Greetings. Welcome to the China Automotive Systems First Quarter 2023 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] Please note this conference is being recorded. I will now turn the conference over to your host Kevin Theiss.

You may begin..

Thank you everyone for joining us today. Welcome to China Automotive Systems' 2023 first 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 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, 2022 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 time controlled our business operations and financial condition may be materially and have reflected as a result of a deteriorating market outlook for automobile sales to slow down the regional national and international 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 impact on the overall business environment cause uncertainties in the regions where we conduct business, so our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.

A prolonged disruption or any further unforeseen 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, 2023.

Management will then conduct a question-and-answer session. This 2023 first quarter results are unaudited and are reported using US GAAP accounting. For the purposes of our call today, I'll review the financial results in US dollars.

We will begin with a review of the recent dynamics of the Chinese economy, the automobile industry in our market position. China's GDP growth rebounded to 4.5% year-over-year in the first quarter of 2023 from 2.9% growth in the fourth quarter of 2022 and compared with 4.8% in the first quarter last year.

Retail sales grew by 5.8% year-over-year in the first quarter of 2023 with a surge in the month of March to 10.6% year-over-year as lockdowns and other COVID restrictions have been eliminated. Industrial production grew by 3.9% year-over-year in the month of March, increasing from 2.4% in the January, February time period.

Investment in infrastructure construction grew by 8.8% year-over-year in the first quarter of 2023 and manufacturing investment rose by 7% according to statistics from Chinese Bureau of Statistics. However, investment into the important property development segment declined by 5.8% year-over-year.

Automobile sales in China continued to be weak in the first quarter of 2023. Passenger vehicle unit sales declined by 7.3% year-over-year. Commercial vehicle hold unit sales decreased by 2.9%.

According to statistics from the China Association of Automobile Manufacturers, the market declined by 11.4% in units year-over-year and the important SUV market was down by 3.4% year-over-year. Mitigating these lower growth numbers, somewhat is a 9.2% year-over-year increase in the unit sales of buses and semi-trailer truck unit sales grew by 21.3%.

New energy vehicle unit sales also rose by 26.2% year-over-year in the first quarter as new energy passenger vehicle sales rose by 25.2% and a much smaller new energy commercial vehicle sales were 50.3% higher. In late 2022, we announced an expansion of our relationship with BYD, China's largest EV producer and a partner for 20 years.

The BYD's research and development team we have designed a new series of EPS steering products, including C EPS, VP EPS and our R EPS for all BYD's series of products.

Due to our DP EPS superior performance in noise, vibration and harshness our DP EPS products have been replacing higher cost R EPS by BYD, especially, for BYD's high-end vehicle models the tank and the Han. We continue to work closely with BYD a new steering product development.

Another step expanding our international presence is that Alfa Romeo [ph] luxury plug-in hybrid SUV model Tonale now being marketed in the US beginning in 2023. Alfa Romeo was a subsidiary of Stellantis and we have been a long-time supplier of steering to other brands under their umbrella including Jeep, Ram and Fiat.

Beyond strengthening our presence in the European markets Tonale sales in the US market further expands our presence there in addition to our production exports to Fiat Chrysler automobiles, FCA and Ford Motor Company in North America.

Sales in North America increased by 7.6% year-over-year mostly due to a higher demand from FCA, while sales in our Brazilian operations grew by 2.9% year-over-year. We continue to make progress with improving our proprietary EPS products to develop our own Advanced Driver Assistance Systems -- ADAS.

Using our AP04 platform for Level 4 autonomous driving, we continue to integrate technologies from our Stellantis AB subsidiary into our products. We are also working with Stellantis to provide enhanced steering to their customers.

Our profitability improved in the 2023 first quarter led by greater sales of products with higher technology content, especially, our rising sales of EPS products.

These sales combined with ongoing cost control measures generated gross margin improvement of 4.6% year-over-year in the 2023 first quarter to 15.2% from 10.8% in the year ago same quarter. Total operating expenses declined by approximately 15.6% year-over-year in the first quarter led by a 21.5% reduction in both selling and R&D expenses.

The income per share of $0.23 in the year 2023 first quarter compared with zero in the year ago same quarter. We maintained our financial strength with cash and cash equivalents pledged cash and short-term investments of $164.3 million as of March 31, 2023 and parent company stockholders' equity was $322.8 million.

Sales of our traditional products to our legacy customers in China remained steady in the first quarter as our product portfolio of EPS has grown so has our customer base for these products in China.

We anticipate that the Chinese economy will continue to recover from the COVID lockdowns and restrictions with the resurgence of past consumer buying patterns aided by government vehicle incentives, which will benefit the automobile deal industry over the next several quarters. Now let me review the financial results in the first quarter of 2023.

Net sales increased by 4.3% to $142.2 million in the first quarter of 2023 compared to $136.4 million in the first quarter of 2022. The net sales increase was mainly due to the gradual recovery of the Chinese economy post-COVID-19.

Net sales of traditional steering products and parts were $94.4 million for the first quarter of 2023, which is consistent with $95.4 million for the same period in 2022. Net sales of electric power steering EPS products rose 16.6% to $47.8 million from $41 million for the same period in 2022.

Henglong KYB sales of passenger vehicle EPS products surged by 24.8% year-over-year to $37.2 million. EPS product sales were 33.6% of the total net sales for the first quarter of 2023 compared with 30.1% for the same period in 2022.

North American net export sales rose by 5.5% to $34.7 million in the first quarter of 2023 compared with $32.9 million in the first quarter of 2022. Steering product sales of the commercial vehicle markets declined slightly year-over-year in the 2023 first quarter.

