China Automotive Systems, Inc.

Good morning everyone and welcome to China Automotive Systems first quarter 2025 conference call. At this time all participants are in a listen only mode and we will be opening the floor for questions following the presentation. If anyone should require operator assistance during this conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Kevin Feese, Investor Relations. Kevin, the floor is yours.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2025 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 Translations. 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 these forward-looking statements due to a number of factors, including those described under the heading RIP factors and the results of operations in the company's Form 10-K Annual Report for the year ended December 31, 2024, 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 when the overall business environment caused uncertainties in the regions where we conduct business, caused our business to suffer in ways 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, increase costs, and reduce revenue. The company expressly disdains any duty to provide updates to any forwarding 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 2025 results for the period ended March 31, 2025. Management will then conduct a question and answer session. The 2025 first quarter results are unaudited and are reported using U.S. GAAP accounting. For the purposes of today's call, I'll review the financial results in U.S. dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy and automobile industry in our market positions. Following our record net sales of $650.9 million for the 2024 year, our net sales increased by 19.9% to $167.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024. All operations reported sales growth with the exception of North America in the first quarter of 2025. Total net sales of electric power steering systems, EPS, increased by 54% year-over-year as our sales mission transitioned to higher technology products. Our Henlong KYB subsidiary achieved 38.2% year-over-year sales growth of its EPS products in the first quarter of 2025. Our largest steering subsidiary, Henlong, which produces traditional hydraulic steering systems for the Chinese passenger vehicle market, reported a sales climb 37.5% year-over-year in the first quarter of 2025. Sales of traditional steering products, the Cherry Auto, increased by 13.5% year-over-year, and sales by Julo's commercial vehicle steering products rallied to 17.4% year-over-year growth in the first quarter of 2025. While North American sales declined by 10.3% year-over-year to $27.2 million due primarily to lower sales to Stellantis, our sales to the Brazilian market increased by 30.2% year-over-year due to higher demand by Stellantis. In the macroeconomy, Chinese GDP growth was 5.4% year-over-year in the first quarter of 2025, consistent with the fourth quarter of 2024. The Chinese economy is stabilized, but it's still facing challenges. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined unit sales of passenger commercial vehicles increased by 11.2% year-over-year to 7.5 million units for the first quarter of 2025. Passenger car unit sales grew 12.9% year-over-year to 6.4 million units And China's passenger vehicle brands sales totaled 4.4 million units and represented 68.1% of total passenger vehicle market sales in the first quarter of 2025. New energy vehicle unit sales grew by 47.1% year-over-year to 3.1 million units, as MEVs were 41.2% of the total car sales in China in the first quarter of 2025. For the first quarter of 2025, Chinese commercial vehicle sales increased by 1.8% year-over-year to 1.05 million units. And exports of automotive vehicle units increased by 7.3% year-over-year to 1.4 million units. Tax incentives, subsidies for scrapping older vehicles and lower interest rates, financing are among the government standards to support the purchases of automobiles in China for 2025. Additionally, local government and private incentives may also aid buyers. Gross profit increased by 18.8% yearly to $28.6 million, compared to $24.1 million in 2024. The gross margin was 17.1% compared to 17.3% in the first quarter last year, up from 15.6% in the fourth quarter of 2024. R&D expenses increased by 64% to $8.7 million from $5.3 million in the first quarter of 2024. The increase in investment was partially due to continuous development of our hydraulic and ECS products. especially our EPS product, which recently started mass production. Also, the increase resulted in the purchase of new molds for a new product beginning in the first quarter of 2025, as well as the project was delayed. A 41.3% increase in operating expenses, including R&D, resulted in a 10.5% year-over-year reduction in income from operations. Net income attributable to the parent company shareholders for deleted shares was 24% versus 27% in the year-ago first quarter. Net cash provided by operating activities was 73.1% year-over-year to $18.1 million for the first quarter of 2025. Total cash and cost equivalents, pledge cash and short-term investments were $135.9 million or approximately $4.50 for delivery to share at March 31, 2025. Our R-EPS steering product developed for Nanjing and Echo has entered mass production in the first quarter of 2025. This product features an electric motor with a unit control and a ball nut and bell drive reduction system to provide steering assist. Our EPS architecture is capable of performing all-time driving functions, such as automatic parking, lane-tooth assist, and lane-follow assist. Versace's U-Run Power Steering Gear Company subsidiary won customer awards and accolades from two major vehicle OEM customers, BK Photon Motors and Sensory Automobile Heavy Truck. Shanshi Zulong provides steering assistance to various commercial vehicles in China. Shanshi Zulong receives dual honors, the Excellent Supplier Series Award and the Excellent Supplier Series Award from the All-Main Business Unit of Shoushan Motors for exemplary product development cooperation, supply guarantees, and quality reliability. In addition, Shanshi Zulong won the Strategic Synergy Award, the highest award given by Shanshi, for future research development and supply chain cooperation. We remain well-positioned with our advanced dealing technologies and diverse product portfolio to address market opportunities in China and overseas. Now let me review the financial results in the first quarter of 2025. Our net sales increased by 19.9% to $167.