China Automotive Systems, Inc.

Good day, everyone. Welcome to the China Automotive Systems Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Kevin Theiss, Investor Relations. The floor is yours.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2026 First Half Results Conference Call. Joining us today are Mr. Jie Li, 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 to wrap 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 Risk Factors, Results of Operations in the Company's Form 20-F Annual Report for the year ended December 31, 2025, 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 impact 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. Approved. 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 those products to our customers, increase costs, and reduce 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 first half of 2026 unordered results, which are reported using US GAAP accounting. Management will then conduct a question and answer session. For the purposes of today's call, I will review the financial results in US dollars. We will begin with a brief overview of our financial performance in the first half of 2026. and recent dynamics of the Chinese economy and automobile industry and our market position. For the six months into June 30, 2026, we had growth across the board in our major operating units with three operating units achieving net sales growth exceeding 40% in the first six months of 2026. These results offset the 5.1% decline and our Brazilian subsidiary. Net sales increased by 20.1% to a six-month record of $412.5 million, with six-month records in gross profits which increased by 49.7% year-over-year, income from operations growth of 100.4% year-over-year, and diluted earnings per share growth by 98% year-over-year. Our growth contrasts with China's automotive industry performance as data from the China Association of Automobile Manufacturers, CAAM, disclosed that vehicle production and sales fell 4% and 4.1% year-over-year respectively in the first half of 2024. Passenger vehicle sales fell by approximately 6% in the first half of 2026 as retail sales of ICE vehicles declined. The sales of NEV vehicles increased by 7.3% year over year and reached 49.6% of all new vehicle sales and battery EV sales represented approximately 67% of total NEV sales. Rising fuel prices and a reduction in government EV subsidiaries, I'm sorry, subsidies and China impacted vehicle demand. The Chinese economy was also a factor in lower vehicle growth as China's growth domestic product grew by a sluggish 4.7% year-over-year in the first half of 2026. With slower growth in the second quarter to 4.3%, the Chinese economy witnessed weak household consumption, an 18% year-over-year contraction in property investment and weak wage growth. However, total exports remain strong with a 17.6% advance in the first half of 2026, including strong growth of NEV vehicles. Nevertheless, China is facing increasing uncertainty in foreign markets for the future. In 2025, we introduced a number of innovations. Our second generation IRCB, that's an Intelligent Electrohydraulic Circulating Ball Power Steering for use in heavy-duty vehicles, the launch of our active rear-wheel steering, our production of our R-EPS steering system for Nijinko Electo, and a high-torque 115-watt platform electric loader. These advancements helped build our sales and marketing in specific markets in 2026. In the first six months of 2026, the first batch of our EPS steering was shipped to a global automaker's European division and is featured in two new European vehicle models. Other vehicle models are targeted to adopt this advanced steering. Annual sales volume is expected to reach 300,000 units. In addition to improving our sales and market presence in South America and Europe, we continue to build Our strategic cooperation agreement with KYB UMW for a new regional manufacturing and supply system focused in Malaysia. With our financial strength, we were able to invest $20.8 million in research and development as well as $30.4 million in property plant equipment in the first half of 2026. Net cash provided by Operating Activities was $47.8 million in the first half of 2026. Cash, cash equivalents, and pledge cash totaled $155.6 million and working capital was nearly $249.8 million. Despite these investments, our free cash flow was $14.3 million in the first six months of 2026. Our new 2026-2030 strategic plan has focused on deepening local presence in global markets, developing additional cutting-edge steering technologies, penetrating new product markets, and zero defect quality with platform-based, lean, automated manufacturing systems. These strategies will lead to higher sales and greater market share in the global automotive marketplace. With these changes, we will grow our market position as a Tier 1 supplier to large global OEM customers in North America, Europe, Asia, and South America. Now let me review the financial results in the first six months of 2026. Net sales increased by 20.1% year-over-year to $412.5 million compared to $343.3 million in the first half of 2025. The net sales increased as many due to higher sales of electric power steering and the appreciation of the RMB against the US dollar. Net sales of traditional steering products and parts increased 11.2% year-over-year to $219.6 million in the first half of 2026. Net sales of EPS products rose 32.2% year-over-year to $192.3 