China Automotive Systems Q2 2023 Earnings Call Transcript

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August 11, 2023

There are 4 speakers on the call.

Operator

Greetings, and welcome to the China Automotive Systems Second Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mr.

Operator

Kevin Sees, Investor Relations. Kevin, you may begin.

Speaker 1

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2023 Second 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 and 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. If the outbreak of COVID-nineteen is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales, the slowdown in regional national and international economic growth, weakened liquidity and financial condition of our customers or other factors we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, called uncertainties in the region where we conduct business, caused our business to suffer in ways that we cannot predict and materially adversely impact our business, financial condition and results of operations.

Speaker 1

A prolonged disruption or any further unseen delay in our operations of the manufacturing, delivery and assembly process within any of 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 duly 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'll provide a brief overview and summary of the Q2 and 1st 6 months results for the period ended June 30, 2023. Management will then conduct a question and answer session. The 2023 Q2 and 1st 6 months results are unaudited and are 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 begin with a review of the recent dynamics of the Chinese economy, the automobile industry and our market position. The Chinese economy showed signs of recovery as GDP growth rate was 5.5% year over year in the first half of twenty twenty three, with a 6.3% year over year increase in the 2nd quarter, following a 4.5% year over year in the Q1. However, these growth rates were influenced by the low base effect of the pandemic and these lockdowns. Quarter over quarter GDP was 0.8% in the Q2 of 2023, as the Chinese economy was still affected by both internal and external factors. Exports declined in the first half of the year as high inflation in many markets and political tensions reduced foreign demand for Chinese goods.

Speaker 1

The Chinese property section continued to be affected by regulatory and fiscal policies with concerns of weak consumer confidence affecting demand. Property sales declined by 5.3% in terms of floor space in the 1st 6 months of 2023. According to statistics from the China Association of Automobile Manufacturers, CAAM, automobile sales in China rebounded in the Q2 of 2023, following a sales decline in both passenger and commercial vehicles during the Q1 of 2023. CAAM statistics show that overall automobile sales in China increased by 17.9% year over year in the Q2 of 2023 with passenger vehicle sales rising by 19.3% year over year and commercial vehicle sales up 10.1% year over year. For the 1st 6 months ended June 30, 2023, overall car sales increased by 9.8% year over year as passenger vehicle sales grew 8.8% year over year and commercial vehicle sales grew by 15.8% year over year.

Speaker 1

New energy vehicle sales rose by 44.1% in the 1st 6 months period. These growth numbers also reflect the weak industry sales in the year ago periods due to the COVID-nineteen restrictions. Some car dealers and local governments have provided financial subsidies and coupons to help promote growth in car sales in China. As the auto industry is a major employer across the country and contributes to economic growth. Our 2nd quarter revenue growth increased by 8.1% year over year with most divisions reporting higher revenues.

Speaker 1

Net sales of our advanced electric power steering EPS rose by 28.4% year over year and South American sales increased by 43.5%. Sales into North America temporarily declined and were affected by foreign exchange rate volatility. Our headlong passenger vehicle sales rose by 27.4% due to higher demand and sales to the commercial vehicle to the commercial vehicle market were also up by 7.2%. We continue to be a long standing supplier to a large number of vehicle OEMs, including industry leaders such as BYD, the largest EV producer in China, multiple operations of Stellantis, including Jeep, Ram, Fiat, NAF Romeo in different markets around the world and Ford Motor Company in North America. In addition to providing steering products, we also collaborate with the research and development programs of our OEM customers to improve current products and create new products to enhance their vehicles.

Speaker 1

For example, we developed a new series of EPS products with BYD, our partner for 20 years, which are being used in a number of their vehicle models. We developed new steering for Alfa Romero's luxury plug in hybrid SUV, the Tonale, which is being sold internationally, further expanding our worldwide presence. Our participation in product improvement and new product development provides a testament to their confidence in our excellent research and development capabilities. Each R and D endeavor increases our technology base for future use. Using our EPS design expertise, we have been developing our own proprietary EPS products to advance our advanced driver assistance systems, ADAS, for level 4 autonomous driving and beyond.

