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 your host Kevin Tease in better 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 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 meeting of the Private Security 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 10k annual report for the year ended December 31, 2024 as filed with the Securities and Exchange Commission and another document filed by the Commission 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 we cannot predict, and materially end adversely in fact our business, financial condition, and 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 disdains any duties 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 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 US GAAP accounting. For the purposes of today's call, I will review the financial results in US 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 position. Following our record net sales of $650.9 million dollars, with the 2024 years, our net sales increased by .9% to $167.1 million dollars in the first quarter of 2025. Compared to $139.4 million dollars 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 64% -over-year as our sales missed transitions to higher technology products. Our Henlong JYB subsidiary achieved .2% -over-year sales growth of its TCS 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 the sales climbed .5% -over-year in the first quarter of 2025. Sales of traditional steering products, the Cherry Arno, increased by .5% -over-year, and sales by Julo's commercial vehicle steering products rallied to .4% -over-year growth in the first quarter of 2025. While North American sales declined by .3% -over-year to $27.2 million due primarily to Stellantis, our sales to the Brazilian market increased by .2% -over-year due to higher demand by Stellantis. In the macroeconomy, Chinese GDP growth was .4% -over-year in the first quarter of 2025, consistent with the fourth quarter of 2024. The Chinese economy is stabilized, but is still facing challenges. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined unit sales of passenger commercial vehicles increased by .2% -over-year to 7.5 million units for the first quarter of 2025. Passenger car unit sales grew .9% -over-year to 6.4 million units. In China's passenger vehicle brand sales totaled 4.4 million years, and represented .1% total passenger vehicle market sales in the first quarter of 2025. New energy vehicle unit sales grew by .5% -over-year to 3.1 million units, and MEVs were .2% of the total car sales in China in the first quarter of 2025. For the first quarter 2025, Chinese commercial vehicle sales increased by .8% -over-year to 1.05 million units, and exports of automotive vehicle units increased by .3% -over-year to 1.4 million units. Tax incentives, subsidies for scrapping older vehicles, and lower-interest financing are among the government's standards to support the purchases of automobiles in China for 2025. Additionally, local government and private incentives may also increase. A .3% increase in operating expenses including R&D resulted in a .5% -over-year reduction in income from operations. That income attributable to the parent company shareholders for deleted shares was 24 cents versus 27% in the year-ago first quarter. Net cash provided by operating activities rose .1% -over-year to $18.1 million for the first quarter 2025. Total cash and cost equivalents, pledge cash, and short-term investments were $135.9 million for approximately $4.50 per deleted share at March 31, 2025. Our ECS Steering product developed for managing VECO has incremented 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 ECS architecture is capable of performing autonomous driving functions such as automatic parking, lane-suit assist, and lane-file assist. Our Sanxi Zhulong Power Steering Gears company subsidiary won customer awards and accolades from two major vehicle OEM customers, BK Photon Motor and Sanxi Automobile Heavy Truck. Sanxi Zhulong provides steering assistance to various commercial vehicles in China. Sanxi Zhulong received dual the excellent supplier series award and excellent supplier series award from the All-Man Business Unit of Photon Motors for exemplary product development cooperation, supply guarantees, and quality reliability. In addition, Sanxi Zhulong won the strategic synergy award, the highest award given by Sanxi, for future research development and supply chain cooperation. We remain well positioned with our advanced steering technologies and diverse product portfolio to adjust market opportunities in China and overseas. Now let me review the financial results in the first quarter of 2025. Our net sales increased by .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 .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. EPS products for the first quarter of 2025 were approximately .7% of total sales compared with 34% of total net sales in the first quarter of 2024. UV hand lungs export sales were $27.2 million compared to $30.1 million in the first quarter of 2024 primarily due to lower demand for passenger-reviewable products by Stellantis and the Sanxi-Hu lung sales increased by .4% to $19.7 million from $16.8 million in the 2024 first quarter. The zil and lung net product sales increased by .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 Stellantis and the Sanxi-Hu market. WuHu sales which mainly provide steering assistance to cherry automobile in China increased by .5% -over-year and sales for other entities increased by .1% -over-year to $34.6 million. Gross profit increased by .8% to $28.6 million in the first quarter of 2024. Gross margin in the first quarter of 2025 was .1% which was consistent with .3% in the first quarter of 2025. Selling expenses increased by .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 .9% of the net sales in the first quarter of 2025. General administrative expenses, G&A, increased by .4% to $7.6 million compared with $5.5 million in the first quarter of 2024. Mainly due to staff related expenses including a one-time selling cost of approximately $1.4 million at one subsidiary. G&A expenses represented .5% of net sales in the first quarter of 2025 compared with 4% of net sales in the first quarter 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 in new projects and products. R&D expenses represented .2% of net sales in the first quarter of 2025 compared to .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 .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 .3% increase in operating expenses. Interest expense was $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 liability. 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 $0.7 million in the first quarter of 2025 compared with equity in losses of affiliated companies of $0.8 million in the first quarter of 2024. Income tax expense was $2.9 million for the first quarter of 2025 compared to $1.7 million for the first quarter of 2024. This high tax was primarily due to a higher income tax expenses as compared to the same period last year and a higher expected annual attractive tax rate in 2025 based on 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. Deluded income per share was $0.24 in the first quarter of 2025 compared to net income for the diluted share of $0.27 in the first quarter of 2024. The weighted average number of diluted common shares outstanding was ,170,172 in the first quarter of 2025 compared to ,185,702 in the first quarter of 2024. Now let's provide some downsheets and other financial high rates. As of March 31, 2025 total cash, tax equipment, and short-term investments were $89.9 million. Total accounts receivable including notes receivable was $323.6 million. Shops payable including notes payable were $282.6 million and short-term bank loans were $66.7 million. Our current ratio is 1.4 to 1 and working capital raised to $164.7 million as of March 31, 2025 compared to $146.2 million as of December 31, 2024. Total parent company 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 for acquire property, finance, and equipment and land use rates was $10.3 million in the first quarter of 2025. Here's the thought book. Management has reiterated revenue guidance for the fourth of four years, 2025, of $700 million. This target is based on companies' current use or operating 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 our session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation panel indicates that your line is in the queue. You may press star two 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 phone set before you press the keys. Please wait a moment while we poll for questions. Thank you. Your first question is coming from Jonathan Yerey, the 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?

