Greetings. Welcome to the China Automotive Systems Third Quarter 2024 Conference Call. [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 2024 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 will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 the forward-looking statements due to a number of factors, including those described under the heading Risk Factors and Results of Operations 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.

Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment cause uncertainties in the regions where we conduct business, cause 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 unforeseen delay in our operations of the manufacturing, delivery and assembly processes within any of our production facilities could 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 for the period ended September 30, 2024. Management will then conduct a Q&A session.

The 2024 third quarter and nine month results are unaudited and financial results are reported using U.S. GAAP accounting. For purposes of our call today, I will review the financial results in U.S. dollars.

We'll begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy and automobile industry and our market position. Our net sales of steering products increased by 19.4% year-over-year in the third quarter of 2024, an increase over the 15.4% year-over-year growth in the second quarter of 2024.

Third quarter sales of our traditional steering products grew by 7.4% year-over-year with our electric power steering, EPS products sales surging by 43.5% year-over-year. All of our business units reported sales increases as headlong domestic sales to passenger vehicles were up by 29.6%.

Sales to Chery Auto were 12.4% higher and our KYB sales to EPS units rose by 54.7%. In the Chinese commercial vehicle markets, our sales rebounded to grow by 10.5% to $17.2 million.

Internationally, our sales into the North America did decline by $8.9 million year-over-year, primarily from reduced demand by Stellantis, which reported a double-digit decline in North American shipments in the third quarter of 2024. Our Brazilian operations experienced a 6.9% increase in the 2024 third quarter.

For the macro economy, Chinese GDP increased by 4.6% year-over-year in the third quarter of 2024 compared with 4.7% growth in the second quarter of 2024. The Chinese economy in the third quarter continues to show weakness in aggregate demand with the ongoing real estate downturn.

However, economic growth has stabilized somewhat as fixed asset investment increased by 3.4% year-over-year, industrial activity rose by 5.8% year-over-year and retail sales increased by 3.3% year-over-year, although Chinese customers stay relatively risk-averse and price sensitive.

Loan demand has remained weak for the first nine months of 2024 despite more favorable monetary policies. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined sales of passenger and commercial vehicles increased by 2.4% year-over-year to 21.6 million units during the January to September period of 2024.

Of this total, passenger car sales grew by 3% year-over-year to 18.7 million units, while commercial vehicle sales declined by 1.6% year-over-year to 2.9 million units. New energy vehicle sales grew by 32.5% year-over-year to 8.3 million units as new energy vehicles has gained a 38.6% share of the motor vehicle market in China.

Exports of automotive vehicles increased by 27.3% year-over-year for the nine months ended September 30, 2024. Purchase subsidies by the government and some auto OEMs, more favorable vehicle trade-in policies and better loan terms all aided auto industry sales.

Passenger vehicle sales benefited from government subsidies of up to $2,800 per car for trading in older cars for electric vehicles. Encouragingly, September passenger vehicle sales increased by 1.5% and accelerated to an 11.2% increase in the month of October.

Our third quarter gross profit rose by 6.5% year-over-year, and our gross margin was 16% compared to 18% in the third quarter of 2023. A change in product mix contributed to the lower gross margin in the 2024 third quarter.

Cost controls reduced operating expenses by 5.8%, resulting in operating income of $11.1 million, an almost 9% improvement compared with the $10.2 million in the third quarter of 2023. Diluted net income per share was $0.18 in the 2024 third quarter compared to $0.31 in the third quarter of 2023.

For the first nine months period ended September 30, 2024, our sales increased by 10.8% to $462.2 million compared to $417.2 million in the same period in 2023. Our nine month gross margin increased to 17.2% from 16.6% in the same period last year.

Income from operations increased by 22.9% year-over-year to $31.6 million for the first nine months of 2024 compared with $25.7 million in the same period of 2023. Diluted earnings per share in the first nine months of 2024 were $0.69 compared to diluted earnings per share of $0.89 in the first nine months of 2023.

Net cash provided by operating activities increased by 54.2% to $16.5 million for the first nine months of 2024 compared with $10.7 million in the first nine months of 2023. Cash and equivalents plus pledged cash were $138.8 million or approximately $4.60 per share as of September 30, 2024.