Gross profit climbed by 46.9% to $21.6 million from $14.7 million in the first quarter of 2022. Gross margin in the first quarter of 2023 was 15.2% compared to 10.8% for the first quarter of 2022, mainly due to a change in the company's product mix and an increase in average selling prices for the three months ended March 31, 2023.

Gain on other sales was $0.7 million compared to $0.9 million in the first quarter of 2022. Selling expenses declined by 20.9% to $3.4 million from $4.3 million in the first quarter of 2022.

This decline in selling expenses was primarily due to lower transportation marketing and office expenses and the impact from appreciation of the US dollar against the RMB. Selling expenses represented 2.4% of net sales in the first quarter of 2023 compared to 3.2% in the first quarter of 2022.

General and administrative expenses were $4.8 million, which is consistent with the $4.8 million of the first quarter of 2022. G&A expenses representing 3.4% of net sales in the first quarter of 2023 compared with 3.5% of net sales in the first quarter of 2022.

Research and development expenses are indeed decreased by 21% to $6.4 million compared to $8.1 million in the first quarter of 2022, mainly due to a decrease of tooling charges and the depreciation of the RMB against the US dollar. R&D expenses represented 4.5% of net sales in the first quarter of 2023 compared to 6% in the first quarter 2022.

Net other income was $1.5 million for the first quarter of 2023 compared to $3.5 million for the first quarter of 2022. This decrease was mainly due to less government subsidies received in the first quarter of 2023.

Income from operations was $0.7 million in the first quarter of 2023 compared to a loss from operations of $1.5 million in the first quarter of 2022. The 2023 first quarter income was primarily due to higher gross profits and lower operating expenses compared with the first quarter of 2022.

Interest expense was $0.2 million in the first quarter of 2023 compared to $0.4 million in the first quarter of 2022. Net financial loss was $0.4 million in the first quarter of 2023 compared with a net financial income of $2 million in the quarter of 2022.

The net financial loss in the first quarter of 2023 was primarily due to foreign exchange losses. Income before income tax expenses and equity in earnings of affiliated companies was $8.6 million in the first quarter of 2023 compared to $3.6 million in the first quarter of 2022.

The increase in income before income tax expenses and equity in earnings of affiliated companies in the first quarter 2022 was mainly due to higher income from operations, partially offset by a loss in net financial income.

Equity income of affiliated companies was $0.1 million in the first quarter of 2023 compared with equity in loss of affiliated companies of $2.5 million in the first quarter 2022.

Net income attributable to parent company's common shareholders was $6.8 million in the first quarter of 2023, compared to a net loss attributable to parent company's common shareholders of $0.1 million in the first quarter of 2023, compared with equity in loss of affiliated companies of $2.5 million in the first quarter 2022.

Net income attributable to parent company's common shareholders was $6.8 million in the first quarter of 2023, compared to a net loss attributable to parent company's common shareholders of $0.1 million in the first quarter of 2022.

Diluted income per share was $0.23 in the first quarter of 2023, compared to a net loss per share of nil in the first quarter of 2022. The weighted average number of diluted common shares outstanding was 30,193,082 shares in the first quarter of 2023, compared to 30,851,776 shares in the first quarter of 2022.

Management has reiterated revenue guidance for the full fiscal year 2023 of $560 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 now ready to begin the Q&A session..

Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is coming from William Gregozeski at Greenridge Global..

Hi. I have a couple of questions. The Hubei and Henglong revenue was up quite a bit from the fourth quarter.

Is that related to that Alfa Romeo, vehicle or just additional shipments from kind of a tough fourth quarter and where do you see that segment for the year trending?.

[Foreign Language] So, Hubei and Henglong's, first quarter revenue increased by a little over 5% and the dollar amount increased by $1.7 million. The main driver for that increase is still in the North America business. Alfa Romeo is in the -- is being booked into different division [indiscernible] division's revenue.

So to answer your question, it's still North America business..

Okay.

And is the -- do you guys think the revenue for Hubei and Henglong is going to stay up above $30 million per quarter for the remainder of the year?.

[Foreign Language] Okay. It's going to be above -- it's going to be in the range of $30 million to $35 million in the quarter every quarter fluctuate within that range this year..

Okay. Great.

And then, on the gross margin side, are you guys still expecting that to be higher for 2023 than all of 2022?.

[Foreign Language] In the first quarter of 2023, our gross margin was 15.2%, which is a very significant increase from Tier one 2022 of 10.8% first line. The main factor attributable to three segments of our business. One is the Hubei and Henglong; the second is Brazil, our business, allow business. And the last piece is the Henglong KYB.

Now, the first two line of business helped drove the gross margin appreciation is also because it's the growth the ForEx change. The stronger dollar helped -- definitely helpful with our gross margin expansion. And in terms of KYB -- Henglong's KYB business is mainly due to the volume increase.

Also, our high-end product has increased, which is helping the margin expansion. And lastly, the overall volume increase helped us to better economy of scale. That also is beneficial to our gross margin. So, overall yes, 2023 the gross margin will be better than 2022. With this pace, we believe, it's going to be continuing to the strong.

Overall 2023 is going to be a better year on the gross margin than 2022..

Okay. All right. And then last question was, you previously mentioned about 6% to 6.5% of revenue for R&D on a quarterly basis and it was quite a bit lower than that in the first quarter.

Is that still a good range, or is that more of an annual range? How should we look at that?.

The first quarter is -- you're right. Your observation is correct. Our R&D expense accounted for the total revenue is lower. There are some onetime events. There's also some of the activity related to the lower module fees. But overall, going forward, we believe the R&D expenses are going to be account between, 5% to 5.5% of the total revenue..

Okay. Great. Thank you..

[Operator Instructions] We have reached the end of the question-and-answer session, and I will now turn the call over to Kevin for closing remarks..

We thank you for your participation in today's conference call. Please be safe and we look forward to speaking with you again in the future..

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