Hanlin Chen - Chairman Qi Zhou Wu - CEO Jie Li - CFO Daming Hu - CAO Kevin Theiss - IR Grayling.

Cormac Glynn - Wall Street Wonders Robert Polich - Private Investor Bernard Lirola - Needham & Company.

Greetings and welcome to the China Automotive Systems Fourth Quarter 2014 Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr.

Kevin Theiss. Thank you. Mr. Theiss, you may now begin..

Thank you for joining us today and welcome to China Automotive Systems 2014 fourth quarter and fiscal year conference call. My name is Kevin Theiss, and I’m with Grayling, China Automotive’s U.S. Investor Relations Advisor. Joining us today are Mr. Hanlin Chen, Chairman; Mr. Qi Zhou Wu, Chief Executive Officer, Mr. Jie Li, Chief Financial Officer; and Mr.

Daming Hu, Chief Accounting Officer of China Automotive Systems. They will be available to answer questions later in the conference call. And we will help with translation. Before we begin, I’ll remind all listeners that throughout this call, we may make statements that may contain forward looking statements.

Forward looking statements represent our 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-K Annual Report for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 26, 2015, respectively; and then documents filed by the Company from time to time with the Securities and Exchange Commission.

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. I’ll provide a brief overview and summary of the 2014 fourth quarter and fiscal year results. And then I’ll turn to management to conduct the question-and-answer session.

The 2014 fourth quarter results are unaudited numbers or the fiscal year results are audited, both period results are reported under U.S. GAAP. For our call today, I’ll review the financial results in U.S. dollars. First, let’s review the industry standards and our market position for the fourth quarter and full-year 2014.

In the fourth quarter of 2014, our overall sales increased by 4.7% to a record fourth quarter high of $135.3 million, compared to $129.2 million in the same quarter of 2013. Our growth in the fourth quarter was lead by higher -- hyper sales of our mid level electric power steering, EPS products and upgraded hydraulic power steering products.

We continue to expand in the two largest automotive markets in the world, China and North America. Slower sales growth in the fourth quarter reflected a sluggish Chinese real estate market, lower GDP growth and apprehension regarding the government’s transformation of the Chinese economy to a more consumer driven model.

Commercial vehicle sales declined due to a pre-buy effect of purchasing national three emission standard compliant commercial vehicles before the January 2015 nationwide enforcement of the more stringent national four emission standards.

The pre-buy effect for commercial vehicle sales were most significantly in the second half of 2014 generating lower unit sales.

We continue to capture market share as our sales of steering gears for passenger vehicles rose by 19.6% in the 2014 fiscal year compared with a 9.9% increase in passenger vehicle sales and a 6.9% improvement for all vehicles according to the China Association of Automobile Manufacturers, CAAM.

Our growing portfolio of advanced power steering products, provides infinite [ph] solutions that further strengthened our relationships with many of the leading vehicle manufacturers in China. We increased our sales at Dongfeng Auto, Beiqi Foton Auto, Geely Holding and Great Wall Auto in 2014.

We also succeeded in gaining additional market share in the fast growing multi-purpose MPV market with joint brand -- joint venture brands in China. We additionally expanded our production capacity in China by half a million units to accommodate increased demand.

We continue to grow our sales in North America as Fiat Chrysler solidified their position as our largest customer. Jeep and Dodge Van trucks maintained growth in 2014 and into 2015. The jeep brand, SUV did best December U.S sales ever in 2014 and set a new yearly record for sales for the year 2014.

The Jeep Wrangle and Dodge pickup truck had their best sales for any December, RAM U.S pickup trucks sales grows 32% in December, which was their 56th consecutive month of sales in the year. RAM pickup trucks also reported their best annual sales since 2003. Growth has continued as we entered into 2015.

The jeep brand as monthly sales were up 23% year-over-year in January 2015. The brands best sales performance in any January. January was also Jeeps 16th consecutive month of sales gains on a year-over-year basis as every month has achieved record sales since November 2013.

January’s 14% growth also represented a 57 consecutive month of year-over-year sales growth for Dodge Van pickup truck sales. In October 2014, our relationship with Fiat Chrysler expanded again, in addition to the RAM 2500 and 3500 model trucks, we began supplying the RAM model 4500 and 5500 model trucks.

With these orders, we’re supplying all for the recirculating ball RCB steering gears for all heavy duty trucks produced by Fiat Chrysler in North America. We are also using our strong financial resources and cash flow to exploit additional opportunities outside of China to enhance our growth.

