first quarter of 2022, mainly due to a change in the company's product mix and an increase in average selling prices for the three months ended March 31, 2023. Gain on other sales was $0.7 million compared to $0.9 million in the first quarter of 2022. Selling expenses declined by 20.9% to $3.4 million from $4.3 million in the first quarter of 2022. This decline in selling expenses was primarily due to lower transportation, marketing, and office expenses and the impact from appreciation of the U.S. dollar against the RMB. Selling expenses declined represented 2.4% of net sales in the first quarter of 2023 compared to 3.2% in the first quarter of 2022. General administrative expenses were $4.8 million, which is consistent with the $4.8 million of the first quarter of 2022. G&A expenses represented 3.4% of net sales in the first quarter of 2023 compared with 3.5% of net sales in the first quarter of 2022. Research and development expenses are indeed decreased by 21% to $6.4 million compared to $8.1 million in the first quarter of 2022, mainly due to a decrease of tooling charges and the depreciation of the RMB against the U.S. dollar. R&D expenses represented 4.5% of net sales in the first quarter of 2023 compared to 6% in the first quarter of 2022. Net other income. was $1.5 million for the first quarter of 2023 compared to $3.5 million for the first quarter of 2022. This decrease was mainly due to less government subsidies received in the first quarter of 2023. Income from operations was $7.7 million in the first quarter of 2023 compared to a loss from operations of $1.5 million in the first quarter of 2022. The 2023 first quarter income was primarily due to higher gross profits and lower operating expenses compared with the first quarter of 2022. Interest expense was $0.2 million in the first quarter of 2023 compared to $0.4 million in the first quarter of 2022. Net financial loss was $0.4 million in the first quarter of 2023 compared with the net financial income of $2 million in the first quarter of 2022. And that financial loss in the first quarter of 2023 was primarily due to foreign exchange losses. Income before income tax expenses and equity in earnings of affiliated companies was $8.6 million in the first quarter of 2023 compared to $3.6 million in the first quarter of 2022. The increase in income before income tax expenses and equity in earnings of affiliated companies In the first quarter of 2020, it was mainly due to higher income from operations, partially offset by a loss in net financial income. Equity in income of affiliated companies was $0.1 million in the first quarter of 2023, compared with equity in loss of affiliated companies of $2.5 million in the first quarter of 2022. net income attributable to parent company's common shareholders was $6.8 million in the first quarter of 2023 compared to a net loss attributable to parent company's common shareholders of $0.1 million in the first quarter of 2022. Diluted income per share was 23 cents in the first quarter of 2023 compared to a net loss per share of nil in the first quarter of 2022. The weighted average number of diluted common shares outstanding was 30,193,082 shares in the first quarter of 2023, compared to 30,851,776 shares in the first quarter of 2022. Management has reiterated revenue guidance for the full fiscal year 2023 of $560 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 now ready to begin the Q&A session.
spk01: Certainly. 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 tone will indicate your line is in the question queue. You may press star two 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. One moment while we poll for questions. Your first question for today is coming from William Gregozeski at Green Ridge Global.
spk06: Hi, I have a couple questions. The Hubei Hang Long Revenue is up quite a bit from the fourth quarter. Is that related to that alpha male vehicle or just additional shipments from kind of a tough fourth quarter? And where do you see that segment for the year trending?
spk02: This is a very interesting question.
spk03: He said that the first quarter sales of Hubei Henglong is growing very fast. But I don't know if this is because of the alpha male or other factors.
spk04: So Hubei Henglong's first quarter revenue increased by
spk03: a little over 5%, and the dollar amount increased by 1.7 million. The main driver for that increase is still the North America business. Aperol Mayo is being put into a different division, Indo-Hano's division's revenue.
spk02: So to answer your question, it's still North America business.
spk06: Okay, and do you guys think the revenue for Hubei Henglong is going to stay up above $30 million per quarter for the remainder of the year?
spk03: Okay. It's going to be above It's going to be in the range of $30 million to $35 million every quarter fluctuate this year.
spk06: Okay, great. And then on the gross margin side, are you guys still expecting that to be higher for 2023 than all of 2022?
spk02: Is it still expected to be higher than 2022?
spk03: This year's 1st quarter, our interest rate reached 15.2%. Compared to last year's 1st quarter, 10.8%, it has improved a lot.
spk04: The reason is that Hubei is very strong, and Brazil is very strong. The interest rate of these two companies has significantly improved. And Shennong KYB is a major improvement. The previous two companies are more interested in the profit-making aspect, which is a positive change for us. Hubei Shennong KYB is more interested in the improvement of our quantity, the economic scale of the economy, and the development of our products in a more high-end way. So in the end, this year's net profit is better than last year's net loss.
spk03: In the first quarter of 2023, the gross margin was 15.2%, which is a very significant increase from Tier 1 2022 of 10.8% gross margin. The main factor attributable to these segment of our business. One is the Hubei Hanlong. The second is Brazil, our Brazil business, Hanlong business. And the last piece is the Hanlong KYB. Now, the first two line of business helped drove the gross margin appreciation is the is also because it's the forex change. The stronger dollar definitely helped with our gross margin expansion. And in terms of KYB business, mainly due to the volume increase. Also, our high end product has increased, which is helping the margin expansion. And lastly, the overall volume increase helped us achieve better economy scale. That also is beneficial to our gross margin. So overall, yeah, 2023, the gross margin will be higher than 2022. With this pace, we believe it's going to be continued to be strong. Overall, 2023 is going to be a better year on the gross margin than 2022. Okay.
spk06: All right. And then last question was, you previously mentioned about 6% to 6.5% of revenue for R&D on a quarterly basis, and it was quite a bit lower than that in the first quarter. Is that still a good range or is that more of an annual range? How should we look at that?
spk03: Is that still a good range or is that more of an annual range? How should we look at that?
spk04: The first quarter, you're right. Your observation is correct. Our R&D expense accounted for the total revenue is lower. There are some one-time events. There's also some of the
spk03: the activity related to the lower module fees. But overall, only for what we believe the R&D expenses are going to be between 5% to 5.5% of the total revenue.
spk07: Okay, great. Thank you. Thank you. Thank you.
spk01: Once again, if there are any questions or comments, please press star 1 on your telephone keypad. We have reached the end of the question and answer session and I will now turn the call over to Kevin for closing remarks.
spk05: We thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you again in the future.
spk01: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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