China Automotive Systems Q1 2025 Earnings Call Transcript

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May 14, 2025

There are 2 speakers on the call.

Operator

Good morning, everyone, and welcome to China Automotive Systems first quarter twenty twenty five 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 0 on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss, Investor Relations.

Operator

Kevin, the floor is yours.

Speaker 1

Thank you everyone for joining us today. Welcome to China Automotive Systems twenty twenty five first quarter conference call. Joining us today are mister Jade 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 meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

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 and the results of operations in the company's Form 10 ks annual report for the year ended 12/31/2024 as filed with the Securities and Exchange Commission and another document 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 regions where we conduct business, cause 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 shipments of products to our customers, increased costs 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.

Speaker 1

On this call, I will provide a brief overview and summary of the first quarter twenty twenty five results for the period ended 03/31/2025. Management will then conduct a question and answer session. The twenty twenty five first quarter results are unaudited and are reported using U. S. GAAP accounting.

Speaker 1

For the purposes of today's call, I'll 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 $650,900,000 for the 2024 year, our net sales increased by 19.9% to $167,100,000 in the first quarter of twenty twenty five compared to $139,400,000 in the first quarter of twenty twenty four. All operations reported sales growth with the exception of North America in the first quarter of twenty twenty five. Total net sales of electric power steering systems, EPS, increased by 54% year over year as our sales mix transitioned to higher technology products.

Speaker 1

Our Henlong, KYB subsidiary achieved 38.2 year over year sales growth on its EPS products in the first quarter of twenty twenty five. Our largest steering subsidiary, Henlong, which produces traditional hydraulic steering systems for the Chinese passenger vehicle market, reported the sales climb 37.5% year over year in the first quarter of twenty twenty five. Sales of traditional steering products to Cherry Auto increased by 13.5% year over year, and sales by Gulow's commercial vehicle steering products rallied to 17.4% year over year growth in the first quarter of twenty twenty five. While North American sales declined by 10.3% year over year to $27,200,000 due primarily to lower sales to Stellantos, our sales to the Brazilian market increased by 30.2% year over year due to higher demand by Stellantos. In the macro economy, Chinese GDP growth was 5.4% year over year in the first quarter of twenty twenty five, consistent with the fourth quarter of twenty twenty four.

Speaker 1

The Chinese economy has stabilized, but is still facing challenges. According to statistics from China Association of Automobile Manufacturers, CAAM, the combined unit sales of passenger commercial vehicles increased by 11.2% year over year to 7,500,000 units for the first quarter of twenty twenty five. Passenger car unit sales grew 12.9% year over year to 6,400,000 units. And China's passenger vehicle brands sales totaled 4,400,000 units and represented 68.1% of total passenger vehicle market sales in the first quarter of twenty twenty five. New energy vehicle unit sales grew by 47.1% year over year to 3,100,000 units, and NEV were 41.2% of the total car sales in China in the first quarter of twenty twenty five.

Speaker 1

For the first quarter of twenty twenty five, Chinese commercial vehicle sales increased by 1.8% year over year to 1,000,005 okay. One point o 5,000,000 units. And exports of automotive vehicle units increased by 7.3% year over year to 1,400,000 units. Tax incentives, subsidies for scrapping older vehicles, and lower interest financing are among the government incentives to support the purchases of automobiles in China for 2025. Additionally, local government and private incentive may also aid buyers.

Speaker 1

Gross profit increased by 18.8% year over year to $28,600,000 compared to $24,100,000 in 2024. Gross margin was 1717.1% compared to 17.3% in the first quarter last year, up from 15.6% in the fourth quarter of twenty twenty four. R and D expenses increased by 64% to $8,700,000 from $5,300,000 in the first quarter of twenty twenty four. The increase in investment was partially due to continuous development of our hydraulic and EPS products, especially our R EPS product, which recently started mass production. Also, the increase reflected the purchase of new molds for a new product beginning in the first quarter of twenty twenty five as well as the project for Stellantis.

Speaker 1

A 41.3% increase in operating expenses, including R and D, resulted in a 10.5% year over year reduction in income from operations. Net income attributable to the parent company shareholders for diluted shares was $0.24 versus 27% in the year ago first quarter. Net cash provided by operating activities rose 73.1% year over year to $18,100,000 for the first quarter of twenty twenty five. Total cash and cash equivalents, large cash and short term investments were $135,900,000 or approximately $4.50 per diluted share, excuse me, at 03/31/2025. Our r EPS gearing product developed for Nanjing and Echo has entered mass production in the first quarter of twenty five.

