China Automotive Systems Q2 2025 Earnings Call Transcript

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August 13, 2025

Key Takeaways

  • Positive Sentiment: Net sales rose 11.1% year-over-year to $176.2 million in Q2, driving a 20.2% increase in operating income and a diluted EPS of $0.25.
  • Positive Sentiment: The sales mix shifted toward electric power steering, with EPS revenue up 31.1% year-over-year and now representing 41.2% of total sales.
  • Positive Sentiment: International markets strengthened as North American sales increased 14.9% and Brazilian sales surged 49.4%, with South America now accounting for 27.5% of total revenue.
  • Negative Sentiment: Gross profit margin declined to 17.3% from 18.5% year-over-year, primarily due to higher tariffs and a greater share of lower-margin products.
  • Positive Sentiment: Management raised full-year 2025 revenue guidance to $720 million, reflecting confidence in continued market strength and operational execution.
AI Generated. May Contain Errors.
Earnings Conference Call
China Automotive Systems Q2 2025
00:00 / 00:00

There are 2 speakers on the call.

Operator

Greetings. Welcome to the China Automotive Systems second quarter two thousand twenty five 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.

Operator

I will now turn the conference over to your host, Kevin Cease, Investor Relations. You may begin.

Speaker 1

Thank you, everyone, for joining us today. Welcome to China Automotive Systems twenty twenty five 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 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 the 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 10 k 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 that we cannot predict and materially and adversely impact our business, financial condition and result 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 the delays in shipments of products to our customers, increased costs, and reduced revenue.

Speaker 1

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 second quarter twenty twenty five results for the period ended 06/30/2025. Management was asked about the question and answer session. The twenty twenty five second quarter results are unaudited and are reported using U. S.

Speaker 1

GAAP accounting. For the purposes of our call today, I'll review the financial results in U. S. Dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy and automobile industry and our market position.

Speaker 1

Our sales increased by 11.1% year over year to $176,200,000 in the 2025 compared to $158,600,000 in the 2024, an increase compared with 167,100,000.0 in the 2025. Total sales of electric power steering systems, EPS, increased by 31.1% year over year to 72,900,000.0 as our sales mix continues to shift to higher technology products. Our Hengloan KYB subsidiary achieved 26% year over year growth of its EPS products in the 2025. Total EPS products were 41.2% of total sales for the three months ended 06/30/2025 versus 35.1% for the same quarter in 2024. Our steering subsidiary, Tenlong, which produces traditional hydraulic steering systems for the Chinese passenger vehicle market, reported a 4.2% year over year sales increase to 83,400,000 in the 2025.

Speaker 1

Sales by Zulong's commercial vehicle steering product increased by 25.6% year over year in the 2025. Tax incentives, subsidiaries for scrapping older vehicles, and lower interest rate financing are among the government centers to support the purchases of automobile vehicles in China for 2025. Additionally, local and private incentives may also aid buyers. North American sales increased by 14.9% year over year to $30,800,000 primarily due to higher sales to Stellantis. Our Brazilian sales increased by 49.4% year over year, mainly due to higher demand by Stellantis also.

Speaker 1

Brazilian sales represented 10.1% of total sales in the 2025. Combined, and South American sales have risen to approximately 27.5% of total sales in the twenty twenty five second quarter. For the macro economy, Chinese GDP was 5.2% year over year in the 2025, a slight decrease from the 5.4% in the 2025. As the passenger vehicle and commercial vehicle markets in China are our largest markets, their status can have direct impact on our sales. According to statistics from the China associate with automobile manufacturers, CAAM, total vehicle unit sales increased by 11.4% year over year in the 2025.

Speaker 1

Passenger vehicle unit sales grew by 13% year over year, and commercial vehicle sales increased by 2.6% year over year in the 2025. Gross profit increased by four four point two percent in the 2025. Operating expenses were well controlled and declined by $2,200,000 in the 2025 compared with the twenty twenty four second quarter. R and D expenses were stable at $8,100,000 in the 2025. We continue development of our high quality EPS products, especially our R EPS product line.