Since our initial exports in 2014, we’ve seen our opportunities in South America progress. We began in 2014 to build an assembly plan in Brazil to better service a global OEM customer in Chinese vehicles being built in the region. Assembly operations are expected to commence in mid 2015.

Our investment in our world class research and development increased 10% to $23 million in 2014. Our R&D focused on further development of our EPS technology and upgrades of hydraulic steering products. In the fourth quarter of 2014, R&D investment declined as commercial production began for some EPS upgraded steering products.

EPS increases fuel efficiency and allows vehicles to reduce exhaust. These products stimulated our sales growth in the fourth quarter of 2014. We believe our EPS products will continue to generate higher sales going forward. With our expanding line of EPS products in commercial production, the outlook is for stable R&D in the near future.

Our EPS and upgraded hydraulic steering products have created a technology challenge for our Chinese competition. We strategically consolidated our ownership to 100% in two key subsidiary during 2014. We purchased the remaining 20% minority interest in Jingzhou Henglong as well as remaining 19% minority interest in Shashi Jiulongat.

Further consolidating subsidiaries financial results immediately increased net profits. Additionally, we now have full control over these key businesses. As of December 31, 2014, total cash and cash equivalents and short-term investments were $109.5 million, compared to $89.5 million as of December 31, 2013.

Working capital was $198.1 million as of December 31, 2014, compared to $179.3 million as of December 31, 2013. Total stockholders' equity was $289.3 million as of December 31, 2014, compared to $226.7 million at the end of 2013. We increased our cash flow from operations by $32.8 million in 2014 compared with 2013.

Given our strong cash flows and higher net earnings, we rewarded our shareholders with a special cash dividend of $0.l8 per common share in mid 2014. Our cash flows have been used to build our R&D and production capacities to better position us to 2015.

Our growing EPS in upgraded steering products are strengthening our relationships with China’s vehicle manufacturers and foreign joint ventures to sustain and improve our market leadership in China. Our relationship with Fiat Chrysler in North America is growing and we continue to receive orders from Ford in North America as well.

Our South American assembly facility will be in operations here to provide local distribution of our products to better serve our customers there. Let me now walk you through our 2014 and fiscal year 2014 financial results.

In the fourth quarter of 2014, net sales increased by 4.7% to $135.3 million compared to $129.2 million in the same quarter of 2013. The net sales increase was mainly due to the growth of the Chinese passenger vehicle market and the strong growth in the sales of mid-level electric power steering units in the fourth quarter of 2014.

Gross profit increased by 7.1% to $24 million in the fourth quarter of 2014, compared to $22.4 million in the fourth quarter of 2013. The gross margin was 17.7% in the fourth quarter of 2014, versus 17.3% in the fourth quarter of 2013. The increase in gross profit was primarily due to greater sales volume.

The increase in gross margin was partially due to greater sales of more advanced EPS units with a higher gross margin, and a decrease in unit material costs associated with better economies of scale and lower component costs.

Selling expenses rose by 24.3% to $4.6 million in the fourth quarter of 2014, compared to $3.7 million in the fourth quarter of 2013. Selling expenses represented 3.4% of net sales in the fourth quarter of 2014 and 2.9% in the same quarter last year.

The increase in selling expenses was primarily due to the growth of transportation and office expenses as a result of higher sales volume. General and administrative expenses, G&A expenses, increased by 64.5% to $5.1 million in the fourth quarter of 2014, compared to$3.1 million in the same quarter of 2013.

The increase in G&A expenses was primarily due to the lower base in the fourth quarter of 2013.

The Company received reimbursement of legal expenses of $0.6 million by the Company's insurance company in the fourth quarter of 2013, and depreciation and amortization expenses decreased mainly due to the continued usage of certain office equipment in the fourth quarter of 2013 that has -- that was fully depreciated at the beginning of the year.

G&A expenses represented 3.8% of net sales in the fourth quarter of 2014 and 2.4% in the fourth quarter of 2013. Research and development expenses, R&D, declined by 16.7% to $6.5 million from $7.8 million in the fourth quarter of 2013.

The decrease in R&D expenses was mainly due to lower investment in the development and trial-production of the Company's new products as some models have reached commercial production, such as electric power steering systems, and reduced external technical support fees.

R&D expenses represented 4.8% of net sales in the fourth quarter of 2014, compared with 6 million -- I’m sorry, compared with 6% in the fourth quarter of 2013. Operating income increased by 8.1% to $9.3 million in the fourth quarter of 2014, compared to $8.6 million in the same quarter of 2013.

