China Automotive Systems Q2 2026 Earnings Call Transcript

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August 13, 2026

Key Takeaways

  • Positive Sentiment: First-half revenue rose 20.1% to a record $412.5 million, while gross profit increased 49.7% and operating income doubled to $43.3 million. Net income attributable to shareholders climbed 98.8% to $29.3 million, or $0.97 per diluted share.
  • Positive Sentiment: Electric power steering continued to outpace the broader business, with EPS sales up 32.2% and reaching 46.8% of total revenue. The company also began shipping EPS systems for two European vehicle models and expects annual volume of roughly 300,000 units.
  • Positive Sentiment: Management raised 2026 revenue guidance to $850 million from $810 million, citing demand growth across major operating units. Growth was particularly strong in Chinese commercial vehicles, Chery-related sales, and the company’s largest Henglong subsidiary.
  • Positive Sentiment: The company plans approximately $50 million of 2026 capital expenditures, including a $15.8 million Mexico facility investment and capacity expansion for EPS, ECUs, eRCB systems, and motors. Management expects these projects to add about one million units of incremental capacity.
  • Neutral Sentiment: Management said it is evaluating acquisitions to broaden its product portfolio, particularly in chassis-related areas such as suspension and braking systems, but provided no specific targets or transaction timeline. Shareholder returns are also under board-level discussion, though expanding operations and elevated capital spending remain the current priorities.
AI Generated. May Contain Errors.
Earnings Conference Call
China Automotive Systems Q2 2026
00:00 / 00:00

Transcript Sections

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Operator

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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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, 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. On this call, I will provide a brief overview and summary of the first half of 2026 unaudited results, which are reported using U.S. 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 U.S. 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

For the six months ended June 30, 2026, we had a 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 in 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 the Chinese 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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 NEV sales represented approximately 67% of total NEV sales. Rising fuel prices and a reduction in government NEV subsidies in China impacted vehicle demand. The Chinese economy was also a factor in lower vehicle growth as China's gross 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

Nevertheless, China is facing increasing uncertainty in foreign markets for the future. In 2025, we introduced a number of innovations. Our second generation IECB, 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 Chery Arrizo, and a high torque 115-platform electric motor. These advancements help 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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, and 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 pledged 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 is 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive 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 increase is mainly due to higher sales of electric power steering and the appreciation of the R&D against the U.S. 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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 Henglong 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

Yulong's net sales to the Chinese commercial vehicle market increased 42.9% year-over-year to $61.7 million, and our Wuhu subsidiary's net sales to Chery Automobile 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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 gains in the first half of 2026. Selling expenses represented 2.9% of net sales in the first half of 2026, compared with 2.7% in the first half of 2025. General and administrative expenses increased by 12.6% to $14.6 million compared to $13 million in the first half of 2025, 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

R&D expenses represented 5% of net sales, compared to 4.9% in the first six months of 2025. Research and development programs include upgrades, enhanced 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 2025 compared to thousand 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 greater sales, higher gross profit margins, and effective cost controls. Interest expense was stable at $0.8 million first half of 2026 and 2025.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

Net financial expense was $2.9 million first half of 2026, compared to net financial income of $3.3 million in the first half of 2025. 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 $5.5 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 higher income before income tax expenses in the first half of 2026.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

The effective 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 company's common shareholders increased by 98.8% to $29.3 million in the first six months of 2026 compared to net income attributable to parent company's 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, 2025. The weighted average number of diluted common shares outstanding were 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 were $155.6 million, or approximately $5.16 per share as of June 30, 2026. Net working capital was $249.8 million. Total accounts receivable, including notes receivable, were $362.4 million.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

Accounts payable, including notes payable, were $361.5 million, and short-term loans were $75 million. Total parent company's 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 payments to acquire property, plant, and 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.

Operator

Certainly. The floor is now open for questions. If you have any questions or comments, please press star one 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 Neve. Please pose your question. Your line is live.

Jonathan Neve
Jonathan Neve
Analyst at Fidelity International

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?

Jie Li
Jie Li
CFO at China Automotive Systems

[Foreign language]

Translator

[Foreign language]

Jie Li
Jie Li
CFO at China Automotive Systems

[Foreign language]

Translator

OK. For your question, EPS product, electric power steering product now is in South America. We are very excited about the prospect in that market. Our planning is about 300,000 units for the market, for that particular line. We are 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 is up and running, we are seeing about $40 million revenue impact. That will be roughly 50% increase from the current run rate for the revenue in the South America market.

Jonathan Neve
Jonathan Neve
Analyst at Fidelity International

All right. Thank you.

Translator

Thank you.

Operator

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

Michael Fiedler
VP of Investment Business Management at Allianz Global Investors

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

Translator

Okay, thank you. [Foreign language]

Jie Li
Jie Li
CFO at China Automotive Systems

[Foreign language]

Translator

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

Michael Fiedler
VP of Investment Business Management at Allianz Global Investors

Thank you.

Translator

Thank you.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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

Translator

[Foreign language]

Jie Li
Jie Li
CFO at China Automotive Systems

[Foreign language]

Translator

Okay. Yes, we do have a pretty sizable CapEx in the first half 2026. The main part of it is our Mexico project. We are building up our Mexico presence, land and facility. We have injected about $15.8 million. The remaining roughly $15 million in the first half of 2026, was all various product related project CapEx. These are EPS, ECUs, IECB, for example, those type of product development. On the full year basis, we are seeing about $50 million. If you exclude the Mexico project, the CapEx is roughly on par with 2025 CapEx. These are for new product capacity expansion, as we just mentioned, these type of new product, and we are foreseeing about 1 million units of incremental capacity coming online.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

Okay. 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 acquisition, or becoming more vertically integrated, or adding other auto related products into their network?

Translator

Okay. [Foreign language]

Jie Li
Jie Li
CFO at China Automotive Systems

[Foreign language]

Translator

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

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

Thank you.

Operator

Once again, if there are any remaining questions or comments, please press star one on your phone at this time. Again, if there are any remaining comments, please press star one. 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.

Kevin Theiss
Kevin Theiss
Manager of Investor Relations at China Automotive Systems

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.

Operator

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.

Executives
    • Kevin Theiss
      Kevin Theiss
      Manager of Investor Relations
    • Jie Li
      Jie Li
      CFO
Analysts
    • Jonathan Neve
      Analyst at Fidelity International
    • Translator
    • Michael Fiedler
      VP of Investment Business Management at Allianz Global Investors
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