China Automotive Systems Q3 2023 Earnings Call Transcript

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November 10, 2023

There are 2 speakers on the call.

Operator

Good morning, everyone, and welcome to the China Automotive Systems Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode and the floor will be open for questions after the presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Kevin Theiss, Investor Relations.

Operator

Kevin, over to you.

Speaker 1

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2023 Third Quarter Conference Call. Joining us today are Mr. Jay 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.

Speaker 1

Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward looking statements. 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 in the company's Form 10 ks Annual Report for the year ended December 31, 2022, 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 region where we conduct business, cause our business to suffer in ways that we cannot predict, and materially impact our business. Financial condition and result of operations.

Speaker 1

A prolonged disruption or any unforeseen delay in our operations of the manufacturing, delivery, assembly process within our production facilities could continue to result in delays in the shipment of products to our customers, increased cost 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 Q3 and 1st 9 months results for the period ended December 30, 2023. Management will then conduct a question and answer session. The 2023 Q3 and 1st 9 months results are unaudited and reported using U.

Speaker 1

S. GAAP accounting. For the purposes of our call today, I'll review the financial results in U. S. Dollars.

Speaker 1

We'll first begin with a review of the recent dynamics of the Chinese economy, the automobile industry and our market position. The Chinese economy continued to grow, but at a more subdued pace as the GDP growth rate was 4.9% year over year in Q3 of 2023 according to China's National Bureau of Statistics. Industrial production increased and retail sales stabilized in to 2023 Q3. However, a 2 year housing slump has continued and resulted in consumer spending more cautiously affecting consumer price levels. Reduced demand for real estate has affected prices and eroded the financial condition on real estate developers and decreased building construction.

Speaker 1

Real estate development investment declined by 9.1% in the 1st 9 months of 2023 year over year. According to the Chinese Association of Automobile Manufacturers, CAAM, passenger automobile statistics in China for the Q3 of 2023 included a decline of 3.4% in July, an increase of 8.2% in August and growth of 6.6% in September on a year over year basis. Passenger vehicle sales increased each month over the prior year during the 2023 Q3. Commercial vehicle sales year over year during the Q3 of 2023 reflected an increase of 16.8% in July, followed by a 20% rise in August and a 33.2% increase in September. Electric vehicle sales and vehicle export sales also rose each month on a year over year basis in the 2023 Q3.

Speaker 1

Vehicle sales growth in the Q3 of 2023 partially reflected weak industry sales in the year ago periods as China was coming out of COVID-nineteen restrictions. The central government, local government and auto dealers have provided financial subsidies and incentives to help foster vehicle sales in China. Specific approaches include reducing automobile purchase taxes, boosting demand for electric vehicles by improving and expanding EV infrastructure, more consumer friendly banking policies and regulations and promoting tourism. Our 2023 Q3 revenue growth increased slightly year over year to $137,500,000 Net sales of traditional steering products and parts at $91,800,000 were consistent with net sales in last year's Q3. Net sales of EPS systems grew by 2% to $45,700,000 and increased as a percentage of sales to 33.2% for the same months ended September 30, 2023.

Speaker 1

Domestic passenger car sales were slightly higher, while sales to the domestic commercial vehicle market declined by 8.2%. Net product sales of other entities rose by 23.9%, primarily due to higher sales by Wuhanjiang, our producer of steering columns. Internationally, our sales in Brazil continued its growth trend rising by 15.7% to $13,300,000 in the 2023 Q3, mainly due to higher sales to Fiat. Sales into North America declined by 6.4 percent to $27,600,000 The lower sales was primarily due to less volume shipped to Ford Motor in the 3rd quarter. The volatility of the U.

Speaker 1

S. Dollar to the RMB also had affected the reported revenue in the Q3 of 2023. With China, the largest the world's largest vehicle exporter, our customers are benefiting and exporters are becoming a more important growth opportunity. While overall net sales increased slightly, our gross margin grew by 18.7% year over year. I'm sorry, our gross profit grew by 18.7% year over year and our gross margin increased to 18% in the Q3 of 2023 from 15.2% in the same quarter in 2022.