The company has added RETS to the R&D team since the first quarter of this year. We have added R&D staff and also added R&D models. So, R&D has increased significantly in the first quarter. Our total budget is about $1.5 million. The total budget is about $34 million. The total budget is about 5% of the sales revenue. This is also a satisfaction for the R&D companies with high-level technical skills. R&D needs to meet the 5% of the sales revenue requirements. So, the total budget is about 5% of the sales revenue.

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 R&D and research and development of RETS products. For this product, we have increased the staffing to help us further advance new technologies. We also increased some equipment and design modules, so all of that contributed to higher R&D expenses in 2021. On a full-year basis, looking forward, we are seeing about 5% of total revenue give a take around $34 million on R&D. So, this also, please be mindful, we are maintaining 5% of revenue in R&D. That will help us to qualify high tax status in China, and then we will also

ensure we receive tax benefits. Okay, are you finished with your questions, Jonathan?

Yeah, 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. Another question from Gary is, the first quarter of 2025, our inventory has increased by $10 million. Could you please explain the situation? Is it related to the current trade situation or other reasons? And then let's talk about the situation of the first quarter of 2025.

To be

honest, the increase in inventory in the first quarter is indeed related to the trade war. In order to deal with the current situation in the US, we have sent out some goods to the US in advance. And then the current inventory can be used until September of this year, almost four months. So this shipment is purely to reduce the impact of the company's relationship with the company. This is a very common thing. In addition, the growth rate has increased by about 10% compared to the previous quarter. Our inventory has increased by about 9.9%. So the growth rate of our inventory has also increased. This is a normal growth rate. In this way, the inventory will be maintained at this level throughout the year. And then it will be at the third quarter, and then after the US inventory is consumed, but generally at the fourth quarter, it will be at a higher sales level throughout the year. So overall, the inventory will maintain this level. Okay.

So, Jerry, to answer your question, the inventory increase is actually partly related to the trade war. And, you know, as the US administration has been putting a lot of pressure on the tariff. So in response to the potential pressure, we have made some advance shipment to the US. Months ahead, so our customer will not experience any disruption in the production for that consideration. So our inventory in the US has given us up to September, in case any kind of volatility is policy-wise. So this is sort of out of ordinary practice. Well, we have to do something to address such potential risk. That's why our inventory increased. But in terms of percentage, inventory increased about 10%. For 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 one on your phone keypad now. Our next question is coming from Michael Fiedler, a private investor. Michael, your line of life.

Good morning. My question is, the gross margin was .1% for the first quarter of 2025. What is the outgrowth margin for the rest of 2025?

Thank you. The first question is about the gross margin. The gross margin for the first quarter is 17.1%. We think the gross margin will be at a certain level

for the whole year. The gross margin for the first quarter of this year is .1% compared with the gross margin for the whole year last year, which is about the same as the gross margin for the first quarter of last year, which is also about the same as the gross margin for the first quarter of last year. Compared with the previous year, it has decreased a little bit. But we also actively reduced the gross margin and then increased the share of the market. The gross margin for the first quarter of this year is 17.1%. The gross margin for the first quarter of this year is 17.1%. The gross margin for the first quarter of this year is 17.1%. The gross margin for the first quarter of this year is 17.1%. The gross margin for the first quarter of this year is 17.1%.