million from $145.9 million for the same period in 2025. EPS product sales grew to 46.8% of the total net sales for the first half of 2026, compared to 42.5% for the same period in 2025. Net sales in our Henlong subsidiary, the largest contributor to sales, rose by 25.3% to $205.7 million compared with $164.2 million for the first half of 2025. Sales to North American customers increased by 3.5% to $59.2 million compared to $57.2 million in the first half of 2025, primarily due to higher demand for passenger vehicle products by one customer. Sales in Brazil declined by 5.1% in the first half of 2026 to $32.6 million from $34.4 million in the first half of 2025. Yiu Long's net sales to the Chinese commercial vehicle market increased 42.9% year-over-year to $61.7 million, and our Wuhu subsidiaries' net sales to Cherry Automotive Company Limited rose by 40.3% year-over-year to $22.7 million in the first half of 2026. Gross profit grew by 49.7% year-over-year to $88.5 million from $59.1 million in the first half of 2025. Gross profit margin increased to 21.5% in the first half of 2026 from 17.2% in the first half of 2025. The increase in gross profit was mainly due to product volume gains and greater sales of relatively higher margin products. Net gain on other sales increased to $2.1 million in the first half of 2026, compared to $1.6 million in the first half of 2025. Selling expenses grew by 28% to $11.9 million in the first six months of 2026, compared with $9.3 million in the same period last year. Higher selling expenses were a result of the sales and volume in the first half of 2026. Selling expenses represented 2.9% of the net sales in the first half of 2026, compared with 2.7% in the first half of 2025. Our administrative expenses increased 12.6% to $14.6 million, compared to $13 million in the 25, primarily due to higher office expenses. G&A expenses represented 3.5% of net sales in the first six months of 2025 compared to 3.8% of net sales in the same period in 2025. Research and development expenses, R&D, increased by 23.6% to $20.8 million in the first six months of 2026 compared with $16.8 million in the first half of 2025. R&D expenses represented 5% of net sales compared to 4.9% in the first six months of 2025. Research and development programs include upgrade performance and quality of current products, customizing products for specific customers, as well as further developing EPS and hydraulic steering systems, automotive intelligence and software technologies, automotive electronics, High Polymer Materials, and Manufacturing Technologies. Other income net was $6.9 million in the first 2020 compared to $3 million in the same period last year. This increase is mainly due to the decrease in the loss of disposal of property, plant, and equipment. Income from operations climbed 100.4% to $43.3 million in the first six months of 2026. from $21.6 million in the first half of 2025. This gain reflected great sales, higher gross profit and margins, and effective cost controls. Interest expense was stable at $0.8 million in the first half of 2026 and 2020. Net financial expense was $2.9 million in the first half of 2026 compared to net financial income of $3.3 This change in net financial income was primarily due to foreign exchange volatility. Income before income tax expenses and equity in earnings of affiliated companies increased by 71.3% to $5 million in the first half of 2026, compared to $27.2 million in the same period in 2025. The change in income before income tax expenses and equities earnings of affiliated companies was mainly due to higher income from operations and higher other income net in the first half of 2026. Income tax expense was $9.9 million in the first half of 2026 compared to $7 million in the first half of 2025. The increase in income tax expense was primarily due to a higher income before income tax expenses in the first half of 2026. The expected tax rate was 21.3% in the first six months of 2026 compared with 25.7% in the same period. Net income attributable to parent companies' common shareholders increased by 98.8% to $29.3 million in the first six months of 2026 compared to net income attributable to parent companies, common shareholders of $14.7 million in the first half of 2025. Diluted earnings per share were $0.97 in the first half of 2026 compared to $0.49 in the same period in 2025. The weighted average number of diluted common shares outstanding was $30,170,702 in each of the 2026 and 2025 six-month periods. Now we'll provide some balance sheet and other financial highlights. Cash and cash equivalents and pledged cash are $155.6 million or approximately $5.16 per share as of June 30, 2026. Networking capital is $249.8 million. Total accounts receivable including notes receivable were $362.4 million. Accounts payable including notes payable were $361.5 million, and short-term loans were $75 million. Total parent company stockholders' equity was $443.8 million as of June 30, 2026, compared to $401.3 million as of December 31, 2025. Net cash provided by operating activities was $47.8 million, with payment to acquire property plant equipment of $30.4 million. Business outlook. Management has increased its revenue guidance for the fiscal year 2026 to $850 million from $810 million. This target is based on the company's current views on operating and market conditions, which are subject to change. With that operator, we're ready to go to the Q&A.