Speaker 1

Our efficient cost controls led to an approximate 8.2% year over year decline in total operating expenses, which helped propel an increase of 108.2% year over year in income from operations in the Q3 of 2023. Diluted income per share rose to $0.31 compared with $0.24 in the year ago Q3. For the 1st 9 months ended September 30, 2023, net sales increased by 4.1% year over year with gross margin increasing to 16.6% from 14.6% a year ago. Diluted income per share increased to $0.89 up from $0.55 in the 1st 9 months of 2022. We continue to supply a large number of vehicle OEMs in China, including BYD, the largest electric vehicle producer in China, Dongfeng Auto Group Limited, BK Photon Motors and internationally including Jeep, Ram, Fiat and Alfa Romeo in different worldwide markets and Ford Motor Company in North America.

Speaker 1

In addition to being a supplier of advanced steering products, our research and development programs are aligned with specific projects of our OEM customers. Collaboration with our OEM customers broadens our technology base for future use. To enhance our own proprietary advanced driver assistance systems, ADAS, we are incorporating our SENTIENT AB Subsidiary's automotive technology, including software development and hardware design for advanced steering functions, combined with their vehicle motion controls to increase our autonomous driving program. With our growing technology capability, new models of steering are underdeveloped to expand our market presence. At September 30, our cash and cash equivalents and pledged cash were 130 $5,100,000 approximately $4.47 per share.

Speaker 1

In addition, at September 30, 2023 inventory levels were $9,000,000 lower and short term loans declined by 7.1% compared to the end of 2022. Total foreign assets were $509,000,000 compared with total liabilities of 358,800,000 dollars at September 30, 2023, further highlighting our financial strength. Now let me review the finance results in the Q3 of 2023. In the Q3 of 2023, our net sales increased slightly to $137,500,000 compared to $137,200,000 in the same quarter of 2022. The increase in net product sales was due to an increase in EPS net product sales and steering columns compared to the Q3 of 2022.

Speaker 1

EPS net sales were $45,700,000 or 33.2 percent of net sales compared to 44 $800,000 or 32.6 percent of net sales in the Q3 of 2022. Net product sales in North America was $27,600,000 compared to $29,500,000 in the Q3 of 2022, primarily due to lower product sales. Net product sales in Brazil rose by 15.7% to $13,300,000 due to higher demand. Gross profit increased by 18.7 percent to $24,800,000 in the Q3 of 2023, compared to $20,900,000 in the Q3 of 2022. Gross margin was 18% compared to 15.2% for the same period of 2022, mainly due to a change in product mix and a decrease in unit cost.

Speaker 1

Selling expenses declined by 5% to $3,800,000 from $4,000,000 in the Q3 of 2022. Selling expenses represented 2.8% of net sales in the Q3 of 2023 compared to 2.9% in the Q3 of 2022. General and administrative expenses, G and A, increased by 24.5 percent to $6,100,000 in the Q3 of 2023 compared to $4,900,000 in the same quarter of 2022. The increase was primarily due to higher marketing and office expenses, a one time expense for the company's 30th anniversary celebrations and the impact of the appreciation of the U. S.

Speaker 1

Dollar against the RMB. Research and develop I'm sorry, G and A expenses represented 4.4% of net sales in Q3 of 2023 compared to 3.6% of net sales in the Q3 of 2022. Research and development expenses R and D decreased by 27.4 percent to $6,900,000 in the Q3 of 2023 compared to $9,500,000 in the Q3 of 2022. R and D expenses represented 5% of net sales in the Q3 of 2023 compared to 6.9% of net sales in the Q3 of 2022. These expenses were primarily due to higher R and D expenses in the Q3 of 2022 for the development of IRCB, ERCB and REPS new products.