The gross margin for the first quarter of this year is 17.1%. The Q1 gross margin is very similar to comparable, the corresponding quarter of 2024, as well as the full year average gross margin. And we are fully aware this level of gross margin is typically lower than our typical gross 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, applying strategy. Clearly this has bear fruit, this strategy has bear fruit. So we are growing revenue, gaining market share. On a full year basis, 2025, full year basis, we believe we will maintain at similar gross margin level and

with a slight improvement. Thank you. Thank you. Thank you, Michael. Have any questions? 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 popping 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 US proposed tariffs on your new order flow? And is it impacting any areas beyond North America? Okay, so we have some questions from our investors. The first question is, what is the impact of the US proposed tariffs on our new order flow? And is it impacting any areas beyond North America? And is it impacting any areas beyond North America? Okay, so we have some additional questions.

So the first one is, what is the impact of the US proposed tariffs on your new order flow? And is it impacting any areas beyond North America? And is it impacting any areas beyond North America? And is it impacting any areas beyond North America? Okay, so the second question is, what is the impact of the US proposed tariffs on your new order flow? And is it impacting any areas beyond North America? And is it impacting any areas beyond North America? Okay, so the first one is, what is the impact of the US proposed tariffs on your new order flow? And is it impacting any areas beyond North America? Okay,

so in terms of tariffs, we mentioned earlier, in the beginning of the year, we anticipated there will be some Okay, 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 advance shipment to our US facility and to those in the three help us to carry us to, you know, fulfillable challenges in the coming quarters, which seems to be useful. And also, as yesterday, in China, you 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 he come to a very good conversation and decision, and they agreed to bear the increased part of the cost related with tariffs. So to answer your question, overall, the tariffs have very minimal impact to our business and the order flow. The new order will continue to develop the product towards our customers. And outside of the US, 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, will help us to further, whether different

kind of opportunities in the marketplace. Okay, thank you. I have another question

that was emailed in. Please provide an update on the manufacturing of the REPS product for Nijingo and VECO, and how other automotive OEMs also ordered the REPS product.

Yes, I have another question.

I want to know about REPS, you also mentioned that the research has been increased a lot. I want to know about REPS, and what new progress is there in the product that is being delivered to Nijingo and VECO, and is there any other OEMs

that are also ordering the REPS system? Okay,

the Nijingo and VECO has already started the mass production. Other than that, we have also started to provide mass supply to the Geli Group. The customers that are currently in the process of development, and the new customers from Guangxi, Yutong, and Qingdao, have already completed the sample development, and are also planning to carry out mass production in the new year. With the increase in demand for REPS, we have also started the expansion of the production and the construction of new factories. Currently, the entire production of REPS is being carried out in the new factory. Thank you.

Yes, REPS is a growth area. We have already begun the mass production and shipment to our customers managing VECO. In addition to VECO, the other OEMs are also placing orders on our new products, including Cherry Auto, Guangzhou, Guangxi Auto, Yutong Bus, and Qingdao. For this new ART-EPS product, we have also built a brand new facility dedicated to the production and installed new production lines. We are pretty excited about this new

opportunity presented to us. Thank you. Then the last question

is, can you provide an update on the Sentian's operation and as far as the automatic driving systems? Yes, the last question is, do you have any new orders for the Sentian AC internal drive company? No, we don't have any new orders for the internal drive

company.

Currently, the order we have is a VOR-VOR truck, mainly EPS. The current production volume has reached 3500 units. The total sales volume is 40,000 units. The expected income is about 30 million euros. The production has continued from last year, and it has reached more than 3000 units. The other one is a domestic DIY delivery truck. It is almost ready to be developed. The third one is a VOR-VOR truck and a VOR-VOR truck. Both are on the line to transfer projects. These are some of the latest technologies.

How much is the sales volume of the 2025 VOR-VOR truck?

The sales volume is 30 million euros.

Yes, we have quite a bit of development on Sentian AD. We are considering developing autonomous driving technologies. Our main customer now is VOR-VOR truck for the EPS product. We are shipping 3500 units. On the full year basis, we are targeting 40,000 units for 2025. On the revenue side, Sentian, for this particular customer, we are booking 30 million euros for 2025. Other than this particular customer, we have one contract with BYD, their new model, Model Song. We are expecting mass production for this particular model, autonomous driving technology for 2025. So, the mass production will start in 2025. Also, we have entered into Volvo passenger vehicles with our -by-wire technology. There is another automaker with Renault. We are making very good progress with all different customers on both passenger and commercial sides. We are expecting a very meaningful contribution from

our subsidiary, Sentian. 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.

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 concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.