Speaker 1

Income from operations rose by 20.2% to $13,000,000 Income tax expense was $4,000,000 for the 2025 as compared to $2,100,000 for the twenty twenty four second quarter. The increase in income tax is due to higher income before income tax expenses of $15,100,000 and expected higher annual effective tax rate '25 2025 based on the latest annual forecast as compared to 2024. Net income attributable to parent parent common shareholders per diluted share of 25¢ versus 24¢ in the year ago second quarter. Net cash provided by operating activities rose by almost $40,000,000 year over year to $49,100,000 for the first six months of twenty twenty five. Total cash, cash equivalents, price cash and short term investments were $135,300,000 or approximately $4.48 per share at 06/30/2025.

Speaker 1

Our second generation IRCB has intelligent electro hydraulic circulating ball power steering for use in heavy duty vehicles that use both hydraulic power and electrical control is now in mass production in China. Following the IRCB's outstanding performance and cost efficiency, new orders in July by customers set a new record in the power steering industry for the ramp up to mass production. It's China's first IRCV comp it's China's first IRCV compatible system with the l two plus assisted driving. This system utilizes cutting edge electrohydraulic control technology to achieve internationally leading benchmarks in steering accuracy and response speed. By optimizing energy consumption, it is projected to reduce operational costs by nearly r and b 36,000 per vehicle annually.

Speaker 1

In our first six months of 2025, our r GPS system steering product developed for MedBeam Aveco also entered mass production. It is capable of performing autonomous driving functions such as automatic parking, lane keep assist, lane follow assist. And also in the first six months of twenty twenty five, our chassis due long power steering gears company, chassis due long, subsidiary won customer awards and accolades from two major commercial vehicle OEM, PK Photon Motor and Shine Shanti Automobile heavy truck. Given our growing international sales, the board of directors and management has decided to begin the process to change our corporate registration from the state of Delaware to the Cayman Islands. We believe this change will pay significant cost, require less regulatory reporting, and allow management to concentrate on improving operations, sales, and penetrating our growing international markets.

Speaker 1

The success of our R and D technology project has provided state of the art steering products. Our large diverse product portfolio provides solutions for the largest vehicle global OEM provided the means to access more international markets to enhance our growth. Now let me go over the financial results in the 2025. Net sales increased by 11.1% year over year to $176,200,000 compared to 158,600,000 in the 2024. Excuse me.

Speaker 1

Net sales of traditional steering products and parts increased slightly year over year to $103,300,000 in the 2025. Net sales of EPS products rose 31.1% year over year to $72,900,000 from $55,600,000 for the same period in 2024. EPS product sales grew to 41.4% of the total net sales for the 2025 compared to 35.1% for the same period in 2024. Our considered due loan sales of commercial vehicle steering systems rose by 25.6% to $23,500,000 compared with $18,700,000 for the 2024. Sales to North American customers increased by 11.8% to $30,000,000 compared to $26,800,000 in the 2024.

Speaker 1

North American sales increased primarily due to improved demand by one customer. Sales in Brazil were 49.4% higher in the 2024 to $17,900,000 from $12,000,000 in the 2024. Gross profit grew by 4.2% year over year to $30,500,000 from $29,300,000 in the 2024. Gross profit margin decreased to 17.3% in in the 2025 from 18.5% in the 2024. The decrease in gross profit margin was mainly due to an increase in tariffs and a product mix change from increased sales portion of relatively lower margin products.

Speaker 1

Paying on other sales was $25,000,000 in the 2025 compared to $1,700,000 in the 2024. Excuse me. Selling expenses at $4,500,000 in the 2025 were consistent with the 2024. Selling expenses represented 2.6% of net sales in the 2025 compared to 2.9% in the 2024. General and administrative expenses, g and a, decreased to $5,400,000 compared to $7,400,000 in the 2024, primarily due to decreased business taxes and surcharges.