Speaker 1

Income from operations increased by 108.2 percent year over year to $10,200,000 compared to $4,900,000 in the Q3 of 2022. Higher income from operations was mainly due to increased gross profit and an 8.2% year over year reduction in operating expenses in the Q3 of 2023. Other income was $1,200,000 in the Q3 of 2023 compared to $700,000 in the Q3 of 2022, primarily due to more government subsidies received in Q3 of 2023. Net financial income was $200,000 in the Q3 of 2023, compared to net financial income of $4,800,000 in the Q3 of 2022, mainly due to a decrease in the foreign exchange gain due to foreign exchange volatility. Income before income taxes and equity and earnings of affiliated companies increased by 12 percent to $11,200,000 in the Q3 of 2023 compared to income before income tax expenses and equity and earnings of affiliated companies of $10,000,000 in the Q3 of 2022.

Speaker 1

The higher income before income tax expenses and equity in earnings of affiliated company was mainly due to increased income from operations compared to the Q3 of 2022. Income tax expense was $700,000 in the Q3 of 2023 compared to an income tax expense of $900,000 for the Q3 of 2022, which was mainly due to a valuation allowance recognized in the Q3 of 2022. Net income attributable to parent company's common shareholders was $9,500,000 in the Q3 of 2023 compared to net income attributable to parent company's common shareholders of $7,500,000 in the Q3 of 2022. Diluted income per share increased by 29.2 percent to $0.31 in the Q3 of 2023 compared to diluted net income per share of $0.24 in the Q3 of 2022. Weighted average number of diluted common shares outstanding was 30,189,363 shares in the Q3 of 2023 compared to 30,640,260 in the Q3 of 2022.

Speaker 1

1st 9 months of 2023. Net sales for the 1st 9 months of 2023 increased by 4,100,000 I'm sorry, by 4.1 percent to $417,200,000 compared to $400,800,000 in the 1st 9 months of 2022. Gross profit for the 1st 9 months of 2023 increased by 18.3 percent to $69,100,000 compared to $58,400,000 in the corresponding period last year. Gross margin for the 1st 9 months of 2023 was 16.6 percent compared to 14.6 percent for the corresponding period in 2022. For the 9 months ended September 30, 2023, gain on other sales amounted to $3,600,000 compared to $5,300,000 for the corresponding period in 2022.

Speaker 1

Income from operations increased 144.8 percent to $25,700,000 compared to income from operations of 10.5 $1,000,000 in the 1st 9 months of 2022. Net income attributable to parent company's common shareholders was $26,800,000 compared to net income attributable to parent company's common shareholders of $16,800,000 in the corresponding period last year. Diluted income per share was $0.89 in the 1st 9 months of 2023 compared to diluted income per share of $0.55 for the corresponding period in 2022. Balance sheet items. As of September 30, 2023, total cash, cash equivalents and pledged cash deposits were $135,100,000 Total accounts receivable including notes receivable were 241 $500,000 Accounts payable including notes payable were $222,100,000 Total parent company stockholders' equity was $328,600,000 as of September 30, 23 compared to $311,700,000 as of December 31, 2022.

Speaker 1

Net cash provided by operating activities was $10,700,000 in the 1st 9 months 2023 compared to net cash provided by operating activities of $31,700,000 in the 1st 9 months of 2022. Payments to acquire property, plant and equipment were $12,200,000 compared to $11,800,000 in the 1st 9 months of 2022. Management has reiterated its revenue guidance for the full year 2023 to $560,000,000 This target is based on the company's current views on operating and market conditions, which are subject to change. With that operator, we are ready to begin the Q and A session.

Operator

Thank you very much, Kevin. At this time, we will be conducting our question and answer session. I'm not seeing any questions come into the queue, but I can certainly let you know if I see somebody.

Speaker 1

We thank you for your participation in today's conference call. Be safe and we look forward to speaking with you in the future.

Operator

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. Thank you for your participation.

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Earnings Conference Call
China Automotive Systems Q3 2023
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