Greetings, and welcome to the China Automotive Systems First Quarter 2021 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Kevin Theiss, Investor Relations for China Automotive Systems. Thank you. You may begin..

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2021 First Quarter Conference Call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; and Mr. Jie Li, Chief Financial Officer 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'll 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, 2020, 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.

If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee.

Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainty in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially impact our business financial condition and results of operations.

A prolonged disruption or any further unseen delay in our operations of the manufacturing, delivery and assembly processes within any of our production facilities could continue to result in delays in the shipment 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. On this call, I will provide a brief overview and summary of the first quarter results for the period ended March 31, 2021. Management will then conduct a Q&A session.

The following 2021 first quarter financial results are unaudited, and are reported using US GAAP accounting. For the purposes of our call today, I will review the financial results in US dollars. We'll begin with a review of recent dynamics of the Chinese economy, the automobile industry and China Automotive's as market position.

We are pleased to report that our net sales rose 77% to $130.3 million from $73.6 million in the first quarter of 2020. Sales of our hydraulic products grew by 61.2%. Electric power steering projects rose 204.9% and represented 19% of total sales compared with 11% in the first quarter of 2020.

This growth is partially due to the Chinese economy essentially reaching full recovery from the impact of the COVID-19 pandemic in the fourth quarter of 2020. In the first quarter of 2021, Chinese GDP grew by 18.3% year-over-year.

Chinese industrial production grew by 24% year-over-year, and overall exports and imports each grew by over 30% year-over-year in the first quarter of 2021.

According to statistics from the China Association of Automobile Manufacturers, CAAM, automobiles in China - automobile sales in China rose by 75.6% year-over-year in the first quarter of 2021 as passenger vehicle sales grew 75.1% year-over-year, commercial Vehicle sales increased by 77.3% year-over-year, electric vehicle sales climbed 280% year-over-year, and other export sales were up 74.6% year-over-year.

The sales of all passenger vehicle segments were higher year-over-year. SUV continued to outsell sedans. Improved commercial vehicle sales were generated by a combination of the move to the National VI emission standards, stronger anti-overloading enforcement and the initiation of infrastructure projects.

The sale of Chinese national branded vehicles in the first quarter of 2021, a key marker for CAAS, increased by 81.5% year-over-year, and represented 41.5% of total automobile sales in China. These growth numbers partially reflect the comparison to the low sales in the first quarter of 2020 generated by the COVID-19 restrictions in China.

However, the 2021 first quarter ended strongly with March automobile sales alone, rising by 73.6% quarter-to-quarter and by 74.9% year-to-year. Our sales through our three main markets, the Chinese OEM passenger vehicle market, the Chinese OEM commercial vehicle market and export market, all achieved growth in the first quarter of 2021.

Each of our operating units generated sales growth and profits in the first quarter as well. Sales of the Chinese passenger vehicle market rebounded strongly compared to the same quarter last year.

As previously announced at the end of 2020, we had begun selling more EPS products into electric vehicle market as a number of large OEMs have begun using our products, including Great Wall, Chery Auto, Beijing Auto and JAC motors.

The outlook is for approximately 200,000 of our EPS units to be supplied to the EV market in 2021 Sales of our commercial vehicle products have increased in both the Chinese OEM and the North American aftermarket. Sales to our Tier 1 customers in North America grew by 26.3% year-over-year in the first quarter of 2021.

Our gross profit increased 75.9% year-over-year with a stable gross margin. Total operating expenses increased 57.4% year-over-year. This combination resulted in income from operations climbing by 311.1% year-over-year, compared with the first quarter of 2020.

For the first quarter of 2021, our net income attributable to parent company's common shareholders was $3.1 million, or basically diluted income per share of $0.10, compared to us a slight net loss in the first quarter of 2020.

With the rate of technology change in the automobile industry rising we increased our research and development investment by 28.6% year-over-year, in the first quarter of 2021.

We announced a new proprietary EPS system during the first quarter, which integrates and communicates with the vehicles' main data to create lane keeping assist, automatic parking assist, lane centering and traffic jam assist functions as part of the company's advanced driver assistance program ADAS or more commonly referred to as autonomous driving system.