Speaker 1

G and A expenses represented 3.1 of net sales in the 2025 compared to 4.7% of net sales in the 2024. Research and development expenses, R and D, were saved by $8,100,000 in the second quarter of each year. R and D expenses represented 4.6% of net sales in the 2025 compared to 5.2% in the 2024. Research and development programs include, but are not limited to electric power and hydraulic steering systems, automotive intelligence and software technology, automotive electronics, high polymer materials, and manufacturing technology. Other income is $1,100,000 for the 2025 compared to $1,700,000 for the three months ended 06/30/2024.

Speaker 1

Income from operations rose by 20.2% to $13,000,000 in second quarter twenty twenty five from $10,800,000 in second quarter twenty twenty four. The increase was primarily due to higher sales. Interest expense was 300,000.0 in the 2025 compared to 200,000.0 in the 2024. Net financial income was $1,300,000 in the 2025 compared to net financial expense of $700,000 in the 2024. The increase in net financial income was primarily due to an increase in the foreign exchange gain due to foreign exchange volatility.

Speaker 1

Income before income tax expenses and equity and earnings of affiliated companies was $15,100,000 in the 2025 compared to income before income tax expense and equity and earnings of the affiliated company of $11,700,000 in the 2024. The change in income before income tax expense and equity and earnings of affiliated companies was mainly due to higher income from operations in the 2025 compared with last year's same quarter. Income tax expense was $4,000,000 in the 2025 compared to $2,100,000 for the 2024. The increase in income tax expense was primarily due to a higher income before income tax expenses and higher expected annual effective tax rate in 2025 based annual Okay. As compared to 2024.

Speaker 1

Net income attributable to parent company's common shareholders was $7,600,000 in the 2025 compared to net income attributable to parent company common shareholders of $7,100,000 in the 2024. Diluted earnings per share were $0.25 2025 compared to $0.24 in the 2024. Weighted average number of diluted common shares outstanding was 30,170,702 in the 2025 compared to 30,185,702 in the 2024. Six months on 2025, net sales increased by 15.2% year over year to $343,000,000 in the first six months of twenty twenty five compared to $298,000,000 in the 2024, primarily due to increased sales in EPS systems. Express gross profit increased by 10.8% year over year to $59,100,000 from $53,400,000 in the corresponding period last year.

Speaker 1

Six months gross profit margin was 17.2% compared with 17.9% in the first six months of twenty twenty four. Gain on other sales was $1,600,000 in the first six months of twenty twenty five compared to $2,200,000 in the corresponding period last year. Income from operations increased by 5.7% year over year to $21,600,000 in the first six months of twenty twenty five from $20,500,000 in the first six months of twenty twenty four. Net income attributable to parent company's common shareholders was $14,700,000 in the first '6 months of twenty twenty five compared to net income attributable to parent company's common shareholders of $15,400,000 in the corresponding period in 2024. Diluted earnings per share in the first '6 months of twenty twenty five was 49¢ compared to diluted earnings per share of 51¢ in the first six months of twenty twenty four.

Speaker 1

Balance sheet charges. Cash, cash, and short term investments were a $135,300,000 or approximately $4.48 per share as of 06/30/2025. Net working capital was $170,900,000. Total accounts receivable, including notes receivable, were $294,200,000. Accounts payable, including notes payable, were $269,600,000, and short term loans were $71,900,000.

Speaker 1

Total parent company stockholders' equity was $366,400,000 as of 06/30/2024 compared to $349,600,000 as of 12/31/2024. Additionally, net net cash provided by operating activities of $49,100,000 in the first six months of 2024. We invested $18,500,000 in the capital expenditures in the 2025 as we continue to invest in our r and d and production capabilities. The business outlook. Management has raised revenue guidance for the full fiscal year 2025 to $720,000,000.

Speaker 1

This target is based on the company's current views on operating and market conditions, which is subject to change. With that operator, we are ready to begin the Q and A.