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024. Net sales of traditional steering products and parts increased by 2.3% to $94.1 million, compared to $92 million for the first quarter of 2024. Net sales of electronic power steering EPS products and parts grew by 54% to $73 million for the three-month end of March 31, 2025, compared with $47.4 million for the same period in 2024. ETF products for the first quarter of 2025 were approximately 43.7% of total sales, compared with 34% of total net sales in the first quarter of 2024. UVM loans export sales were $27.2 million, compared with $30.1 million in the first quarter of 2024. primarily due to lower demand for passenger vehicle products like the Lanthus and the SACU. SACU loan sales increased by 17.4% to $19.7 million from $16.8 million in the 2024 first quarter. Brazil's end loan net product sales increased by 30.2% to $16.5 million in the first quarter of 2025 compared to $12.7 million for the same period from 2024 due to higher demand from Stiletto's NVA in that market. Woohoo sales, which mainly provide steering assistance to carry automobiles in China, increased by 13.5% year-over-year, and sales for other entities increased by 19.1% year-over-year to $34.6 million. Gross profit increased by 18.8% to $28.6 million and $24.1 million, in the first quarter of 2024. Gross margin in the first quarter of 2025 was 17.1%, which was consistent with 17.3% in the first quarter of 2024. Selling expenses increased by 18.3% to $4.8 million from $4.1 million in the first quarter of 2024. This increase in selling expenses was primarily due to higher warehouse and logistical expenses due to higher revenues. Selling expenses represented 2.9% of net sales in the first quarter of 2025 and the first quarter of 2024. General administrative expenses, G&A, increased by 36.4% to $7.6 million, compared with $5.5 million in the first quarter of 2024, mainly due to staff-related expenses, included a one-time severance cost of approximately $1.4 million at one subsidiary. G&A expenses represented 4.5% of net sales in the first quarter of 2025 compared with 4% of net sales in the first quarter of 2024. Research and development expenses, R&D, increased by 64% to $8.7 million compared to $5.2 million in the first quarter of 2024, mainly due to higher R&D activities for new projects and products. R&D expenses represented 5.2% of net sales in the first quarter of 2025 compared to 3.8% in the first quarter of 2024. Other income was $1.9 million for the first quarter of 2025 compared to $2.4 million for the first quarter of 2024. Income from operations declined by 10.5% to $8.6 million in the first quarter of 2025, compared to income from operations of $9.7 million in the first quarter of 2024. The decrease in 2025 first quarter income from operations was primarily due to a 41.3% increase in operating expenses. Interest expense was pushed $0.5 million in the first quarter of 2025 compared to $0.3 million in the first quarter of 2024. Financial income net was $2 million in the first quarter of 2025 compared to financial expense net of $0.01 million in the first quarter of 2024. This change was primarily due to an increase in foreign exchange gains due to foreign exchange volatility Income before income tax expenses and equity in earnings of affiliated companies was $12.1 million in the first quarter of 2025 compared to $11.8 million in the first quarter of 2024. Equity in losses of affiliated companies was $.7 million in the first quarter of 2025 compared with equity in losses of affiliated companies $0.8 million in the first quarter of 2024. Income tax expense was $2.9 million for the first quarter of 2025 as compared to $1.7 million for the first quarter of 2024. This higher tax was primarily due to a higher income before income tax expenses as compared to the same period last year and a higher expected annual attractive tax rate in 2025 based on for the latest annual forecast as compared to 2024. Net income attributable to parent company common shareholders was $7.1 million in the first quarter of 2025 compared to $8.3 million in the first quarter of 2024. The alluded income to share was 24 cents in the first quarter of 2025 compared to net income for the alluded share of 27 cents in the first quarter of 2024. The weighted average number of deleted common shares outstanding was $30,170,172 in the first quarter of 2025 compared to $30,185,702 in the first quarter of 2024. Now let's provide some balance sheets and other financial hybrids. As of March 31, 2025, total cash tax equivalent, and short-term investments were $89.9 million. Total accounts receivable, including notes receivable, were $323.6 million. Accounts payable, including notes payable, were $282.6 million. And short-term bank loans were $66.7 million. Our current ratio was 1.4 to 1, and working capital raised to $154.7 million as of March 31, 2025, compared to $146.2 million as of December 31, 2024. Total parent company's stockholders' equity was $357.5 million as of March 31, 2025, compared to $349.6 million as of December 31, 2024. Net cash flow from operating activities was $18.1 million in the first quarter of 2025, compared with $10.5 million in the first quarter of 2024. Cash paid to acquire property, plants, equipment, and land use rates was $10.3 million in the first quarter of 2025. Here's a thought book. That is the Hedry Interregion Revenue Guidance for the fourth fiscal year of 2025 of $700 million. This target is based on companies' current use or operating in the market conditions, which are subject to change. With that operator, we are ready to begin the Q&A session.