Speaker 1

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 autonomous driving functions, such as automatic automatic parking, lane keep assist, and lane follow assist. Apache Durango power steering gears company, subsidiary, won customer awards and accolades from two major vehicle OEM customers, PK faux Photon Motor and Shanshi Automobile Heavy truck. Shanshi Zulong provides steering systems to various commercial vehicles in China. Shanshi Zulong received the excellent supplier series award and the excellent supplier series award from the online business unit of Soutan Motors for exemplary product development cooperation, supply guarantees, and quality reliability.

Speaker 1

In addition, Sachi Gulong won the strategic synergy award, the highest award given by Shanxi for our future research development and supply chain cooperation. We remain well positioned with our advanced gearing 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 twenty twenty five. Our net sales increased by 19.9% to $167,100,000 in the first quarter of twenty twenty five compared to $139,400,000 in the first quarter of twenty twenty four. Net sales on traditional steering products and parts increased by 2.3% to $94,100,000 compared to $92,000,000 for the first quarter of twenty twenty four.

Speaker 1

Net sales of electronic power steering, EPS products, and parts grew by 54% to $73,000,000 for the three months ended 03/31/2025 compared with $47,400,000 for the same period in 2024. EPS products for the first quarter of twenty twenty five were approximately 43.7% of total sales compared with 34% of tow total sales in the first quarter of twenty twenty four. UVM loans export sales were $27,200,000 compared to $30,100,000 in the first quarter of twenty twenty four, primarily due to lower demand for passenger vehicle products like the Lantus and the chassis due loan sales increased by 17.4 to $19,700,000 from $16,800,000 in the twenty twenty four first quarter. Brazil and Long's net product sales increased by 30.2% to $16,500,000 in the first quarter of twenty twenty five compared to $12,700,000 for the same period in 2024 due to higher demand from Star Autos NV in that market. Woohoo sales, which mainly provide steering system to Cherry auto automobile in China, increased by 13.5% year over year, and sales for other entities increased by 19.1% year over year to $34,600,000.

Speaker 1

Gross profit increased by 18.8% to $28,600,000 and $24,100,000 in the first quarter of twenty twenty four. Gross margin in the first quarter of twenty twenty five was 17.1%, which was consistent with 17.3% in the first quarter of twenty twenty four. Selling expenses increased by 18.3% to $4,800,000 from $4,100,000 in the first quarter of twenty twenty four. 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 twenty twenty five and the first quarter of twenty twenty four.

Speaker 1

General and administrative expenses, G and A, increased by 36.4% to $7,600,000 compared with $5,500,000 in the first quarter of twenty twenty four, mainly due to staff related expenses, including a onetime severance cost of approximately $1,400,000 at one subsidiary. G and A expenses represented 4.5% of net sales in the first quarter of twenty twenty five compared with 4% of net sales in the first quarter of twenty twenty four. Research and development expenses, R and D, increased by 64% to $8,700,000 compared to $5,200,000 in the first quarter of twenty twenty four, mainly due to higher R and D activities for new projects and products. R and D expenses represented 5.2% of net sales in the first quarter of twenty twenty five compared to 3.8% in the first quarter of twenty twenty four. Other income was $1,900,000 for the first quarter of twenty twenty five compared to $2,400,000 for the first quarter of twenty twenty four.

Speaker 1

Income from operations declined by 10.5% to $8,600,000 in the first quarter of twenty twenty five compared to income from operations of $9,700,000 in the first quarter of twenty twenty four. The decrease in twenty twenty five first quarter income from operations was primarily due to a 41.3% increase in operating expenses. Interest expense was post $500,000 in the first quarter of twenty twenty five compared to $300,000 in the first quarter of twenty twenty four. Financial income net was $2,000,000 in the first quarter of twenty twenty five compared to financial expense net of $10,000 in the first quarter of twenty twenty four. This change was primarily due to an increase in foreign exchange gains due to foreign exchange volatility.