Speaker 1

We are leveraging our Sentient AB subsidiaries automotive technology, including software development and hardware design for advanced steering functions, combined with vehicle motion controls to heighten the capability of our autonomous driving program. With hydraulic, EPS and ADAS steering, our enlarged portfolio of steering products has never been stronger. And we are working on new models of steering for the future to improve our market presence. Pricing cost controls led to an approximate 11% year over year decline in total operating expenses, resulting in an 8.2% gain in operating profit in the 2nd quarter. Net income per share grew by 12.9 percent to $0.35 compared to same quarter last year.

Speaker 1

At June 30, our cash and equivalents and pledged cash was $125,500,000 approximating $4.16 per share. New incentives and policy changes by the central, regional and local governments are designed to enhance economic growth in future quarters. Specific markets are targeted, including the automobile, real estate and services sector with a greater focus on consumer consumption. Measures including reducing automobile purchase taxes, boosting demand for electric vehicles through improved EV infrastructure, adjusting real estate and banking policies and regulations and promoting tourists. Private companies are encouraged to increase investment in specific markets as well as increasing private investment in research and development.

Speaker 1

Now let me review the financial results in the Q2 of 2023. Our net sales increased by 8.1% year over year to $137,400,000 for the Q2 of 2023 compared to $127,200,000 in the Q2 of 2022. Net sales of traditional steering products and parts increased by 1.1% year over year to 95 $800,000 for the Q2 of 2023 compared to $94,800,000 in the same quarter of 2022. Net sales of EPS products rose 28.4% year over year to $41,600,000 from $32,400,000 for the same period in 2022. EPS product sales were 30.3% of the total net sales for the Q2 of 2023 compared to 25.5 percent for the same quarter in 2022.

Speaker 1

Export net sales in North American customers decreased by 24.5% year over year to $28,900,000 in the Q2 of 2023 compared to $38,300,000 in Q2 of 2022. North American sales declined due to less demand and the effects of foreign exchange fluctuations. Sales in Brazil rose 43.5 percent year over year to $12,200,000 Q2 of 2023 from $8,500,000 in the Q2 of 2022. Gross profit was $22,700,000 which is stable to $22,700,000 in the Q2 of 2022. Gross margin in the Q2 of 2023 was 16.5% compared to 17.9% in the Q2 of 2022.

Speaker 1

The decrease in gross margin was mainly due to the changes in the product mix. Gain on other sales was $700,000 compared to $2,100,000 in the Q2 of 2022. Selling expenses decreased by 6.7% year over year to $3,800,000 compared to $4,100,000 the Q2 of 2022, primarily due to lower marketing and office expenses. The appreciation of the U. S.

Speaker 1

Dollar against the RMB also affected expense levels. Selling expenses represented 2.8% of net sales in the Q2 2023 compared to 3.2% in the Q2 of 2022. General and administrative expenses, G and A, decreased by 6.9% year over year to $5,300,000 compared to $5,700,000 in Q2 of 2022, primarily due to the reversal of credit losses and the impact of appreciation of the U. S. Dollar against the R and D.

Speaker 1

G and A expenses represented 3.9% of net sales in the Q2 of 2023 compared to 4.5 percent of net sales in the Q2 of 2022. Research and development expenses, R and D decreased by 16.2% year over year to $6,600,000 compared to $7,900,000 in the Q2 of 2022. R and D expenses represented 4.8% of net sales in the Q2 of 2023 compared to 6.2% in the Q2 of 2022. Other income net was $2,000,000 for the Q2 of 2023 compared to $2,800,000 for the 3 months ended June 30, 2022. Income from operations was $7,800,000 in the Q2 of 2023 compared to income from operations of $7,200,000 in Q2 of 2022.

Speaker 1

The increase was primarily due to lower operating costs. Interest expense was $300,000 in the Q2 of 2023 compared to $400,000 in the Q2 of 'twenty two. Net financial income was $4,000,000 in Q2 of 2023 compared to net financial income of $2,500,000 in the Q2 of 2022. The change in net financial income was primarily due to the depreciation of the U. S.