Thank you very much. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. Since you're using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Jonathan Yeres. He's a private investor. Jonathan, your line is live.

Good morning, everybody. My question is, Why did research development increase by 64% in the 2025 first quarter? Will R&D remain at this high level for the 2025 year, or will it vary?

This is a question from one of our investors. He said that the cost of research in the first quarter increased by 64 times compared to last year. But why did it go up so much? And then the second problem is that we look at it year-on-year This customer service will remain at such a high position or there will be some changes From January of this year, the company has added RETS research and development group

We have increased the number of R&D personnel, and at the same time, we have increased the number of R&D modules. Therefore, the total R&D cost of the entire R&D department has increased relatively much. Our overall budget is about 34 million US dollars. Then, it accounts for 5% of sales and revenue. This is also to satisfy domestic high-tech enterprises.

In the first quarter, we did increase our R&D effort and hence the R&D expenses also went up. mainly in the area of our research and development of our EPS products. For this product, we have increased the staffing to help us to further advance new technologies. We also increased some of the equipment design modules, so all that contributed to higher R&D. expenses in Q1. On the four-year basis looking forward, we are seeing about 5% of total revenue give or take around $34 million U.S. dollars on RMB. So, this also, please be mindful, we are, you know, we are maintaining 5% revenue in RMD, and that will help us to qualify high tax status in China, and then we will also in turn receive tax benefits.

Okay. Are you finished with your questions, Jonathan?

Yes. Thank you very much. Thank you.

Thank you very much. And our next question is coming from Gary Nash from Nash Consultants. Gary, your line is live.

Thank you. First, good day to everyone. Two-part question. Could you please comment on the almost $10 million increase in inventories in the first quarter of 2025? And then if you could also comment as what is the outlook for inventory levels in the rest of 2025?