Speaker 1

Income before income tax expenses and equity and earnings of affiliated companies was $12,100,000 in the first quarter of twenty twenty five compared to $11,800,000 in the first quarter of twenty twenty four. Equity and losses of affiliated companies was $700,000 in the first quarter of twenty twenty five compared with equity and losses of affiliated companies of $800,000 in the first quarter of twenty twenty four. Income tax expense was $2,900,000 for the first quarter of twenty twenty five as compared to $1,700,000 for the first quarter of twenty twenty four. 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 effective tax rate in 2025 based on the latest annual forecast as compared to 2024. Net income attributable to parent company common shareholders was $7,100,000 in the first quarter of twenty twenty five compared to $8,300,000 in the first quarter of twenty twenty four.

Speaker 1

Diluted income per share was 24¢ in the first quarter of twenty twenty five compared to net income per diluted share of 27¢ in the first quarter of twenty twenty four. The weighted average number of diluted common shares outstanding was 30,170,172 in first quarter of twenty twenty five compared to 30,185,702 in the first quarter of twenty twenty four. Now I'll provide some balance sheet and other financial highlights. As of 03/31/2025, total cash, cash equivalent, and short term investments were $89,900,000. Total accounts receivable, including notes receivable, was $323,600,000.

Speaker 1

Accounts payable, including notes payable, were $282,600,000, and short term bank loans were $66,700,000. Our current ratio was 1.4 to one, and working capital raised to $154,700,000 as of 03/31/2025 compared to $146,200,000 as of 12/31/2024. Total parent company's stockholders' equity was $357,500,000 as of 03/31/2025 compared to $349,600,000 as of 12/31/2024. Net cash flow from operating activities was $18,100,000 in the first quarter of twenty twenty five compared with $10,500,000 in the first quarter of twenty twenty four. Cash paid to acquire property, plant, and equipment and land use rate was 10.3 in the first quarter of twenty twenty five.

Speaker 1

Business outlook. Management has reiterated revenue guidance for the full fiscal year 2025 of $700,000,000 This target is based on company's current views on operating the 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. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue.

Operator

Since using speaker equipment, it may be necessary to pick up your handset before you press the key. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Jonathan Nieves, who's a private investor. Jonathan, your line is live.

Speaker 1

Good morning, everybody. You're well. My question is, why did research development increase by 64% in the twenty twenty five first quarter? Will r and d remain at this high level for the 2025 year, or will it vary? This will make a total of no one.

Speaker 1

So I think take a Korean Okay. In the first quarter, we did increase our our r and d effort and hence the r and d expenses also went up, mainly in the area of our research and development of our EPS product. For this product, we have increased the staffing to to help us to further advance new technologies. We also increased some of the equipment design modules. So all that contributed to higher r and d expenses in q one.

Speaker 1

On the full year basis, looking forward, we are we're seeing about 5% of total revenue, give or take around 34,000,000 US dollars on RMB. So this also please be mindful. We are, you know, we we are maintaining 5% revenue in RMB. That will help us to qualify high-tech status in in China, and then we will also, in turn, receive tax benefit. Okay.

Operator

Are you finished with your questions, Jonathan?

Speaker 1

Yes. Thank you very much. Thank you.

Operator

Thank you very much. And our next question is coming from Gary Nash from Nash Consulting. Gary, your line is live.

Speaker 1

Thank you. First, good day to everyone. Two part question. Could you please comment on the almost $10,000,000 increase in inventories in the first quarter of twenty twenty five? And then if you could also comment as what is the what is the outlook for inventory levels and the revenue of 2025.

Speaker 1

Okay. Thank you. Okay. So, Gary, to answer your question, inventory increase, it's actually partly related to the the the trade war and, you know, as you US administration has been putting a lot of pressure on the tariff. So in response to the potential pressure, we have made some about shipment to The US months ahead.

Speaker 1

So we don't our customer will not experience any disruption in the production for that consideration. So we our inventory in US has given us up to September in case any kind of volatility policy wise. So this is a it's it's sort of out of ordinary practice, but 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%.

Speaker 1

For overall revenue, we have increased 1919.9%. So it's not completely outsized increase. And and on a full year basis, we believe we will maintain a a healthy level. We will now have a oversized the oversized inventory.

Operator

Okay. Does that answer your question, Gary?