The increase was mainly due to higher gross profit and net gain on other income in the fourth quarter of 2014, compared to the fourth quarter last year. As a percent -- of sales, the operating margin was 6.9% in the fourth quarter of 2014, compared to 6.6% in the fourth quarter of 2013.

Net financial income was $0.03 million in the fourth quarter of 2014, compared to net financial expenses of $0.05 million in the fourth quarter of 2013. Income before income taxes and equity in earnings of affiliated companies was $9.9 million in the fourth quarter of 2014, compared to $9.2 million in the fourth quarter last year.

The increase was mainly due to higher operating income of $0.7 million and a$0.4 million reduction in interest expenses.

Net income attributable to parent company's common shareholders was $9 million in the fourth quarter of 2014, compared to net income attributable to parent company's common shareholders of $7.2 million in the corresponding quarter of 2013.

Diluted earnings per share were $0.28 in the fourth quarter of 2014, compared to diluted earnings per share of $0.26 in the fourth quarter of 2013. Weighted average number of diluted common shares outstanding was 32,139,697 in the fourth quarter of 2014, compared to 28,062,553 in the fourth quarter of 2013.

Now I’ll go over to fiscal year 2014 results. Annual net sales increased by $51.6 million, or 12.4%, to $466.8 million in 2014, compared to $415.2 million in 2013. According to 2014 annual statistics from CAAM, the industry sales volume of passenger vehicles increased 9.9% compared to 2013.

The Company's sales volume of power steering gears for passenger vehicles increased due to higher sales of passenger vehicles in China. Higher sales volume represented a sales increase of $49.4 million.

The Company's new products, including volume sales of EPS for mid-range cars, and quality improvements in some earlier power steering gears for MPVs, resulted in increased market share in China, especially among joint-venture brands' auto customers.

Gross profit in 2014 increased by 14.2% to $87.5 million, from $76.6 million in 2013, mainly due to higher sales volume in 2014. Gross margin was 18.7% in 2014, compared to 18.5% in 2013, with the increase primarily due to greater sales of higher-margin products.

Gain on sales -- gain on other sales mainly consisted of the net amount retained from the sales of materials, property, plant and equipment, land use rights and scraps. With the year ended December 31, 2014, gain on other sales amounted to $11.8 million, compared to $7.6 million for the year ended December 31, 2013.

This gain represented an increase of $4.2 million, or 55.3%, which was mainly due to the Company's sale of the remaining land use rights in 2014. The Company recognized a gain on the sale of land use rights of $7.5 million in 2014 and $4.1 million in 2013.

Selling expenses increased by 18% to $15.7 million in 2014 from $13.3 million in 2013, which was mainly due to higher transportation and office expenses related to the increase in unit volume. Selling expenses represented 3.4% and 3.2% of net sales in 2014 and 2013, respectively.

G&A expenses increased by $2.9 million, or 21.8%, to $16.2 million in 2014 from $13.3 million in 2013. Higher G&A expenses were primarily due to increased staff compensation and a rise in property taxes due to larger property holdings. G&A expenses represented 3.5% of net sales in 2014 compared to 3.2% in 2013.

R&D expenses increased by $2.1 million or 10% to $23 million in 2014 from $20.9 million in 2013, primarily due to the cost incurred with the company’s further development from its EPS technology, improvement of machinery molds and higher staff compensation cost, although external technical fees were reduced in 2014.

At present, the company developed and sold several types of EPS for small-engine cars. R&D expenses represented 4.9% of net sales in 2014, which was a decrease from 5% of net sales in 2013.

Operating income increased by 21% to $44.4 million in 2014 from $36.7 million in 2013, the increase is due to a 14.2% increase in gross profit and a higher gain on other sales for material scraps, fixed assets and land use rights. The operating margin was 9.5% in 2014, compared to 8.8% in 2013.

Net financial income was $2.4 million in 2014, compared to net financial income of $2 million in 2013, due to an increase in interest income of $0.2 million and a decrease in bank handling expenses of $0.1 million.

Income before income tax expenses and equity in earnings of affiliated companies was $46.1 million for 2014 compared with $38.2 million for 2013, an increase of $7.9 million or 20.7%. This growth was mainly due to an increase in income from operations of $7.7 million.

Income tax expense was $6.8 million for 2014, compared to $5.5 million for 2013, representing an increase of $1.3 million or 23.6%. This tax increase was mainly due to higher income before tax. The effective tax rate increased to 14.7% for the year ended December 31, 2014 from 14.4% in 2013.

