Good day ladies and gentlemen, and welcome to the China Automotive Systems Third Quarter 2021 Earnings Conference Call. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Kevin Theiss.

Sir, the floor is yours..

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2021 third quarter 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'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 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 adversely 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 third quarter and first nine months results for the period ended September 30, 2021.

Management will then conduct a Q&A session. The following 2021 third quarter first nine months financial results are unaudited, and are reported using U.S. GAAP accounting. For the purposes of our call today, I will review the financial results in U.S. dollars.

We'll begin with a review of recent dynamics of the Chinese economy, automobile industry and China Automotive's market position.

Chinese passenger car sales declined by 13% year-over-year, and commercial vehicle sales declined by 24% year-over-year in the third quarter of 2021 according to statistics from the China Association of - Automobile Manufacturers, CAAM. Auto sales in the U.S.

also declined by approximately 13% year-over-year in the third quarter of 2021 as a major player in the Chinese auto parts segment, our revenue was affected by the auto market headwinds, but our business only decreased by 5.4% year-over-year in the third quarter of 2021.

Our sales decrease reflected weaker demand in China and the widespread shortage of automobile semiconductor chips. Our sales to the large auto markets were uneven in the third quarter of 2021.

Net sales of traditional hydraulic steering products declined by 19.3% year-over-year to $78.8 million, while net sales of our newer EPS models climbed by 76.2% year-over-year to $29.4 million and represented 27.2% of total net sales versus 14.6% of total net sales in the third quarter last year.

Net sales to the Chinese commercial vehicle market declined, by 34% year-over-year in the third quarter of 2021. Our net sales to our customer Shenyang Brilliance Jinbei grew slightly while net sales of [indiscernible] another major automotive manufacturer in China were $7.9 million compared to $3.2 million a 144.6% increase year-over-year.

Net sales into North America decreased by 16.2% year-over-year our sales in Brazil increased by 157% year over year. In the third quarter of 2021, the cost of products sold declined by 9.1% year-over-year as our gross margin grew to 15.5% compared with 11.9% in the third quarter of 2020.

For the first nine months of 2021 ended September 30 according to statistics from CAAM automobile sales, rose 8.7%. With passenger vehicle sales up 11% and commercial vehicle sales rose a 0.5% due to a 26% increase in bus sales, partially offsetting a 1.6% decline in the larger truck market sales.

New energy vehicle sales rose 185.3% in the first nine months of 2021. For the first nine months of 2021, our net sales increased by 32.4% year-over-year to $359.2 million. Gross profit increased by 60.8% year-over-year to $52.4 million and gross margin increased to 14.6% compared to 12% for the corresponding period in 2020.

We are encouraged by our growth of our EPS products, even as we continue to upgrade our traditional hydraulic products. Our EPS products are contributing a higher percentage to our total sales and we believe that trend will continue.

We are especially pleased with our sales into the Chinese electric vehicle market where we expect to sell over 200,000 EPS units in 2021 including to EV producers, Great Wall, Chery Auto, Beijing Auto, JAC motors. And we added more technology to a new proprietary EPS product earlier in 2021.

These technologies integrate and communicate with the vehicles' main data to create lane keeping assist LKA, automatic parking assist APA, lane centering LCK and traffic jam assistance TJA functions as part of the company's advanced driver assistance program ADAS or more commonly referred to as autonomous driving system.

In Europe, we also entered into the OTOP, Off Tool, Off Process phase for new steering system for Alfa Romeos first luxury compact plug in hybrid SUV model, the 2021 Tonale. This is the company's first plug-in-hybrid powertrain and the expectation is for orders approximately 100,000 annual units.

The Alfa Romeos project is the company second in Europe. To further our technology base, especially for vehicle controller autonomous driving, we are purchasing 40% of Sweden Sentient AB. This high technology company specializes in software and hardware design for advance steering functions.

Sentient products for motion control has been in production since 2013, and has been tested on EPS, angle-overlay systems, steer-by-wire and fully autonomous vehicle that's the NHTSA level three to five. We believe that Sentient's acquisition is a key to advance our autonomous driving products into the marketplace.