Speaker 1

Dollar against the RMB. Income before income taxes and equity earnings of affiliated companies was $13,400,000 in Q2 of 2023 compared to income before income taxes, expenses and equity earnings of affiliated companies of $12,200,000 in the Q2 of 2022. Net income attributable to parent company's common shareholders was $10,500,000 in the Q2 of 2023 compared to net income attributable to parent company's common shareholders of $9,400,000 in the Q2 of 2022. Diluted earnings per share was $0.35 in the Q2 of 2023 compared to $0.31 per share in the Q2 of 2022. Weighted average number of diluted common shares outstanding was 30,185,537 in the Q2 of 2023 compared to $30,849,009 in the Q2 of 2022.

Speaker 1

Now for the 1st 6 months of 2023, our net sales increased by 6.1% year over year to $279,700,000 in the 1st 6 months of 2023 compared to $263,000,000 in the 1st 6 months of 2022. 6 month gross profit was $44,300,000 compared to $37,400,000 in the corresponding period last year. 6 month gross margin was 15.9% compared with 14.2% in the 1st 6 months of 2022. Gain on other sales was $1,400,000 the 1st 6 months of 2023 compared to $3,000,000 in the corresponding period last year. Income from operations was $15,500,000 in the 1st 6 months of 2023 compared to income from operations of $5,700,000 in the 1st 6 months of 2022.

Speaker 1

Net income attributable to parent company's shareholders was $17,300,000 in the 1st 6 months of 2023 compared to net income attributable to parent company's common shareholders of $9,400,000 in the corresponding period to 2022. Diluted earnings per share increased by 90% year over year to $0.57 in the 1st 6 months of 2023 compared to diluted earnings per share of $0.30 in the 1st 6 months of 2022. Some balance sheet items. As of June 30, 2023, total cash, cash equivalents and pledged cash were $125,500,000 Total accounts receivable including notes receivable were $234,000,000 Accounts payable including notes payable were $216,700,000 and short term loans were $38,500,000 Total parent company stockholders' equity was $317,800,000 as of June 30, 2023, compared to $311,700,000 as of December 31, 2022. With the business outlook, management has reiterated its revenue growth for the full year 2023 to $560,000,000 This target is based on the company's current views on operating and the marketing conditions, which are subject to change.

Speaker 1

With that, operator, we're ready to begin the Q and A.

Operator

Thank you very much. At this time, we are opening the floor for questions. Okay. We do appear to have oh, we do. We have a question from Robert Jensen, who is a private investor.

Operator

Robert, your line is live.

Speaker 2

Yes. Could you shed a little bit of color?

Speaker 1

I think you said that your

Speaker 2

sales to the U. S. Were down some. Could you shed some color on that and your expectations going forward and possibly some of the reasons for that?

Speaker 3

Okay. So you're right. The sales to the North America is down during this quarter. To be more specific, it was down 24.5%. The decline of the sales to the North America is mainly due to the volume decrease.

Speaker 3

However, our market share within our customers remain the same. That being said, it's actually our customer during the quarter has produced fewer product, finished product and older, less gearing from us. We don't want to speculate here, but we are closely following the situation. Whenever our customer are returned to their normal volume, our sales will go back up. Okay.

Speaker 3

So in addition to what we just commented, we are also working with our customers in North America on their new product. So we are expecting to increase the shipment along with their new product rollout. So we are continue to work closely with our customer to penetrate the U. S. Market.

Speaker 3

On the other hand, we are also developing or working on signing a new client in North America. And please be tuned. We'll make announcements when we get to that stage. So we are laser focused on that and looking forward to continue to expand our market share in North America.

Speaker 2

Okay. Thank you. What percent of your sales are come from North America currently?

Speaker 1

Around 20%.

Speaker 3

Yes, 20%.

Speaker 1

You mean only North America? Yes. What percent of revenues come from North America? It's about 20%, yes. Okay.

Speaker 1

Thank you.

Speaker 3

Thank you.

Operator

Thank you very much. Okay. I'm going to hand back over to Kevin for any closing comments as we've reached the end of our Q and A session.

Speaker 1

We want to thank you for your participation in today's conference call. Please be safe. We look forward to speaking with you in the future. Thank you.

Operator

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

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Earnings Conference Call
China Automotive Systems Q2 2023
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