China Automotive Systems, Inc.

Greetings welcome to the China automotive systems third quarter 2024 conference call at this time all participants are in a listen only mode. A question and answer session will follow the formal presentation, if you would like to ask a question, please press star one at any time during the conference. 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 Cease. You may begin.

Thank you everyone for joining us today. Welcome to China Automotive Systems 2024 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 within the meaning of the Private Securities Litigation Reform Act of 1995. 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 and results of operations in the company's form 10-K annual report for the year 2021-2020 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. 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 unforeseen delay in our operations of the manufacturing, delivery, and assembly processes within any of our production facilities could 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 and summary of the third quarter for the period end of September 30, 2024. Management will then conduct a Q&A session. The 2024 third quarter and nine-month results are unaudited And financial results are reported using US GAAP accounting. For purposes of our call today, I will review the financial results in US dollars. We'll begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy and automobile industry, and our market position. Our net sales of steering products increased by 19.4% year over year in the third quarter of 2024, an increase over the 15.4% year-over-year growth in the second quarter of 2024. Third quarter sales of our traditional steering products grew by 7.4% year-over-year, with our electric power steering EPS products sales surging by 43.5% year-over-year. All of our business units reported sales increases as headlong domestic sales to passenger vehicles were up by 29.6%. Sales to Cherry Auto were 12.4% higher, and our KYB sales to EPS units rose by 54.7%. In the Chinese commercial vehicle markets, our sales rebounded to grow by 10.5% to $17.2 million. Internationally, our sales into North America did decline by $8.9 million year over year, primarily from reduced demand by Stellantis, which reported a double-digit decline in North American shipments in the third quarter of 2024. Our Brazilian operations experienced a 6.9% increase in the 2024 third quarter. For the macro economy, Chinese GDP increased by 4.6 year-over-year in the third quarter of 2024, compared with 4.7% growth in the second quarter of 2024. The Chinese economy in the third quarter continues to show weakness in aggregate demand with the ongoing real estate downturn. However, economic growth has stabilized somewhat as fixed asset investment increased by 3.4% year-over-year, industrial activity rose by 5.8% year-over-year, and retail sales increased by 3.3% year-over-year, although Chinese customers stay relatively risk-averse and price-sensitive. Loan demand has remained weak for the first nine months of 2024, despite more favorable monetary policies. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined sales of passenger and commercial vehicles increased by 2.4% year-over-year to 21.6 million units during the January to September period of 2024. Of this total, passengers Car sales grew by 3% year-over-year to 18.7 million units, while commercial vehicle sales declined by 1.6% year-over-year to 2.9 million units. New energy vehicle sales grew by 32.5% year-over-year to 8.3 million units. New energy vehicles have gained a 38.6% share of the motor vehicle market in China. Exports of automotive vehicles increased by 27.3% year-over-year for the nine months ended September 30, 2024. Purchased subsidies by the government and some auto OEMs, more favorable vehicle trade-in policies and better loan terms all aided auto industry sales. Passenger vehicle sales benefited from government subsidies of up to $2,800 per car for trading in older cars for elective vehicles. Encouragingly, September passenger vehicle sales increased by 1.5% and accelerated to an 11.2% increase in the month of October. Our third quarter gross profit rose by 6.5% year over year, and our gross margin was 16% compared to 18% in the third quarter of 2023. A change in product mix contributed to the lower gross margin in the 2024 third quarter. Cost controls reduced operating expenses by 5.8%, resulting in operating income of $11.1 million, an almost 9% improvement compared with the $10.2 million in the third quarter of 2023. The alluded net income per share was 18 cents in the 2024 third quarter compared to 31 cents in the third quarter of 2023. For the first nine months, In the September 30, 2024, our sales increased by 10.8% to $462.2 million compared to $417.2 million in the same period in 2023. Our nine-month gross margin increased to 17.2% from 16.6% in the same period last year. Income from operations increased by 22.9% year-over-year to $31.6 million for the first nine months of 2024. compared with $25.7 million in the same period of 2023. Diluted earnings per share in the first nine months of 2024 were 69 cents, compared to diluted earnings per share of 89 cents in the first nine months of 2023. Net cash provided by operating activities increased by 54.2% to $16.5 million for the first nine months of 2024, compared with $10.7 million in the first nine months of 2023. Cash-in equivalents plus pledged cash were $138.8 million or approximately $4.16 per share as of September 30, 2024. A special cash dividend of $0.80 per common share was paid in late August 2024 to reward our shareholders. This cash dividend was paid from internal funds and cash flow and reflects our confidence in and our sustainable sales growth and cash flow generation. We also celebrated the 20th anniversary of our NASDAQ listing, highlighting what a small Chinese OEM manufacturing company can accomplish. From small domestic manufacturing serving the domestic Chinese market, we have established a global reach serving Tier 1 companies whose operations include North America, South America, Europe, India, and Asia. And with vehicle leaders such as BYD, Stellantis, Ford Motor Corporation, and Mahinda and Mahindra in India. Our traditional steering parts continue to grow even as our EPS products are expanding rapidly and our advanced driver assist are being enhanced with the technologies of our sentient AB operations in Europe. Now let me review the financial results in the third quarter of 2024. Net sales increased by 19.4% year over year to $164.2 million in the third quarter of 2024. compared to $137.5 million third quarter of 2023. Net sales of traditional steering products and parts increased by 7.4% year-over-year to $98.6 million for the third quarter of 2024, compared to $91.8 million for the same quarter in 2023. Net sales of EPS products rose 43.5% year-over-year to $65.6 million, $45.7 million, for the same period in 2023. EPS products grew to 39.9% of the total net sales for the third quarter of 2024 compared to 33.2% for the same period in 2023. Sale of Headlong's passenger vehicle steering systems increased by 29.6% and sales to Sherry Auto rose by 12.4% due to higher demand. Sales to the commercial vehicle markets increased by 10.5%. Exports to North American customers decreased by $18.7 million in the third quarter of 2024 compared to $27.6 million in the third quarter of 2023. North American sales declined primarily due to decreased demand from one customer. Sales in Brazil were $14.3 million in the third quarter of 2024 compared to $13.3 million in the third quarter of 2023. Net product sales for other entities rose 23.4%, to $35.2 million, compared to $28.5 million in the third quarter of 2023. Gross profit grew by 6.5% year-over-year to $26.4 million, to $24.8 million in the third quarter of 2023. Gross margin was 16% in the third quarter of 2024, compared to 18% in the third quarter of 2023. The change in gross margin was mainly due to changes in the products mix for the third three months and this September 30th, 2024. Gain on other sales was $0.6 million in the third quarter of 2024 compared to $2.2 million in the third quarter of 2023. Salary expenses increased by 14.6% year over year to $4.4 million compared to $3.8 million in the third quarter of 2023. This expense increase was primarily due to higher warehouse and logistics costs related to the increased revenue. Selling expenses represented 2.7% of net sales in the third quarter of 2024 compared to 2.8% in the third quarter of 2023. General administrative expenses, G&A, decreased by 17% year-on-year to $5.1 million compared to $6.1 million in the third quarter of 2023. primarily due to reversal of bad debt provisions for receivables. G&A expenses represented 3.1% of net sales in the third quarter of 2024 compared to 4.4% of net sales in the third quarter of 2023. Research and development expenses, R&D, decreased by 7.1% year-over-year to $6.4 million compared to $6.9 million third quarter of 2023. The decrease was related to lower revenues R&D miscellaneous expenses caused by the reduction in R&D activities for new projects. R&D expenses represent 3.9% of net sales in the third quarter of 2024, compared to 5% in the third quarter of 2023. Other income is $1.3 million for the third quarter of 2024, which is stable compared to the $1.2 million for the three months into September 30, 2023. Income from operations was $11.1 million for the third quarter of 2024, a nearly 10% increase compared to $10.2 million for the three months into September 30, 2023. Interest expense was $0.3 million in the third quarter of 2024 compared to $0.2 million in the third quarter of 2023. Net financial expense was $0.2 million in the third quarter of 2024 compared to net financial income of $0.2 million in the third quarter of 2023. The change in net financial expense and income primarily resulted from an increase in foreign exchange losses due to the foreign exchange volatility. Income before income tax expense and equity in earnings of affiliated companies was $11.9 million in the third quarter of 2024 compared to income before income tax expense and equity in earnings of affiliated companies of $11.2 million in the third quarter of 2023. Income tax expense was $4 million third quarter of 2024 compared to $0.7 million in the third quarter of 2023. Primarily due to a one-time income tax expense settlement for the subsidiaries in the PRC and an increase in the global intangible low tax income, GILTI tax expenses. Net income attributable to Parent companies' common shareholders was $5.5 million in the third quarter of 2024, compared to net income of parent companies' common shareholders of $9.5 million in the third quarter of 2023. Diluted earnings per share was $0.18 in the third quarter of 2024, compared to $0.31 in the third quarter of 2023. The weighted average number of diluted shares outstanding was $30,185,702 in the third quarter of 2024 compared to $30,189,363 in the third quarter of 2023. Now reviewing the results for the first nine months of 2024. Net sales increased by 10.8% year-over-year to $462.2 million in the nine months past. first nine months of 2024, compared to $417.2 million in the first nine months of 2023, primarily due to an increase in sales of both traditional steering and EPS products. Nine months gross profit increased by 15.4% year-over-year to $79.7 million from $69.1 million in the corresponding period last year. Nine-month gross margin increased to 17.2% from 16.6% in the first nine months of 2023. Gain on other sales was $2.8 million in the first nine months of 2024, compared to $3.6 million in the course. Income from operations increased by 22.9% year-over-year to $31.6 million in the first nine months of 2024 from... $25.7 million in the first nine months of 2023. Net income attributable to parent companies' common shareholders was $20.9 million in the first nine months of 2024 compared to net income attributable to parent companies' shareholders of $26.8 million in the corresponding period in 2023. Eluded earnings per share in the first nine months of 2024 were $0.69 compared to eluded earnings per share of $0.89 in the first nine months of 2023. Then we'll go over some balance sheet and other financial highlights. As of September 30, 2024, total cash equivalents and pledged cash was $138.8 million. Total accounts receivable and trillion notes receivable were $314.2 million. Accounts payable and trillion notes payable were $271.8 million, and short-term loans were $59.7 million. Total parent company shares stockholders' equity was $388.6 million as of September 30, 2024, compared to $367.8 million as of December 31, 2023. Our current ratio was approximately 1.4, and the working capital, that's total current assets plus total current liabilities, was $156.6 million as of September 30, 2024. Net cash provided by operating activities was $16.5 million in the 2024 first nine months compared with $10.7 million in the first nine-month period of 2023. Payments to acquire property plant equipment were $18.3 million compared to $12.2 million in the first nine months of 2023. The business outlook. Management has raised the revenue guidance for the full year 2024 to $630 million from $605 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 are now ready to begin the Q&A session.

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 2 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. Once again, that is star 1 to ask a question. Please hold while we poll for questions. Your first question for today is from Gary Nash, a private investor.