Greetings, and welcome to the China Automotive Systems Second 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, Mr.

Kevin Theiss, Investor Relations. Kevin, you may begin..

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2023 Second 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 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 on regional national and international economic growth, weakened liquidity and financial condition of our customers or other factors we cannot foresee.

Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, all the uncertainties in the regions where we conduct business cause our business to suffer 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 process within any of our production facilities could continue to result in delays in the shipment of products to our customers, increased cost 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'll provide a brief overview and summary of the second quarter and first six months results for the period ended June 30, 2023.

Management will then conduct a question-and-answer session. The 2023 second quarter and first six months results are unaudited and are reported 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 and our market position. The Chinese economy showed signs of recovery as GDP growth rate was 5.5% year-over-year in the first half of 2023 with a 6.3% year-over-year increase in the second quarter following a 4.5% year-over-year in the first quarter.

However, these growth rates were influenced by the low base effect of the pandemic-induced lockdowns. Quarter-over-quarter, GDP was 0.8% in the second quarter of 2023 as the Chinese economy was still affected by both internal and external factors.

Exports declined in the first half of the year as high inflation in many markets and political tensions reduced foreign demand for Chinese goods. The Chinese property section continued to be affected by regulatory and fiscal policies with concerns of weak consumer confidence affecting demand.

Property sales declined by 5.3% in terms of floor space in the first six months of 2023. According to statistics from the China Association of Automobile Manufacturers, CAAM, automobile sales in China rebounded in the second quarter of 2023 following the sales decline in both passenger and commercial vehicles during the first quarter of 2023.

CAAM statistics show the overall automobile sales in China increased by 17.9% year-over-year in the second quarter of 2023, with passenger vehicle sales rising by 19.3% year-over-year and commercial vehicle sales up 10.1% year-over-year.

For the first six months ended June 30, 2023, overall car sales increased by 9.8% year-over-year as passenger vehicle sales grew 8.8% year-over-year and commercial vehicle sales grew by 15.8% year-over-year. New energy vehicle sales rose by 44.1% in the first six months period.

These growth numbers also reflect the weak industry sales in the year-ago periods due to the COVID-19 restrictions. Some car dealers and local government have provided financial subsidies and coupons to help promote growth in car sales in China as the auto industry is a major employer across the country and contributes to economic growth.

Our second quarter revenue growth increased by 8.1% year-over-year with most divisions reporting higher revenues. Net sales of our advanced electric power steering, EPS, rose by 28.4% year-over-year, and South American sales increased by 43.5%. Sales into North America temporarily declined and were affected by foreign exchange rate volatility.

Our Henglong passenger vehicle sales rose by 27.4% due to higher demand, and sales to the commercial vehicle market were also up by 7.2%.

We continue to be a long-standing supplier to a large number of vehicle OEMs, including industry leaders such as BYD, the largest EV producer in China, multiple operations of Stellantis, including Jeep, Ram, Fiat and Alfa Romeo in different markets around the world and Ford Motor Company in North America.

In addition to providing steering products, we also collaborate with the research and development programs of our OEM customers to improve current products and create new products to enhance their vehicles.

For example, we developed a new series of EPS products with BYD, our partner for 20 years, which are being used in a number of their vehicle models. We developed new steering for Alpha Romeo's luxury plug-in hybrid SUV, the Tonale, which is being sold internationally, further expanding our worldwide presence.

Our participation in product improvement and new product development provides a testament to their confidence in our excellent research and development capabilities. Each R&D endeavor increases our technology base for future use.

Using our EPS design expertise, we have been developing our own proprietary EPS products to advance our Advanced Driver Assistance Systems, ADAS, for level-4 autonomous driving and beyond.

We are leveraging our Sentient AB subsidiary’s Automotive Technology, including software development and hardware design for advanced steering functions, combined with vehicle motion controls to heighten the capability of our autonomous driving program.

With hydraulic, EPS and ADAS steering, our enlarged portfolio of steering products has never been stronger. And we are working on new models of steering for the future to improve our market presence.

Our efficient cost controls led to an approximate 11% year-over-year decline in total operating expenses, resulting in an [$8.2 million] (ph) operating profit in the second quarter. Net income per share grew by 12.9% to $0.35 compared with the same quarter last year.

At June 30, our cash and equivalents and pledged cash was $125.5 million, approximating $4.16 per share. New incentives and policy changes by the central, regional and local governments are designed to enhance economic growth in future quarters.

Specific markets are targeted, including the automobile, real estate and services sector with a greater focus on consumer consumption. Measures, including reducing automobile purchase taxes, losing demand for electric vehicles through improved EV infrastructure, adjusting real estate and banking policies and regulations and promoting tourism.

Private companies are encouraged to increase investment in specific markets as well as increasing private investment in research and development. Now let me review the financial results in the second quarter of 2023.

Our net sales increased by 8.1% year-over-year to $137.4 million for the second quarter of 2023 compared to $127.2 million in the second quarter of 2022. Net sales of traditional steering products and parts increased by 1.1% year-over-year to $95.8 million for the second quarter of 2023 compared to $94.8 million in the same quarter of 2022.

Net sales of EPS products rose 28.4% year-over-year to $41.6 million from $32.4 million for the same period in 2022. EPS Product sales were 30.3% of the total net sales for the second quarter of 2023 compared to 25.5% for the same quarter in 2022.

Export net sales in North American customers decreased by 24.5% year-over-year to $28.9 million in the second quarter of 2023 compared to $38.3 million in the second quarter of 2022. North American sales declined due to less demand and the effects of foreign exchange fluctuation.

