Rachel Levine - Investor Relations Qizhou Wu - Chief Executive Officer Jie Li - Chief Financial Officer.

Good day everyone and welcome to today’s program. At this time, all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to turn the conference over to Ms. Rachel Levine. You may begin..

Thank you. Thank you everyone for joining us today. Welcome to China Automotive Systems Third Quarter 2015 Conference Call. My name is Rachel Levine, and I’m representing China Automotives US Investor Relations Advisor. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; Mr. Jie Li, Chief Financial Officer; and [Mr.

Tin Yau], Financial Manager of China Automotive Systems. They 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.

Forward-looking statements represent the company’s estimates and assumptions only as of the date of this call.

As a result, the company’s actual results could differ materially from those contained in these forward-looking statements due to a number of factors including those described under the heading Risk Factors in the company’s Form 10-K Annual Report for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on March 26, 2015, and in 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. On this call, I will provide a brief overview and summary of financial results for the third quarter and nine-month periods of 2015.

And then I will turn the call over to management to conduct a question-and-answer session. The following 2015 third quarter and nine-month results are unaudited numbers; results are reported under US GAAP. For the purposes of our call today, I’ll review the financial results in US dollars.

First, let’s review the dynamics of the automobile industry and China Automotive’s market position for the third quarter of 2015. While the third quarter is usually a slow season for auto sales in China, this year’s quarter was more challenging than usual.

According to China’s National Bureau of Statistics, China’s GDP growth rate was 6.9% in the third quarter of 2015, which is the slowest it has been since 2009. The resulting impact to consumer confidence combined with turbulence in the Chinese stock market negatively affected overall domestic automobile sales.

This trend naturally also led to a decline in domestic original equipment manufacturer or OEM production volume. Since the majority of China Automotive’s business is in China, these declines resulted in decreased sales volume for the quarter. Passenger vehicles sales showed some signs of recovery in September.

However, the commercial vehicle market continued to suffer. Fortunately, the company was able to offset some of the impact of the market decline with very strong sales growth of 123% in its electronic power steering or EPS systems, which accounted for 22.4% of total sales in the third quarter.

The company’s EPS and traditional hydraulic circulating ball or RCB steering systems also received the number one ranking in a road test by Yutong Bus. The driverless lane-keeping feature of this system was very well received by Yutong’s engineering team.

Management is encouraged by the growing adoption of EPS in China and the company’s sales team is targeting many more OEMs with these EPS products. On the hydraulic product front, in September, the company passed quality and safety certifications for the second project with the PSA Peugeot Citroën of Shanghai and successfully began mass production.

In the international markets, the company continues to penetrate North America through expanded relationships with more OEMs. Given management’s anticipation of more contracts from the North American market in the foreseeable future, the company expanded its production capacities in compliance with the US OEM standard.

In addition, the company’s new production facility in Brazil is currently undergoing final testing and is expected to begin mass production in 2016. In early October, the Chinese government announced an incentive plan, including 50% purchase tax reductions that are intended to stimulate sales in the passenger vehicle sector.

Management believes that this new policy will help revitalize the auto market in China after three consecutive weak quarters. As the main supplier to many OEMs in China, the company is well positioned to benefit from this new policy. Let me now go through financial results for the third quarter of 2015.

Third quarter net sales were $90.8 million compared to $101.7 million in the same quarter of 2014. The net sales decline was mainly due to decreased auto sales in a weak economic environment and a shift in demand to EPS versus traditional steering products which represent the majority of the company’s products.

Net sales of traditional steering products were $44.7 million for the three months ended September 30, 2015, compared to $66.8 million for the same period in 2014, representing a decrease of $22.1 million or 33.1%.

Net sales at EPS were $20.3 million for the three months ended September 30, 2015, compared to $9.1 million for the same period in 2014, representing an increase of $11.2 million or 123.1%. As a percentage of sales, the sales of EPS was 22.4% for the three months ended September 30 compared to 8.9% for the same period in 2014.

Gross profit was $15.9 million in the third quarter of 2015, compared to $20.6 million in the third quarter of 2014. Gross margin was 17.5% in the third quarter compared to 20.2% for the same period in 2014. The decrease in gross margin was mainly due to weaker unit volume sales and lower average selling price adjustment.

Gain on other sales was $0.9 million, compared with $1.1 million in the third quarter of 2014. Third quarter selling expenses were $3.3 million compared to $3.7 million in the prior year’s quarter. Selling expenses represented 3.7% of net sales in the third quarter of 2015, compared to 3.7% in the third quarter of 2014.

General and administrative expenses or G&A expenses, decreased by 17.5% to $3.1 million in the third quarter compared to $3.7 million in the same quarter of 2014. G&A expenses represented 3.4% of net sales in the third quarter of 2015 and 3.7% in the third quarter of 2014 as the company continued to implement cost control measures.