This system is a company in Chinese automobile industry milestone. For the first time a Chinese domestic steering producer drove the entire product development cycle in house from design to testing. We also developed the key proprietary algorithms for the steering control software.

A number of purchase orders have been received for this advanced steering systems from domestic and foreign OEMs such as Great Wall, JAC, Chery Auto, CS Chrysler Automobiles. We will continue to improve our current products, as well as introduce other new products in the future to provide advanced products to our customers.

Building financial strength remains a top priority provide the resources to support future growth and enhance shareholder value. Our total cash and cash equivalents and pledge cash was $122 million as of March 31, 2021. Total parent company stockholders equity rose to $304.4 million in March 31, 2021 from $303.2 million at the end of 2020.

We expect the Chinese economy will continue to grow in 2021. There was slower rate than the 18.3% experienced in the first quarter of 2021. We have been experiencing greater demand for advanced EPS and autonomous driving products and the sale of our advanced hydraulic products continues to expand in both domestic and international markets.

Now, let me review the financial results in the first quarter of 2021. Net sales increased by 77% to $103.3 million in the first quarter of 2021 compared to $73.6 million in the first quarter of 2020. The net sales increase was mainly due to the recovery of the Chinese economy and Chinese automobile demand post COVID-19.

Net sales of traditional steering products and parts, increased by 61.2% to $105.6 million for the first quarter of 2021 compared to $65.5 million for the same period in 2020. Net sales of electric power steering product rose to 204.9% to $24.7 million from $8.1 million for the same period in 2020.

EPS product sales were 19% of the total net sales for the first quarter of 2021 compared with 11% for the same period in 2020. Export sales rose 30.4% to $40.7 million in the first quarter of 2021 compared with $31 million in the first quarter of 2020. Gross profit rose by 75.9% to $19.7 million, compared to $11.2 million in the first quarter of 2020.

Gross margin in the first quarter of 2021 was 15.1% generally consistent with the 15.2% in the first quarter of 2020. Gain on other sales was $1.3 million compared to $0.6 million in the first quarter of 2020. Selling expenses were $5.6 million, compared to $2.1 million in the first quarter of 2020.

This increase in selling expenses was primarily due to higher sales volumes and increased air freight charges. Selling expenses represented 4.3% of net sales in the first quarter of 2021 Budget 2.9% in the first quarter of 2020. General and administrative expenses, G&A were $4.6 million, compared to $3.4 million in the first quarter of 2020.

The increase in G&A expense was primarily due to higher personnel costs to support the increase in net sales. G&A expenses represented 3.5% of net sales in the first quarter of 2021 compared to $4.6 million - 4.6% of net sales in the first quarter of 2020.

Research and Development expenses, R&D were $6.7 million compared to $5.2 million in the first quarter of 2020. R&D expenses represented 5.1% of net sales in the first quarter of 2021 compared to 7.1% in the first quarter of 2020.

Other income net was $1.7 million for the first quarter of 2021 compared to $0.1 million for the three months ended March 31, 2020. The increase of $1.6 million was mainly due to government subsidies of $1.4 million received in the first three months of 2021.

Income from operations was $4.2 million in the first quarter of 2021, compared to $1 million in the first quarter of 2020. This growth was primarily due to a higher year-over-year increase in sales and gross profit compared with the increase in operating expenses.

Interest expense was $0.3 million in the first quarter of 2021 compared to $0.4 million in the first quarter of 2020 primarily due to less loans. Net financial expense was $0.2 million in the first quarter of 2021 compared $0.5 million in the first quarter of 2020. The reduction in net financial expense was primarily due to less foreign exchange loss.

Income, before income tax expenses and equity and earnings of affiliated companies was $5.3 million in the first quarter 2021 compared $0.2 million in the first quarter of 2020.

The increase in income before income tax expenses and equity and earnings of affiliated companies in the first quarter of 2021 was mainly due to higher income from operations and higher other income.

