China Automotive Systems, Inc.

Greetings and welcome to the China Automotive Systems second 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, Mr. Kevin Cease, Investor Relations. Kevin. You may begin.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2023 Second 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 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, 2022, 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 a deteriorating market outlook for automobile sales. The slowdown of regional, national, and international economic growth weakened weakened liquidity and financial condition of our customers or other factors we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment called uncertainties in the region 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 unseen 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'll provide a brief overview and summary of the second quarter and first six months results for the period ended June 30, 2023. Management will then conduct a question and answer session. The 2023 second quarter and first six months 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 review of the recent dynamics of the Chinese economy, the automobile industry, and our market position. The Chinese economy showed signs of recovery as GDP growth rate was 5.5% year-over-year in the first half of 2023, with a 6.3% year-over-year increase in the second quarter, following a 4.5% year-over-year in the first quarter. However, these growth rates were influenced by the low base effect of the pandemic and this lockdown. Quarter over quarter GDP was 0.8% in the second quarter of 2023, as the Chinese economy was still affected by both internal and external factors. Exports declined in the first half of the year, as high inflation in many markets and political tensions reduced foreign demand for Chinese goods. the Chinese property section continued to be affected by regulatory and fiscal policies with concerns of weak consumer confidence affecting demand. Property sales declined by 5.3% in terms of floor space in the first six months of 2023. According to statistics from the China Association of Automobile Manufacturers, CAAM, Automobile sales in China rebounded in the second quarter of 2023, following a sales decline in both passenger and commercial vehicles during the first quarter of 2023. CAAM statistics show that overall automobile sales in China increased by 17.9% year-over-year in the second quarter of 2023, with passenger vehicle sales rising by 19.3% year-over-year and commercial vehicle sales up 10.1% year-over-year. For the first six months ended June 30th, 2023, overall car sales increased by 9.8% year-over-year as passenger vehicle sales grew 8.8% year-over-year and commercial vehicle sales grew by 15.8% year-over-year. New energy vehicle sales rose by 44.1% in the first six months period. These growth numbers also reflect the weak industry sales in the year-ago periods, due to the COVID-19 restrictions. Some car dealers and local governments have provided financial subsidies and coupons to help promote growth in car sales in China. The auto industry is a major employer across the country and contributes to economic growth. Our second quarter revenue growth increased by 8.1% year-over-year, with most divisions reporting higher revenues. Net sales of our advanced electric power steering, EPS, rose by 28.4% year-over-year, and South American sales increased by 43.5%. Sales into North America temporarily declined and were affected by foreign exchange rate volatility. Our Henlong passenger vehicle sales rose by 27.4% due to higher demand, and sales to the commercial vehicle market were also up by 7.2%. We continue to be a longstanding supplier to a large number of vehicle OEMs, including industry leaders such as BYD, the largest EV producer in China, multiple operations of Stellantis, including Jeep, Ram, Fiat, NAFTA, and Mayo in different markets around the world, and Ford Motor Company in North America. In addition to providing steering products, we also collaborate with the research and development programs of our OEM customers to improve current products and create new products to enhance their vehicles. For example, we developed a new series of EPS products with BYD, our partner for 20 years, which are being used in a number of their vehicle models. We developed new steering for Alfa Romero's luxury plug-in hybrid SUV, the Tornado, which is being sold internationally, further expanding our worldwide presence. Our participation in product improvement and new product development provides a testament to their confidence in our excellent research and development capabilities. Each R&D endeavor increases our technology base for future use. Using our EPS design expertise, we have been developing our own proprietary EPS products to advance our Advanced Driver Assistance Systems, ADAS, for Level 4 autonomous driving and beyond. We are leveraging our Sentient AB subsidiary's automotive technology, including software development and hardware design for advanced steering functions, combined with vehicle motion controls to heighten the capability of our autonomous driving program. With hydraulic, EPS, and ADAS steering, our enlarged portfolio of steering products has never been stronger. And we are working on new models of steering for the future to improve our market presence. Our efficient cost control led to an approximate 11% year-over-year decline in total operating expenses, resulting in an 8.2 gain in operating profit in the second quarter. Net income per share grew by 12.9% to 35 cents compared with the same quarter last year. At June 30th, our cash and equivalents and pledge cash was $125.5 million, approximating $4.16 per share. New incentives and policy changes by the central, regional, and local governments are designed to enhance economic growth in future quarters. Pacific markets are targeted, including the automobile, real estate, and services sector, with a greater focus on consumer consumption. Measures including reducing automobile purchase taxes, boosting