Certainly. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold a moment while we poll for any questions. First question is coming from Jonathan Neves. Please pose your question. Your line is live.

Hello, everybody.

My question is... With the company's electric power steering now entering the South American market, how will it impact the company's operations in South America?

投資人的問題是說,我們的EPS產品現在進入南美市場。 由於這個新產品進入南美市場,對我們的業務的影響現在是, What kind of impact did it bring in South America?

The design capacity of our 8G South America EPS project is 300,000 units. Currently, the entire engineering technical staff has been dispatched. The preparation work for the previous period is in progress. The plan is to produce in 2028. Now, we have started to prepare the entire EPS line and the PowerPack line. After the entire project is finished, the estimated added sales income is about US$40 million. Currently, it can be increased by 50%.

50% increase in the South America market, right?

Yes, 50% increase.

Okay. Yeah, so for your question, EPS product, electric power steering product, now is in South America. We are very excited about the prospect in that market. We planned, our planning is about 300,000 units. for the market for that particular line or building. Our engineers are working closely on the ground to get things ready. We are foreseeing the production or the batch production starts in 2028. That being said, the general assembly line for the EPS product is on track going there now, being setting up. Once it's up and running, we're seeing about $40 million revenue impact. That will be roughly 50% from the current run rate for the revenue in the South America market.

All right.

Thank you. Thank you.

Your next question is coming from Michael Fiedler. Please pose your question. Your line is live.

Good morning. With the current financial resources, what are management's thoughts on cash dividends and buybacks in the near future?

Okay, thank you. His question is, based on the current financial situation, there is plenty of cash. Have you considered The way of repaying shareholders, such as repurchasing stocks, is very cheap now.

These are all considered in Guangdong. Because of the recent capital spending, it is very large. Including this year, last year, and next year, it will be relatively large. So after we proposed it last time, the board of directors was still considering it. Thank you.

In terms of shareholder return program, we are currently in discussion at a very high level, the board level. But in the meantime, I just want you to be mindful as we're expanding our Global Footprint, growing rapidly on the top and bottom line. We also are increasing CapEx. We have been increasing CapEx in last year and we're seeing higher CapEx this year and next year as well. So we just want you to be aware the cash is putting back to the operation and to generate further return for shareholders. But that being said, we are at the board level are considering options to enhance shareholder value.

Thank you.

Thank you.

Okay, I have two questions that have been emailed to me. So the first one is, with the $30 million in CapEx in the first half of 2026, where will the greatest impact be, and what's the outlook for CapEx in the future?

Okay. One of the online questions is, in the first half of the year, in the first half of the year of 2026, the capital expenditure is $30 million. He wants to know what the future production level will be like in the future.

The biggest investment in the first half of this year is the purchase of land and land in our Mexico project. The total cost is $15.8 million, and the remaining $15 million is invested in various EPS capacity upgrades, including R-EPS, DP, EPS, ECU, including ERCV, as well as electrical energy, these capacity upgrades. Then, The entire year's CapEx plan will probably reach a level of $50 million. If the entire year's plan is removed from the Mexico project, because this is a one-off, the entire calculation is $3,500 million, which is almost the same as last year. This can almost increase the capacity of about 1 million. Thank you. Okay.

So yes, we do have a pretty sizable CapEx in the first half of 2026. The main part of it is our Mexico project. We're building up our Mexico presence. Land and Facility. We have injected about 15.8 million U.S. dollars. Then the remaining roughly 15 million in the first half of 2026 was all various product related project CapEx. So these are EPS, ECUs, ERCB, for example, those type of product development. So on the full year basis, we're seeing about 50 million US dollars. But if you exclude the Mexico project, the CapEx is roughly on par with 2025's CapEx. These are for new product capacity expansion, as we just mentioned, these type of new product. And we're foreseeing about one million units of incremental capacity coming online.

Okay. Now, I have a second question, which is, Regarding mergers and acquisitions, is the company more focused on trying to expand the current product line through mergers and acquisitions, or becoming more vertically integrated, or adding other auto-related products into their network?

Okay. This question is also related to the ice cream shopping. I have a question. How do we think about it? Because there are a lot of resources in the private sector. Have you considered doing some high-end construction? If so, is it horizontal or vertical construction? Whether it is to increase the product category or to enhance your ability to go up and down.

OK. OK.

Yeah, it's a good question on M&A. We actually are looking at, you know, different areas to enhance our product offering. More on the new product side, which will complementary to our product offerings, as well as In particular, the chassis-related product, whether it's suspension or other type of things we are, such as braking systems, that will further enhance our offering for the autonomous driving offerings. So that said, We remain open-minded. We are looking at all kinds of options to see if we can further enhance our competitiveness by bringing on new product.

Thank you.

Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. Again, if there are any remaining comments, please press star 1. There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Kevin Theiss for closing remarks.

Well, we thank you for your participation in today's conference call. Please be safe and we look forward to speaking with you in the future.

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