Operator

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Operator

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from Jonathan Neves, an individual investor.

Speaker 1

Hello? My question is why has the income tax rate increased in 02/2025? Okay. So there's a the the increase of the taxes due to two factors. One is the pretax profit or profit before taxes has gone up as the overall revenue and the and it has increased.

Speaker 1

And the other reason is the tax rate has slightly ticked up. And last year, there was a 1,500,000.0 tax adjustment and and which affected, you know, the the and last year's tax provision. And this year has a a different effect, and that's overall affecting the tax total tax provision.

Operator

Your next question for today is from Michael Fitter, an individual investor.

Speaker 1

Good good morning. I have two I have a question about R and D. It's in the twenty twenty five second quarter, why was R and D flat at 8,100,000.0? And what's the outlook for r and d spending? Okay.

Speaker 1

So q two, yeah, you're right. In the first quarter, our in the second quarter, our revenue has increased. As you can see, revenue increased by 11%. But r and d during the same quarter was relatively flat. The reason being, during the first quarter, we actually with r and d expenses that was was a little bit over spent.

Speaker 1

It increased on a year over year basis during the first quarter. It was increased by one point I mean, $3,400,000. That's about 64% year over year increase increase. That's that's part of the reason we didn't have to increase as much during the second quarter. On the first half perspective, first half the r and d expense is about 16.5 16,800,000.0 versus last year same period 13,500,000.0.

Speaker 1

So that r and d expense will continue to invest in in the future technology, whether it's driverless technology or the the the different type of steering product going to electric vehicle. So we're very committed to long term investment into r and d. Yes. On a full year basis, we're expecting thirty to thirty two to thirty five million dollars on the r and d expenses. That's that's about 5% of total revenue.

Speaker 1

80% of our R and D expenses is going to EV related product. The steering product for the EV sector, including our UPS and all different kind of product and our customers are sending orders. So overall, r and d is on track. Okay. I have a follow-up question, which is given a strong electric vehicle in China, how much of the current r and d spending is for new energy technologies?

Speaker 1

And for which product is new energy technologies for? Okay. Okay. So 80% of our r and d expenditures are going to the EV. As you know, in China right now, every two cars sold in the market, one of every two cars is is in is EV.

Speaker 1

So the EV penetration is very large, and they they will most likely will remain at this level if not increasing. And so that's why our product portfolio had to also need to be adjusted to to meet the demand. Thank you. Thank you.

Operator

Your next question for today is from Gary Nash, a private investor.

Speaker 1

Good morning. Thank you for taking my question. With sales in Brazil rising by almost 50% in the second quarter, what is the capacity utilization and need for more capital investment? Okay. Yes.

Speaker 1

Our we're very pleased and very proud of our growth in the market for Brazil. It's not only growing at a very rapid play pace, like, a 50% year over year. But also now, it's accounting it's across the threshold 10% of total revenue for our overall company. So it's it's very exciting about the Brazilian market. In terms of your question of cap capacity utilization, we right now have to run down three production lines in in Brazil facility, and the utilization is about 90%.

Speaker 1

We have experienced some a bit of a bottleneck on the production process, and and that has been solved. And so and in addition to that, we are going to add another production line. So sometime by the end of this year, we'll have full production line. The new line is EPS product, electric power steering's product. So we're have four production lines in Brazil alone.

Speaker 1

Total CapEx, as you ask, will will be around 3,500,000.0 US dollars. Thank you. Thank you. Thank you.

Operator

Once again, if you would like to ask a question, please press star one. Your next question is from Kevin Seas. Kevin, your line is live.

Speaker 1

Thank you. I have a a question from a investor, and he wanted to know a a comment, please, that the company's buying back shares and then issuing options to the to the management. And he'd he'd like to get some clarification on that. So first of all, this question that you received on the email? Email was a com a conversation that he he had with me.