Research and development expenses, or R&D expenses, were $5.4 million in the third quarter of 2015, unchanged from the previous year’s period. R&D expenses represented 6% of net sales in the third quarter of 2015 compared with 5.3% of net sales in the third quarter of 2014.

The higher R&D expenses as a percentage of revenue was mainly due to the lower revenue base in the current year. The company continued to develop EPS products and improve the production equipment. Net financial income was $0.5 million in the third quarter of 2015 compared to net financial income of $1.1 million in the third quarter of 2014.

Income from operations was $5 million in the third quarter of 2015, compared to $8.8 million for the same period in 2014. The decrease was mainly due to the lower revenue in the current quarter compared with the same quarter of last year.

Income before income tax expenses and equity in earnings of affiliated companies was $5.2 million in the third quarter of 2015, compared to $9.3 million for last year.

The decrease in income before income tax expenses and equity in earnings of affiliated companies was mainly due to lower operating income in the third quarter compared to the prior year’s period.

Net income attributable to CAAS common stockholders was $4.3 million in the third quarter of 2015, compared to net income attributable to CAAS common shareholders of $6.7 million in the third quarter of 2014.

Diluted earnings per share were $0.13 in the third quarter of 2015, compared to diluted earnings per share of $0.24 in the third quarter of 2014. The weighted average number of diluted common shares outstanding was 32,134,839 in the third quarter of 2015, compared to 28,063,661 in the third quarter of 2014.

Now, let’s discuss the first nine months of the year. Net sales for the first nine months of 2015 were $323.5 million, compared to $331.5 million in the first nine months of 2014. Nine-month gross profit was $59.4 million, compared to $63.5 million in the corresponding period last year.

Nine-month gross margin was 18.4%, compared to 19.2% for the corresponding period in 2014. For the nine months ended September 30, 2015, gain on other sales amounted to $3.2 million, compared to $10.3 million for the corresponding period in 2014, which included a one-time gain of $7.5 million on sales of land use rights.

Income from operations was $22.6 million compared to $35.1 million in the first nine months of 2014. Operating margin was 7%, compared to 10.6% for the corresponding period of 2014, or 8.3% after excluding the one-time gain of $7.5 million.

Net income attributable to CAAS common stakeholders was $20.5 million compared with $24.5 million in the corresponding period last year. Diluted earnings per share were $0.64 for the first nine months of 2015, compared to diluted earnings per share of $0.87 for the corresponding period last year.

Excluding the one-time net income of $5.1 million on the sale of land use rights, net income attributable to CAAS common stockholders and diluted earnings per share would have been $19.4 million and $0.69 respectively for the first nine months of 2014. Now, turning to the balance sheet.

For the first nine months of the year, net cash flow from operating activities was $24.1 million, a significant increase $8.1 million for the first nine months of 2014. This increase has resulted in a very strong balance sheet that management believes is strong enough to weather the current industry challenges.

As of September 30, 2015, total cash and cash equivalents, pledged cash deposits and short-term investments were $132.5 million. Total accounts receivable including notes receivable were $273.9 million; accounts payable were $192.5 million and bank and government loans were $45 million.

At the end of September, total liquid assets amounted to over $150 million, which is almost 75% of the company’s total market cap today.

More than half of total receivables were represented by notes receivable and endorsed by large commercial banks at the end of the third quarter, making management confident about the full collection of outstanding accounts receivable.

Total CAAS stockholders’ equity was $305.9 million as of September 30, 2015, compared to $298.2 million as of December 31, 2014. As always, management closely tracks return on capital and is committed to maintaining solid returns and increasing shareholder value. Before we open the floor to questions, let’s briefly discuss the business outlook.

Management continues to project revenues for fiscal 2015 to be unchanged from fiscal 2014. This guidance is based on the company’s current views on operating and market conditions, which are subject to change. That being said, recent developments in government policy may help improve the industry outlook going forward.

As management mentioned during the second quarter conference call, the Chinese central government was expected to adopt new policies and actions to increase economic growth in China.

In early October, the Chinese government announced an incentive plan including 50% purchase tax reductions and engine displacements of 1.6 liter and below that are intended to stimulate the passenger vehicle sector. This policy will be effective until the end of 2016.

Management believes that this new policy will help revitalize the auto market in China. According to the latest data from the China Association of Automotive Manufacturers, October passenger vehicle sales grew by 15% year-over-year and SUV sales were up 62% year-over-year.

As the main supplier to many OEMs in China, many of which are specialized in small vehicles, management believes the company is well positioned to benefit from the new policy in the coming quarters. Before we open the floor to questions, let me say that management continues to focus on increasing efficiencies and maintaining or increasing margins.

With China Automotive’s low-cost manufacturing capabilities and technologically advanced steering products, the company is well positioned to maintain its domestic market share and continue to expand its footprint in the global markets. With that, operator, we’re ready to begin the Q&A session..