Net income attributable to parent company's common shareholders was $30.2 million in the first quarter of 2021 compared to a net loss attributable to parent company's common shareholders of point 0.03 million in the first quarter of 2020.

Diluted income per share was $0.10 in the first quarter of 2021 compared to nil per share in the first quarter of 2020. The weighted average number of diluted common shares outstanding was 30,857,736 in the first quarter of 2021 compared to 31,174,045 shares in the first quarter of 2020. Now we will review a few balance sheet items.

As of March 31, 2021, total cash equivalents and pledged cash were $122 million. Total accounts receivable including notes receivable were $236.6 million. Accounts payable including notes payable were $223.9 million. And short-term bank and government loans were $46.2 million.

Total parent company stockholders equity was $304.4 million as of March 31, 2021 compared to $303.2 million as of December 31, 2020. For the business outlook management has raised revenue guidance for the full year 2021 from $470 million to $485 million.

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

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions].

Okay. Hi, operator. Hi, Melissa. So we have some questions from our analyst Bill Gregozeski, Greenridge Capital - Greenridge Global. He - due to the travel schedule, he is unable to attend the call. So he has emailed his questions. So he has the following five questions.

First question, can you break out the revenue from Brazil in first quarter 2021 compared to first quarter 2020.

And where did that large Stellantis order start?.

[Interpreted] Okay. The answer for the first question, the revenue from Brazil market in 2020 first quarter was about $2 million. But it quickly increased to $67 million in the first quarter 2021. That's representing more than 200% increase. And in terms of when the order started with Stellantis.

That order started in the end of 2020, so in the fourth quarter of 2020, in December more specifically..

Then we have the second question.

The sales of the EPS products seem to be accelerating, is this related more to the growth in the market or demand for your EPS product?.

[Interpreted] The growth of our EPS product sales is mainly driven by the demand - market demand for our EPS products. If you look at the overall passenger auto sales in China, in the first quarter, it's a phenomenal - we saw a phenomenon growth. The overall year-over-year growth for auto sales is over 70%.

But if you look at our EPS product sales, we grew more than 200%. That clearly outpaced the overall market. And mainly attributable - these kind of growth mainly attributable to our large customers like Great Wall, Chilly, JAC and their order of EPS product.

And these orders start to piling in the fourth quarter of 2020 already and we see its continuing accelerating in the first quarter of 2021..

Now, we'll switch to the G&A side. And the question three is the G&A expenses was lower than each of the last three quarters.

What's the good range we should expect for this going forward?.

[Interpreted] Yes, in the first quarter of 2021 we are - we underwent a restructuring. So we have streamlined our operations especially in the managerial and administrative category and the non - especially the non-manufacturing staff.

We have consolidated - we have done some consolidation and so our G&A expenses is about down 20% - G&A area we have managed to reduce by 20%. And going forward, you should see a similar trend continue in the following quarters..

Question four, the fourth question is, can you talk more about $1.4 million loss from affiliated companies I did not see a discussion on the course of that in the 10-Q?.

[Interpreted] Okay. The loss from affiliated company is mainly from our investment in a - in the investment fund. And we disclosed in the past we invested in a few venture capital fund mainly targeting in the automotive technology space. And some of our investment went public in the last 12 months.

The market has been quite fluctuating in the last few quarters, especially in the first quarter of 2021. So this booking was mainly due to one of the investment, one of our portfolio company went public and their stock has suffered a decline in the first quarter. And so we have made the booking in the first quarter..

Now the last question, what are you budgeting for CapEx in 2021 and 2022 and what will be spent up?.

[Interpreted] Okay. The CapEx budgeting for 2020 was about $18 million. 2022 is about $20 million. The - most of those budget will go into the maintenance CapEx, but also a portion that will go into the new projects mostly in the EPS category as we will continue to invest in electric motor technologies.

So that would be the most of the use of the CapEx..

With that operator, we can take questions from the queue if there is any..

Thank you. There are no questions at this time. [Operator Instructions] Thank you. This concludes today's question-and-answer session. I'll turn the floor back to Mr. Theiss for any final comments..

I want to thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you again. Thank you..

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