demand for electric vehicles through improved EV infrastructure, adjusting real estate and banking policies and regulations, and promoting tourism. Private companies are encouraged to increase investment in specific markets, as well as increasing private investment in research and development. Now let me review the financial results in the second quarter of 2023. Our net sales increased by 8.1% year-over-year to $137.4 million, the second quarter of 2023 compared to $127.2 million in the second quarter of 2022. Net sales of traditional steering products and parts increased by 1.1% year-over-year to $95.8 million for the second quarter of 2023 compared to $94.8 million in the same quarter of 2022. Net sales of EPS products rose 28.4% year-over-year to $41.6 million from $32.4 million for the same period in 2022. EPS product sales were 30.3% of the total net sales for the second quarter of 2023 compared to 25.5% for the same quarter in 2022. Export net sales in North American customers decreased by 24.5% year-over-year to $28.9 million in the second quarter of 2023 compared to $38.3 million in the second quarter of 2022. North American sales declined due to less demand and the effects of foreign exchange fluctuations. Sales in Brazil rose 43.5% year-over-year to $12.2 million in the second quarter of 2023 from $8.5 million in the second quarter of 2022. Gross profit was $22.7 million, which is stable to $22.7 million in the second quarter of 2022. Gross margin in the second quarter of 2023 was 16.5% compared to 17.9% in the second quarter of 2022. The decrease in gross margin was mainly due to the changes in the product mix. Gain on other sales was $0.7 million compared to $2.1 million in the second quarter of 2022. Selling expenses decreased by 6.7% year-over-year to $3.8 million compared to $4.1 million the second quarter of 2022, primarily due to lower marketing and office expenses. The appreciation of the U.S. dollar against the RMB also affected expense levels. Selling expenses represented 2.8% of net sales in the second quarter of 2023, compared to 3.2% in the second quarter of 2022. General administrative expenses, G&A, decreased by 6.9% year-over-year to $5.3 million in compared to $5.7 million in the second quarter of 2022, primarily due to the reversal of credit losses and the impact of appreciation of the US dollar against the R&D. G&A expenses represented 3.9% of net sales in the second quarter of 2023, compared to 4.5% of net sales in the second quarter of 2022. Research and development expenses, R&D, decreased by 16.2% year-over-year to $6.6 million compared to $7.9 million in the second quarter of 2022. R&D expenses represented 4.8% of net sales in the second quarter of 2023, compared to 6.2% in the second quarter of 2022. Other income net was $2 million for the second quarter of 2023, compared to $2.8 million for the three months ended June 30, 2022. Income from operations was $7.8 million in the second quarter of 2023 compared to income from operations of $7.2 million in the second quarter of 2022. The increase was primarily due to lower operating costs. Interest expense was $0.3 million in the second quarter of 2023 compared to $0.4 million in the second quarter of 2022. Net financial income was $4 million in the second quarter of 2023 compared to net financial income of $2.5 billion in the second quarter of 2022. The change in net financial income was primarily due to the appreciation of the U.S. dollar against the RMB. Income before income taxes and equity in earnings of affiliated companies was $13.4 million in the second quarter of 2023 compared to income before income taxes expenses and equity and earnings of affiliated companies of 12.2 million dollars in the second quarter of 2022. Net income attributed to a parent company's common shareholders was 10.5 million dollars in the second quarter of 2023 compared to net income attributed with the parent company's common shareholders of 9.4 million dollars in the second quarter of 2022. Diluted earnings per share was 35 cents in the second quarter of 2023 compared to 31 cents per share in the second quarter of 2022. Weighted average number of diluted common shares outstanding was 30,189,537 in the second quarter of 2023, compared to 30,849,009 in the second quarter of 2022. For the first six months of 2023, index sales increased by 6.1% year-over-year to $279.7 million in the first six months of 2023 compared to $263 million in the first six months of 2022. Six-month growth profit was $44.3 million compared to $37.4 million in the corresponding period last year. Six-month growth margin was 15.9% compared with 14.2% in the first six months of 2022. Gain on other sales was $1.4 million in the first six months of 2023 compared to $3 million in the corresponding period last year. Income from operations was $15.5 million in the first six months of 2023 compared to income from operation of $5.7 million in the first six months of 2022. Net income attributable to parent companies' shareholders was $17.3 million in the first six months of 2023 compared to net income attributable to parent companies' common shareholders of $9.4 million in the corresponding period in 2022. Diluted earnings per share increased by 90% year-over-year to 57 cents in the first six months of 2023, compared to diluted earnings per share of 30 cents in the first six months of 2022. Some balance sheet items. As of June 30, 2023, total cash equivalents and pledged cash were $125.5 million. Total accounts receivable, including notes receivable, were $234 million. Accounts payable, including notes payable, were $216.7 million. And short-term loans were $38.5 million. Total parent company stockholders' equity was $317.8 million as of June 30, 2023, compared to $311.7 million as of December 31, 2022. For the business outlook, management has reiterated its revenue growth for the full year 2023 to $560 million. This target is based on the company's current views on operating in the market conditions, which are subject to change. With that, operator, we're ready to begin the Q&A.