Sales in Brazil rose 43.5% year-over-year to $12.2 million the second quarter of 2023 from $8.5 million in the second quarter of 2022. Gross profit was $22.7 million, which is stable to $22.7 million in the second quarter of 2022. Gross margin in the second quarter of 2023 was 16.5% compared to 17.9% in the second quarter of 2022.

The decrease in gross margin was mainly due to the changes in the product mix. Gain on other sales was $0.7 million compared to $2.1 million in the second quarter of 2022. Selling expenses decreased by 6.7% year-over-year to $3.8 million compared to $4.1 million in the second quarter of 2022, primarily due to lower marketing and office expenses.

The accretion -- appreciation of the US dollar against the RMB also affected expense levels. Selling expenses represented 2.8% of net sales in the second quarter of 2023 compared to 3.2% in the second quarter of 2022.

General and administrative expenses, G&A, decreased by 6.9% year-over-year to $5.3 million compared to $5.7 million in the second quarter of 2022, primarily due to the reversal of credit losses and the impact of appreciation of the US dollar against the RMB.

G&A expenses represented 3.9% of net sales in the second quarter of 2023 compared to 4.5% of net sales in the second quarter of 2022. Research and development expenses, R&D, decreased by 16.2% year-over-year to $6.6 million compared to $7.9 million in the second quarter of 2022.

R&D expenses represented 4.8% of net sales in the second quarter of 2023 compared to 6.2% in the second quarter of 2022. Other income net was $2 million for the second quarter of 2023 compared to $2.8 million for the three months ended June 30, 2022.

Income from operations was $7.8 million in the second quarter of 2023 compared to income from operations of $7.2 million in the second quarter 2022. The increase is primarily due to lower operating costs. Interest expense was $0.3 million in the second quarter of 2023 compared to $0.4 million in the second quarter 2022.

Net financial income was $4 million in the second quarter of 2023 compared to net financial income of $2.5 million in the second quarter of 2022. The change in net financial income was primarily due to the depreciation of the US dollar against the RMB.

Income before income taxes and equity in earnings of affiliate companies was $13.4 million in the second quarter of 2023 compared to income before income taxes, expenses and equity and earnings of affiliated companies of $12.2 million in the second quarter of 2022.

Net income attributable to parent company's common shareholders was $10.5 million in the second quarter of 2023 compared to net income attributable to parent company's common shareholders of $9.4 million in the second quarter of 2022.

Diluted earnings per share was $0.35 in the second quarter of 2023 compared to $0.31 per share in the second quarter of 2022. Weighted average number of diluted common shares outstanding was 30,189,537 in the second quarter of 2023 compared to 30,849,009 in the second quarter of 2022.

For the first six months of 2023, our net sales increased by 6.1% year-over-year to $279.7 million in the first six months of 2023 compared to $263 million in the first six months of 2022. Six-month gross profit was $44.3 million compared to $37.4 million in the corresponding period last year.

Six-month gross margin was 15.9% compared with 14.2% in the first six months of 2022. Gain on other sales was $1.4 million in the first six months of 2023 compared to $3 million in the corresponding period last year.

Income from operations was $15.5 million in the first six months 2023 compared to income from operations of $5.7 million in the first six months of 2022.

Net income attributable to parent company shareholders was $17.3 million in the first six months of 2023 compared to net income attributable to parent company's common shareholders of $9.4 million in the corresponding period in 2022.

Diluted earnings per share increased by 90% year-over-year to $0.57 in the first six months of 2023 compared to diluted earnings per share of $0.30 in the first six months of 2022. On balance sheet items. As of June 30, 2023, total cash, cash equivalents and pledged cash were $125.5 million.

Total accounts receivable, including notes receivable, were $234 million. Accounts payable, including notes payable, were $216.7 million. And short-term loans were $38.5 million. Total parent company stockholders' equity was $317.8 million as of June 30, 2023, compared to $311.7 million as of December 31, 2022.

For the business outlook, management has reiterated its revenue growth for the full year 2023 to $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 ready to begin the Q&A..

Thank you very much. At this time, we are opening the floor for questions. [Operator Instructions] We don’t appear to have -- we do. We have a question from Robert Jensen, who's a private investor. Robert, your line is live..

Yeah. Could you shed a little bit of color -- I think you said that your sales to the US were down some.

Could you shed some color on that and your expectations going forward and possibly some of the reasons for that?.

[Foreign Language] Okay. So you're right, the sales to the North America is down during this quarter. To be more specific, it was down 24.5%. The decline of the sales to the North America is mainly due to the volume decrease. However, our market share with our customers remain the same.

That being said, is -- actually our customer during the quarter has produced fewer product -- finished product and order less steering from us. We don't want to speculate here, but we are closely following the situation. Whenever our customers are -- return to their normal volume, our sales will pick a little back up. [Foreign Language] Okay.

So in addition to what we just commented, we are also working with our customers in North America under a new product. So we are expecting to increase the shipment along with our new product rollout. So we are continuing to work closely with our customer to penetrate the US market.

On the other hand, we are also developing or working on signing a new client in North America. And please be tuned. We'll make announcements when we get to that stage. So we are laser-focused on that and looking forward to continue to expand our market share in North America..

Okay, thank you.

What percent of your sales come from North America currently?.

[Foreign Language] Around 20%..

Yeah, 20%..

You mean only in North America?.

Yeah, what percentage of your total revenues come from North America?.

It's about 20%, yeah..

Okay. Thank you..

Thank you..

Thank you very much. [Operator Instructions] Okay. I'm going to hand back over to Kevin for any closing comments as we've reached the end of our Q&A session..

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

Thank you, everybody. This does conclude today's conference, and you may disconnect your phone lines at this time. Thank you for your participation, and have a wonderful weekend..