Okay, thank you. 这是另外一个投资人的问题。 他是说第一季度我们的存货增加了1000万美元。 能不能解释一下什么情况? 是不是跟贸易... Is it related to the current peak or other reasons? And then talk about this whole year, the whole year of 2025, what is the situation of the stock market?

To be frank, the increase in the stock market in Egypt has something to do with the trade war. We have to deal with this. The United States may be able to increase the price. 我们提前的话呢 像美国呢 这个发运了一些货 然后这个目前已经入库的话呢 差不多可以用到新年的九月份 差不多还可以用四个月了 就是说 所以说这块存货的话呢 是纯粹是为了 减少这个关税 关税对公司的影响 而提前费的货 就是一个非常规的 另外的话呢 增长能力的话呢 可能减量大概我看了一下 now is 10 million US dollars, that kind of ratio, they are also divided into a 10% and then our sales, then a quarter is increased by 19.9%, so that the sales growth, then it will probably become a normal growth. Well, it looks like the whole year, it should be almost uh, it will almost remain at this level, and then it will be at this level, and then we will Okay.

So, Gary, to answer your question, the inventory increase is actually partly related to the trade war and, you know, as the U.S. administration has been putting a lot of pressure on the tariffs. So in response to the potential pressure, we have made some advance shipments to the U.S. months ahead, so our customers will not experience any disruption in the productions for that consideration. So our inventory in the U.S. has given us up to September in case any kind of volatility policy-wise. So this is sort of an out-of-ordinary situation. of practice, but we have to do something to address such potential risk. That's why our inventory increased. But in terms of pretendings, inventory increased about 10%. Overall revenue, we have increased 19.9%. So it's not a completely outsized increase. And on a four-year basis, we believe we will maintain a healthy level. We will now have an oversized inventory.

Okay.

Does that answer your question, Gary?

Yes, it does.

Thank you very much. Thank you.

Thank you very much. Just a reminder, if there are any remaining questions, you can still join the queue by pressing star 1 on your phone keypad now. Our next question is coming from Michael Fiedler, a private investor. Michael, your line is live.

Good morning. My question is the gross margin was 17.1% for the first quarter of 2025. What is the outlook for the gross margin for the rest of 2025?

Thank you. 这个问题是投资人的问题是关于劳力。 劳力第一季度是17.1。 全年预测我们觉得这个劳力会是在什么一个时期?

This year, the first quarter's interest rate is 17.1% compared to last year's full year, which is almost the same as last year's first quarter. It's a little bit lower than the previous year, but this is also our initiative to reduce some interest rates and then to acquire more market share. Yes, Q1 power margin is slightly higher than 17%.

That's the Q1 gross margin is very similar to comparable, a corresponding quarter in 2004, as well as a full year average gross margin. And we are, you know, we are fully aware this level of gross margin is typically, it's lower than our typical margin in the past. prior to 2024. But this is our, you know, part of our strategy to proactively seeking more market share by using some of the strategy, pricing strategy. Clearly, this has bear fruit. This strategy has bear fruit. So, we are growing revenue gaining market share on a four-year basis, 2025, four-year basis, we believe we will maintain at a similar course margin level and with a slight improvement.

Thank you. Thank you, Michael. That answers my question. Thank you.

Okay, we appear to have no further questions in the queue, but if you would like to ask a question, you can still do so by pressing star 1 on your phone keypad now. Wait a moment in case anyone else pops into the queue.

Okay, I'll hand back over to Kevin then for further comments.

Okay. Well, we have some additional questions that were emailed to us. So I'll go ahead and announce those. So the first one is, what is the impact of the U.S. proposed tariffs on your new order flow? And is it impacting any areas beyond North America? Okay. Okay. What kind of impact will the US tariffs have on our new business? And what impact will it have on the market outside of North America? Will the US tariffs cause some changes in other markets?