[Operator Instructions] We’ll take our first question from [Don Cooper]..

I was wondering if management would characterize the automotive market in China with respect to the level of inventory, specifically, [indiscernible] held in inventory relative to more normal market..

[Foreign Language] So the third quarter, we saw a reduction on the inventory in China and mainly due to the cut back on the production, so OEM sees a weakness in demand side, so this cut back – a total reduction and so that helped to eliminate some of the inventory. And fourth quarter is typically a strong quarter.

And so everyone is now building off their inventory as we’re heading towards a high seasonal auto sales. On top of that, we have government subsidies coming in play to incentivize consumer to buy small vehicles..

[Operator Instructions] We will take our next question from [Robert Polivic]..

I had a couple of questions, actually. The reduction in margins for the quarter, was that related to a change in currency or price reductions in contracts to the car manufacturers? That’s my first question..

[Foreign Language] So to answer your question, the margin decline on a year-over-year basis is not related to the currency change. It’s mainly due to the utilization, production utilization rate. In the third quarter, as you know, the industry – the sector is very weak. So our production utilization rate is at 70%.

At such a low rate, utilization rate, our fixed cost was normally 6% to 7% of total cost of goods sold. And so we’ll not be able to [spread them into new products]. That being said, gross margin was down by about 1 percentage point. And also on the cost side, the raw material price also [indiscernible] due to the weak sector, the steel sector.

So we took advantage of it. So it’s a bit on cost, raw material cost. But net-net, [indiscernible]..

My next question has to do with sales for the fourth quarter, I assume if you’re saying that sales year-over-year should be flat, the fourth quarter should be very strong, like somewhere around $150 million.

And if that’s the case, with this government tax incentive, should we see some reasonable growth heading into 2016 with the reduction in sales tax for vehicles that qualify?.

[Foreign Language] So as you already saw after the incentives by the Chinese government, October month’s encouraging increase of 15% on the passenger vehicle sector on a year-over-year basis. Now, looking to 2016, I think bulk of those demand will return in 2016. We are seeing probably 5% to 8% conservatively, 5% to 8% increase.

And that’s mainly driven by two factors. One is directly tied into this, reduction on purchase tax on smaller vehicle, engine size of 1.6 liter or below. And the other is the economy.

As you probably read, the Chinese government has placed a greater emphasis on the economy to moving from old type of manufacturing [indiscernible] economy to more – or consumer oriented economy. And that alone will see not more policy will come in to help to revitalize the economy.

And that being said, the auto is probably – auto is the second largest industry in China. Number one is the real estate. The auto industry after all these years of growth, we’re still seeing a relatively smaller penetration in terms of consumer in China.

And so per 1,000 population, we still have less than 10% vehicles, which is substantially lower than global ownership level. And not to mention the Chinese consumer now has higher savings and has already experienced the lifestyle change through some of their new purchases of such vehicles.

And so this could be – a number of factors will come in to help with the growth of the auto sector in 2016..

I did have one other question and it just has to do with competitive – or competition, I should say, setting up factories in China, I guess some steering manufacturers from the US, I guess, Europe and Japan probably to sell to related companies that they have relationships with.

How is that competitively affecting China Automotive, you’re still in a very good position to gain share from global auto manufacturers and in the pressure increasing in China with regard to competition from these new plants or I don’t know if there are that many that have set up or plant is set up in China?.

[Foreign Language] So the competitive landscape has not changed much in the last, I would say, 10 years, or been competing with those peers whether they’re from Japan, Europe or US in China. However, we still command the larger market share in China. And two of the main reasons are driving this to continue to be the leader.

One is we provide the best value. When we compete with a competitor’s product, if we have a similar quality, our price is better. When we are competing with their – on the same price, we offer better quality. So either way, we have an advantage over our competitors.

And second reason is our after sales services that are being a local player, being established in China for over 20 years and we are the best service provider. So we’re very confident and that’s one of our selling point that we’ll continue to capitalize on that.

[Foreign Language] In the past, we’ve been very strong in the domestic branch, whether [indiscernible]. We are the first group of supplier to support them and we play a vital role in their transformation to become a large player in China and globally.

We will continue that relationship to expand with those OEMs domestically, but also we will also start to increase our penetration into the Sino-foreign joint ventures. As you know, there are a number of Sino-foreign joint ventures in China. So want to leverage our competitive advantage to increase our orders from them.

And globally, since we already have a quite strong track record in Detroit working with Chrysler and we look forward to expand that relationship and through our other OEM players in the global market. So we think we’re very well positioned. And not to mention we have already planned and built our facility in Brazil and that’s in the testing stage.

And so in 2016 we’ll start mass production..

And we have no additional questions at this time..

Thank you everyone for participating in the China Automotive Systems third quarter 2015 financial results conference call. We look forward to speaking with you next quarter and wish you all a good day or evening..

This does conclude today’s program. You may now disconnect at any time..