The increase was primarily due to an increase in income before tax of certain high effective tax rate subsidiaries. The Chinese government rewards high-tech companies with favorable tax rates. Net income attributable to parent company's common shareholders was $33.5 million in 2014, compared to $26.8 million in 2013.

Diluted earnings per share were $1.15 in 2014, compared to $0.95 in 2013. The weighted average number of diluted common shares outstanding was 29,082,809 in 2014 compared to 28,056,144 in 2013. Management’s revenue growth target is 10% year-over-year growth for the fiscal year 2015.

This target is based on the company’s current views on operating the marketing conditions, which are subject to change. We continue to focus on maintaining our market leadership domestically as we expand globally. We are maintaining gross margins and generating positive cash flow. With that operator, we are ready to begin the Q&A session..

Thank you. [Operator Instructions] Thank you. Our first question is from the line of Cormac Glynn with Wall Street Wonders. Please go ahead with your question..

Good morning.

How many unit sales for electric power steering do you need to achieve economy scale and increase gross margin?.

To reach the economy scale we need to produce and sell between 800,000 or above 1 million. Yes, 800,000 units to 1 million. In 2015 our projection is to sell 700,000 to 800,000 units. So we expect margin will be increased -- improved in 2015. That’s for the electric power steering..

Thank you very much. Thank you..

[Operator Instructions] The next question comes from the line of Robert Polich, a Private Investor. Please proceed with your questions..

Thanks for taking my call.

You know I was just wondering, is there any plans to do, the share price has been really low and I’m kind of surprised that there is, in expenses as it is and I was just wondering would there be any plan to possibly buyback some shares and is there any possibility, I know we had a -- it was sort of a dividend last year, I guess it was a return of capital.

Do you think that would be repeated? Those are my questions. Thank you..

So the share buyback as well as the dividend will be discussed in our board meeting in the middle of the year. So we’ll make announcement if there is a decision..

Okay. Thank you very much..

Thank you..

[Operator Instructions] Thank you. Our next question comes from the line of Bernard Lirola with Needham. Please proceed with your questions..

Yes, and by the way congratulations on the great quarter. I just wanted to get more visibility on growth expectations in Latin America with regard to, ultimate volume produced in about three years in terms of understanding the capacity you’re putting out there.

And my second question is, I think you commented that South America would be used for global markets. So I’m trying to understand if you intent to ship to the U.S.

for example from that facility or not?.

Three year plan is -- at the end of three year we want to reach 350,000 units and these are mainly for, all for Brazil and Argentina market, 350,000 annual unit volume, for the next three years, that’s the goal. And in North America, it’s not going to be shipped out of our South America facility. It’s still going to be shipped out of China..

If I could ask a follow-up question..

Sure..

Can you give us any sense for your views on the African market long-term or mid-term?.

For Africa, as you know the OEM market in Africa is very small. It’s not promising for us either. However in there they do have a decent aftermarket in which we can play in that market..

On the Chinese facility?.

Yes, we’ll be shipping out of China facility and the general term is, if the market demand reaches certain thresholds we’ll start to built facility there, produce locally and ship locally. Anywhere below that threshold we’ll have to ship out of China for the economy of scale..

So obviously you’re producing some net cash and you’ve completed some consolidation, you did mention that you were reviewing alternative use of the cash and if you’re completing the South American build up as well as have no African plans and no real Chinese, I might to conclude that the use of cash beside the dividend or a stock buyback would be to make an acquisition of another supplier to the OEM market?.

Yes, to answer your question, we’re looking at two areas, as you know we are having quite a decent cash spending right now, cash position right now, its continued to grow in the coming year.

And in terms of the cash and how we use it, one is we’re going to continue to expand our capacity for [indiscernible] that satisfy or to make the global market demand such as North America and our North America shipment has been increasing every year.

So we need [ph] to continue to expand capacity to meet that demand, that including Ford as well as Chrysler. And the second area we’re looking at is, yes, its some acquisition target, we’re looking at high quality companies with high -- we’re looking for acquisition target as a high quality customer base as well as cutting edge technologies.

So we’re looking to bring out these companies into our coverage..

Thank you so much..

Thank you. End of Q&A.

[Operator Instructions] Again we have no additional questions.

Do you like to make some closing remarks?.

Thank you all for participating in our 2014 earnings conference call. We look forward to speaking with you again, and we wish you all a good day..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..