Speaker 1

Okay. So his question is that the company has bought have been buying back shares and and also issues options to management team. Yeah. That's right. Okay.

Speaker 1

Alright. He's gonna yeah. Go ahead, Kevin. I thought he would just like like to have a comment from management. Okay.

Speaker 1

Okay. So to answer this question Mhmm. Yeah. Yeah. It's a very very good answer.

Speaker 1

Yeah. Here's the answer for the question. The the company buy back shares because the company see the stock is undervalued or grossly undervalued. And they want to u utilize the cash on the book to create some shareholder value. And it's part of shareholder return program like any other company.

Speaker 1

When you see the stock at prices get below intrinsic value, you buy the stock. Now on the stock option plan to issue to give to management team, it's part of the incentive plan to incentivize middle and operational management or even senior management to continue to execute the game plan to to to to support the company's long term growth, including number of strategic initiative from r and d to partnerships. And so these are critical tools to for a company to reward to award key employee and also attract talent to join the So this is no difference. This process going in CS is no difference from other things happening with Google, Microsoft, Amazon. It's exactly the same thing.

Speaker 1

The US company are incentivized their employee and attracting Thailand. And at the same time, they're using their strong cash flow free cash flow to buy back shares. Okay. Thank you.

Operator

As a reminder, if you would like to ask a question, please press star one.

Speaker 1

Okay. So I have another question then. Can you discuss the the move to to the Cayman Islands and what advantages you see to the company and also to the shareholders from this move? Okay. Good.

Speaker 1

Yes. This is a very good question. We received it from a few shareholders regarding the we domicile to Cayman Island. This move is mainly for the purpose of reducing the overall cost of being listed listed company. As you know, right now, since that we are a US company, a US company.

Speaker 1

We have to do quarterly a filing ten ten q's and annual report on 10 k's. So there are tremendous amount of saving if we move into this new structure. We're still reporting, but but the overall cost of reporting is is a lot lower as a foreign company. And we are most of our operation is outside of US anyway. That's one.

Speaker 1

And two is we even this move, domicile to Cayman, doesn't change the main things we are still listed on Nasdaq. The stock ticker is still under CAAF. And our other shareholder reward program, whether it's dividend or share buyback, will will will continue. So in terms of shareholders, there won't be any effect due to this change. And and, oh, one more thing is one more thing is being a Cayman company, I'm no longer a US company, give us business flexibility as we are as you can see, our business is now expanding globally.

Speaker 1

We already have a pretty good global footprint. Let me remind everybody on the call. We start off thirty odd years ago as a regional power steering company in China. We quickly grew into a national champion and by supporting and supplying to the fast rising domestic brands. So now you see all the brands in the news, it's a Cherry Auto, BYD, Geely, Great Wall.

Speaker 1

A number of those automakers are now very large automakers by global standard now. They're all our major customers, and they start up the first sets of parts dealing with us. So we're very proud of that. And then from there, about about twenty eighteen or eighteen years ago, we we launched into we expand our footprint into US market. And so now you have a formerly known as Chrysler and Ford and our our major customers.

Speaker 1

And we have a quite large shares with these two companies in a number of product. And and then our European businesses start taking off. So our relationship with the FIA has deepened over the last fifteen years. And and now we are supplying to a number of European model automakers auto models. We're growing very fast in terms of our market share.

Speaker 1

And and then lastly, we just mentioned earlier, our Brazilian business are growing very rapidly. So this quarter is 50%, and we're expanding more capacity. So overall, we are a global company now, and we'll continue to expand our footprint. So that being said, being a, you know, a foreign domicile company or non US domicile company will give us a business flexibility to continue to win contracts and expand business and and grow market share. And lastly, to build shareholder value.

Operator

We have reached the end of the question and answer session, and I will now turn the call over to Kevin Feiss for closing remarks.

Speaker 1

We want to thank everyone for participating in today's conference call. We wish you all to be safe, and we look forward to speaking with you in the future. Thank you.

Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

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