Speaker 1

Yes. It does. Thank you very much. Thank you. Thank you.

Speaker 1

Thank

Operator

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 is live.

Speaker 1

Good morning. My question is the gross margin was 17.1% for the first quarter of twenty twenty five. What is the outlook for the gross margin for the rest of 2025? Right. Thank you.

Speaker 1

Okay. Yes. Q one, our margin at, you know, slightly higher than 17%. That's the q one gross margin is very similar to comparable corresponding quarter in 2024 as well as the full year average gross margin. And we are, you know, we're we are are fully aware this level of gross margin is typically it's it's lower than our typical margin in the past prior to 2024.

Speaker 1

But this is our, you know, part of our strategy to proactively seeking more market share by using some of the strategy pricing 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 a similar gross margin level and with a slight improvement.

Speaker 1

Thank you.

Operator

Very much.

Speaker 1

Thank you.

Operator

Do you have Michael? Have any okay.

Speaker 1

That answers my question. Thank you.

Operator

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 pressing star one on your phone keypad now. Wait a moment in case anyone else pops into the queue. Okay.

Operator

I'll hand back over to Kevin then for further comments.

Speaker 1

K. Well, we have some additional questions that were emailed to us. So I'll I'll go ahead and announce those. So the first one is, what is the impact of The US proposed to tie tariffs on your new order flow? And are are they is it impacting any areas beyond North America?

Speaker 1

Okay. 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 did made a decision to to to make some advanced shipment to our US facility and to those inventory help us to carry us to, you know, foreseeable challenges in in the in the coming quarters, which turns out to be very useful. And also, as yesterday, China and US announced the the the choose on the trade on the tariff, which is a very positive development.

Speaker 1

And we have immediately gotten in touch with our customer in in North America. And and we come to a very good conversation and and decision, and they all agreed to to to bear the increased part of the the cost related with tariff. So to answer your question, overall, the tariff has very minimal impact to our business and the order flow. The new order continues. We'll continue to develop product towards our customers.

Speaker 1

And outside of US, we we still see opportunities as as we reported today. We have a pretty healthy strong growth in in Brazil. So we are also making some strategic planning global expansion. And that will also, at some point, we announce, will help us to further weather different kind of volatilities in the marketplace. Okay.

Speaker 1

Thank you. I have another question that was emailed in. Please provide an update on the manufacturing of the RETS steering product for Naginco Aleco, and have other automotive OEMs also ordered the REPS product? Yeah. To contact you.

Speaker 1

That'll be traffic for r UPS. R UPS, Wu Chen, okay, 19, it it will cost again to the to the whole. Yes. Our UPS is a growth area. We have already begun the mass production and shipment to our customer Nanjing Iveco.

Speaker 1

In addition to Iveco, the other OEM also placing orders on our new products. They are including Cherry Auto, Guangzhou, Guangxi Auto, and then the Tombass, and Qingdao. And for this new for this UP EPS product, we have also built a value facility dedicated to the production and and install new production lines. And so we are pretty excited about this new opportunity presented to us. K.

Speaker 1

Thank you. Then the last question is, can you provide an update on the Sentient operation and as far as the automatic driving systems? Yeah. So you're going to to take a look at that. Okay.

Speaker 1

Yes. We have a quite a bit development on Sentient AV, our subsidiary developed for developing autonomous driving technologies. Our the Sentient's main customer now is Volvo Truck for the EPS product. We are shipping 3,500 units. And on a full year this month, on a full year basis, we are targeting 40,000 units for 2025.

Speaker 1

On the revenue side, Centene, for this particular customer, we're booking €30,000,000 for 2025. Other than this particular customer, we have we have one contract with BYD, their new model, model Song, s o n g. The we are expecting mass production for this particular model autonomous driving technology for 2025. So the mass production will start in 2025. And, also, we we have entered into Volvo passenger vehicle with our FlyFi wire technology.

Speaker 1

And there's another automaker with a a a reno. So we are making very good progress with all different customers on both passenger and commercial side. So we are expecting a very meaningful contribution from from our subsidiaries, Centimeters. Thank you.

Operator

Just before we wrap up the call, I'm gonna check to see if there are any further questions from the audience. If you want to press 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.

Speaker 1

Well, we wanna 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.

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. We thank you for your participation.

Speaker 1

Thank

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