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.