Thank you very much. At this time, we are opening the floor for questions. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please pause a moment as we poll for any questions. as a reminder there if you have a question you can press star 1 on your phone keypad now okay if anyone would like to get into the question queue press star 1 on your phone keypad

Okay, we don't appear to have – oh, we do.

We have a question from Robert Jensen, who's a private investor. Robert, your line is live.

Yeah, could you shed a little bit of color? I think you said that your sales to the U.S. were down some. Could you shed some color on that and your expectations going forward and possibly some of the reasons for that?

OK, this is a personal question. He said he saw our sales to North American sales. Now this quarter is a bit down. Can you tell us exactly why? And then talk about the future. How do you see this North American express business sales? OK, the rest of the quarter.

Yes, this quarter, we saw that the sales of North America, mainly the sales of our Hengsheng Company, which is a domestic company, has dropped by almost 24.5%. The main reason is due to the reduction in our customer orders. We actually have no changes in the share of our customers. The share? Okay. Okay, so you're right. The sales to the North America is down during this quarter. To be more specific, it was down 24.5%. The decline of the sales to the North America

is mainly due to the volume decrease. However, our market share within our customers remain the same. That being said, it's actually our customer during the quarter has produced fewer product, finished product and order less. hearing from us. We don't want to speculate here, but we are closely following the situation. Whenever our customers return to their normal volume, our sales will go back up.

In addition to the current situation, we expect that customers will also have new products launched. Then we will also be able to integrate new products into the customer base. In addition, in North America, we are also developing another new customer. This is expected to contribute some new sales revenue to us in the near future.

Okay, so in addition to what we just commented, we are also working with our customers in North America on their new product. So we are expecting to increase the shipment along with their new product rollout. You know, so we are continue to work closely with our customer to penetrate the U.S. market. On the other hand, we're also developing or working on assigning a new client in North America. And please be tuned. We'll make announcements when we get to that stage. So we are laser focused on that and looking forward to continue to expand our market share in North America. Okay, thank you.

What percent of your sales are come from North America currently.

Around 20%. Yeah, 20%. You mean only North America? Yeah, what percentage of total revenues come from North America? It's about 20%, yeah.

Okay, thank you.

Thank you.

Thank you very much. If there will be any remaining questions, please press star 1 on your phone keypad now. Okay, I'm going to hand back over to Kevin for any closing comments as we've reached the end of our Q&A session.

We want to thank you for your participation in today's conference call. Please be safe. We look forward to speaking with you in the future. Thank you.

Thank you, everybody. This does conclude today's conference and you may disconnect your phone lines at this time. Thank you for your participation and have a wonderful weekend.