Also our wholly-owned subsidiary Hubei Henglong Automotive Systems Group received the highest rate of safety designation the ISO26262:2018 ASIL-D SGS TÜV of Germany, testifying both software systems and hardware components with different safety risk. We received a decertification the highest, which distinguishes us for many years.

We have developed a large base of customers growing advanced technologies and we are strong financially. We are a leader in steering products in a large and commercial vehicle markets in China.

However, our goal is to become a larger global supplier, as we have a growing presence with global OEMs in North and South America, and we are developing greater penetration in the European, Indian and African auto markets. Now let me go over the financial results in the third quarter of 2021.

In the third quarter of 2021, Net sales decreased by 5.4% to $108.2 million, compared to $114.4 million in the same quarter of 2020. The decrease in net product sales was mainly due to the decline in market demand as a result of the chip shortage and other overall market, auto market trends. Sales of the company's hydraulic products decreased 19.3%.

Net product sales for the company's EPS products increased by 76% to $29.4 million or 27.2% of net sales compared with $16.7 million, or 14.6% of net sales in the third quarter of 2020. Net product sales in North America decreased by 16.2% to $31 million due to lower sales volume compared with $37 million for the same quarter in 2020.

Gross profit of $16.8 million in the third quarter of 2021 compared to $13.6 million in the third quarter of 2020. Gross margin was 15.5% compared to 11.9% for the same period of 2020 mainly due to changes in product mix. Selling expenses were $4.8 million in the third quarter of 2021 compared to $3.8 million in the third quarter of 2022.

The higher selling expenses were mainly related to hire personnel and logistics expenses. Selling expenses represented 4.4% of net sales in the third quarter of 2021 compared to 3.3% in the third quarter of 2020. General and administrative expenses G&A was $6.2 million in the third quarter of 2021 compared to $5.1 million in the same quarter of 2020.

The increase was primarily due to the increased, bad debt provision for accounts receivable. G&A expenses represented 5.7% of net sales in the third quarter of 2021 compared with 4.5% of net sales in the third quarter of 2020.

Research and development expenses R&D were $5.7 million in the third quarter of 2021 compared to $6.1 million in the third quarter 2020. R&D expenses represent a 5.3% of net sales in the third quarter - each of 2021 and 2020. Lower R&D was mainly due to reduce personnel expenses.

Income from operations was $0.6 million in the third quarter of 2021 compared to net income sorry to income from operations of $0.1 million in the same quarter of 2020. The higher income from operations was mainly due to higher gross profit and higher gross margin in the third quarter of 2021.

Other income was $2.4 million in the third quarter of 2021, compared with $0.4 million in the third quarter of 2020, primarily due to higher government subsidies received in the third quarter of 2021.

Financial expense net was $28 million in the third quarter of 2021, compared with $2.3 million in the third quarter of 2020, mainly due to lower foreign exchange losses.

Income before - income before income tax expenses and equity and earnings of affiliated companies was $1.9 million in the third quarter of 2021 compared to a loss before income tax expenses and equity and earnings of affiliated companies of $2.3 million in the third quarter of 2020.

The increase of income before income tax expenses equity and earnings of affiliated companies, but mainly due to higher other income and lower financial expense, compared with the third quarter of 2020.

Income tax expense was $2.4 million in the third quarter of 2021 compared to an income tax benefit of $0.2 million for the third quarter of 2020, which was mainly due to an increase in the valuation allowance recognized in the third quarter of 2021.

Net loss attributable to the parent company's common shareholders was $0.3 million in the third quarter of 2021 compared to net income attributable to parent company's common shareholders of $2.4 million in the third quarter 2020.

Diluted loss per share was $0.01 in the third quarter of 2021 compared with diluted earnings per share of $0.08 in the third quarter of 2020. Weighted average number of diluted common shares outstanding was 30,851,776 shares in the third quarter of 2021 compared to 31,113,374 shares in the third quarter of 2020.

Now we'll go over [indiscernible] in nine month financial highlights, net sales for the first nine months of 2021 increased by 32.4% to $359.2 million, compared to $271.2 million in the first nine months of 2020.