We predicted that the tariffs would change at the beginning of the year. Just like I mentioned in the previous question, China is preparing goods in advance. If it is the fastest, the influence of tariffs will be the lowest. After the U.S. administration's announcement of new tariffs, we are also actively communicating with customers to find solutions. Now it seems that it is still very effective. Many customers are willing to take some more tariffs. This part, we hope they can handle this part. As far as I can see, the car's performance is very good. Therefore, in general, this part of the current business basically has no big impact on this part. As for the new order, we are still continuing to proceed. We are still continuing to promote the whole new salt flower. So in terms of tariffs, we mentioned earlier in the beginning of the year,

we anticipated there will be some pressure coming from the administration. So we made a decision to make some about shipment to our U.S. facility. to those inventory help us to carry us to, you know, fulfillable challenges in the coming quarters, which turns out to be useful. And also, as yesterday, in China, U.S. announced the truth on the trade, on the tariffs. which is a very positive development. And we have immediately got in touch with our customer in North America. And we come to a very good conversation and decision. And they all agreed to bear the increased part of the cost. related with tariff. So, to answer your question, overall, the tariff has very minimal impact to our business and the order flow. The new order will continue to develop product towards our customers. And outside the U.S., We still see opportunities as we reported today. We have a pretty healthy strong growth in Brazil. So we are also making some strategic planning of global expansion and that will also at some point when we announce it will help us to further

weather, different kind of fall activities in the marketplace. Okay, thank you. I have another question that was emailed in.

Please provide an update on the manufacturing of the REPF steering product for Nijinko Aleko and have other Automotive OEMs also ordered the REPS product. Yeah. Uh, uh, uh,

In addition to this, we are now also starting to provide this mass supply to Geely Group. In the process of development, the customers also have Guangqi, Yutong, Qingdao. These customers have already completed the sample development. It is also planned to achieve mass production on the new side. With the increase in demand for RETS, Yes, RETS is a growth area.

We have already begun the mass production and shipment to our customers. Nanjing EVACO. In addition to EVACO, the other OEM also placing orders on our new products. They are including Cherry Auto, Guangzhou, Guangxi Auto, the Yifeng Bus, and Qingdao. And for this new, for this ARC EPS product, we have also built a brand-new facility that's dedicated to the production and install new production lines. And so we are pretty excited about this new opportunity presented to us.

Okay, thank you.

Then the last question is, Can you provide an update on the sentience operation and as far as the automatic driving systems? 最后一个问题是想问一下三线AZ内展公司 有没有一些新的订单关于无人驾驶? 好的 目前在手的订单是沃尔沃卡车的

ah ah ah ah ah Another one is the domestic BYD Song model, and it is almost ready to be developed. It should be ready for mass production in the future. This is the second one. The third one is in the process of development, and it is the VW passenger car and the Renault passenger car. These two are all remote control transfer projects. These are some of our latest technologies.

Okay. Yes, we have quite a bit development on Sentient AD, our subsidiary for developing autonomous driving technologies. Our Sentient's main customer now is Volvo truck for the EPS product. We are shipping 3,500 units. And on the full year of this month, on the full year basis, we are targeting 40,000 units for 2025. On the revenue side, for this particular customer, we're booking a 30 million euro for 2025. Other than this particular customer, we have one contract with BYB, their new model, model SONG, S-O-N-G. We are expecting mass production for this particular model autonomous driving technology for 2025. So the mass production will start in 2025. And also, we have entered into Volvo passenger vehicle with our fly-by-wire technology. And there's another automaker with Renault. So we are making very good progress with all different technologies customers on both passenger and commercial side so we are expecting a very meaningful contribution from from our subsidiaries sent here thank you just before we wrap up the call I'm going to check to see if there are any further questions from the audience if you want to press star 1 to join the queue

okay we have no one else in the queue at the moment i'll now hand back over to kevin for any closing remarks well we want to thank everyone for your participation in today's conference call please be safe and we look forward to speaking with you in the future thank you thank you very much this does conclude today's conference call you may disconnect your phone lines at this time and have a wonderful day we thank you for your participation