Gross profit for the first nine months of 2021 increased by 60.8% to $52.4 million compared to $32.6 million in the corresponding period last year. Gross margin for the first nine months of 2021 was 14.6%, compared to 12% for the corresponding period in 2020.

For the nine months ended September 30, 2021, gain on other sales amounted to $2.5 million, compared to $2.9 million for the corresponding period in 2020. Income from operations was $4.9 million compared to loss from operations of $4.1 million in the first nine months of 2020.

Net income attributable to parent company's common shareholders was $6.1 million compared with net loss attributable to parent company's common shareholders of $1.8 million in the corresponding period last year.

Diluted income per share was $0.20 in the first nine months of 2021, compared to diluted loss per share of $0.06 for the corresponding period in 2020. Now we'll go over a few balance sheet items. As of September 30, 2021 total cash, cash equivalents and pledged cash deposits were $115 million.

Total accounts receivable including notes receivable were $227.3 million. Accounts payable including notes payable were $215.1 million short-term loans were $42.2 million. Total parent company stockholders' equity was $326.3 million as of September 30, 2021, compared to $319.4 million as of December 31, 2020.

The business outlook, management reiterated its revenue guidance of $495 million for the full year 2021. 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 begin the Q&A..

[Operator Instructions] Your first question for today is coming from William Gregozeski. Please announce your affiliation then pose your question..

Hi guys, can you explain on the on the chip shortage which segments were most impacted by that?.

Yes, the chip shortage is definitely a widespread phenomenon throughout the auto industry in China. The impact we see are two-folds one, is to the OEM side. We do see the OEM automakers are experiencing production decline especially in the quarter because of chips shortage.

And our supplier side like us our main product our all products use semiconductor chips, our electric power steering EPS product and these product - and we are less impacted for a particular reason we have a very unique sourcing capability. We have a few different channels and we work with those suppliers very closely.

So - and we're able to mitigate the impact that's why you see our EPS sales during this difficult time especially the semiconductor sector going through such a change and our EPS sales has increased significantly..

Okay which operating segment though was there, I mean is it shipments to the U.S.

or what was most impacted or was it just spread pretty evenly for you guys?.

Okay mostly in China our U.S. customers are relatively smaller volume in terms of these type of product..

Okay, all right.

On the KYB JV looks like the gross margins went above 10% in the quarter can we expect to see that continue to increase?.

Okay, this joint venture yes, we are seeing the improvement in the gross margin category and we anticipate it will continue to improve mainly these kinds of expectations mainly driven by two factors one is as you see we are increasing productions, the utilization rate is climbing and as we know, the scalability, the economy of scale will help to lower per unit cost and then in turn will increase our gross margin.

On the other hand, the technology content also has been increased for - in that particular joint venture. And so, in terms of product offerings, when we first started we only providing a CVPs product. Now we have expanded DP-EPS product, DP-EPS product and our EPS product.

So, we have a wide range of product now to meet our customer demand and a lot of those new product, newer products are more - have more technologies and that also give us a better margin contribution as well..

Okay, all right.

Are you guys able to provide any kind of expected mix for you know where you expect to end the year between traditional and EPS this year and are you expect to end it next year?.

Say it again what was the question EPS mix..

Yes, the mix between traditional and EPS what you expect that mix to be at the end of 2021 and the end of 2022?.

So, the EPS sells as of end of third quarter the first nine months sales accounted for 27.2% of total sales. We are anticipating this will increase to 30% by 2022. Hydraulic will take - still takes about 70% of the steering product sales..

Okay, all right.

And last question do you have any significant CapEx plans coming up?.

Okay, we don't see a huge increase on CapEx. We will increase some of the production capacity for EPS product. We will continue to put some money into the maintenance CapEx. So together we're seeing about $50 million CapEx for 2022..

Okay, all right. Thanks guys..

Thank you.

[Operator Instructions] There are no questions in queue..

We like to thank everyone for participating today, be safe and look forward to speaking with you again..

Thank you ladies and gentlemen, 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..