A special cash dividend of $0.80 per common share was paid in late August 2024 to reward our shareholders. This cash dividend was paid from internal funds and cash flow and reflects our confidence in our sustainable sales growth and cash flow generation.

We also celebrated the 20 anniversary of our NASDAQ listing, highlighting what a small Chinese OEM manufacturing company can accomplish.

From small domestic manufacturing serving the domestic Chinese market, we have established a global reach, serving Tier 1 companies whose operations include North America, South America, Europe, India and Asia and with vehicle leaders such as BYD, Stellantis, Ford Motor and Mahindra & Mahindra in India.

Our traditional steering products continue to grow even as our EPS products are expanding rapidly and our advanced driver assist systems are being enhanced with the technologies of our Sentient AB operations in Europe. Now let me review the financial results in the third quarter of 2024.

Net sales increased by 19.4% year-over-year to $164.2 million in the third quarter of 2024 compared to $137.5 million in the third quarter of 2023. Net sales of traditional steering products and parts increased by 7.4% year-over-year to $98.6 million for the third quarter of 2024 compared to $91.8 million for the same quarter in 2023.

Net sales of EPS products rose 43.5% year-over-year to $65.6 million from $45.7 million for the same period in 2023. EPS products grew to 39.9% of the total net sales for the third quarter of 2024 compared to 33.2% for the same period in 2023.

Sales of Henglong's passenger vehicle steering systems increased by 29.6% and sales to Chery Auto rose by 12.4% due to higher demand. Sales of the commercial vehicle markets increased by 10.5%. Exports to North American customers decreased by $18.7 million in the third quarter of 2024 compared to $27.6 million in the third quarter of 2023.

North American sales declined primarily due to decreased demand from one customer. Sales in Brazil were $14.3 million in the third quarter of 2024 compared to $13.3 million in the third quarter of 2023. Net product sales for other entities rose 23.4% to $35.2 million compared to $28.5 million in the third quarter of 2023.

Gross profit grew by 6.5% year-over-year to $26.4 million from $24.8 million in the third quarter of 2023. Gross margin was 16% in the third quarter of 2024 compared to 18% in the third quarter of 2023. The change in gross margin was mainly due to changes in the product mix for the three months ended September 30, 2024.

Gain on other sales was $0.6 million in the third quarter of 2024 compared to $2.2 million in the third quarter of 2023. Selling expenses increased by 14.6% year-over-year to $4.4 million compared to $3.8 million in the third quarter of 2023.

This expense increase was primarily due to higher warehouse and logistic costs related to the increased revenue. Selling expenses represented 2.7% of net sales in the third quarter of 2024 compared to 2.8% in the third quarter of 2023.

General and administrative expenses, G&A, decreased by 17% year-over-year to $5.1 million compared to $6.1 million in the third quarter of 2023, primarily due to reversal of bad debt provisions for receivables. G&A expenses represented 3.1% of net sales in the third quarter of 2024 compared to 4.4% of net sales in the third quarter of 2023.

Research and development expenses, R&D, decreased by 7.1% year-over-year to $6.4 million compared to $6.9 million third quarter of 2023. The decrease was related to lower R&D miscellaneous expenses caused by the reduction in R&D activities for new projects.

R&D expenses represented 3.9% of net sales in the third quarter of 2024 compared to 5% in the third quarter of 2023. Other income was $1.3 million for the third quarter of 2024, which is stable compared to the $1.2 million for the three months ended September 30, 2023.

Income from operations was $11.1 million for the third quarter of 2024, a nearly 10% increase compared to $10.2 million for the three months ended September 30, 2023. Interest expense was $0.3 million in the third quarter of 2024 compared to $0.2 million in the third quarter of 2023.

Net financial expense was $0.2 million in the third quarter of '24 compared to net financial income of $0.2 million in the third quarter of 2023. The change in net financial expense and income primarily resulted from an increase in foreign exchange losses due to the foreign exchange volatility.

Income before income tax expense and equity and earnings of affiliated companies was $11.9 million in the third quarter of 2024 compared to income before income tax expense and equity and earnings of affiliated companies of $11.2 million in the third quarter of 2023.

Income tax expense was $4 million in the third quarter of 2024 compared to $0.7 million in the third quarter of 2023, primarily due to a onetime income tax expense settlement for the subsidiaries in the PRC and an increase in the global intangible low tax income, GILTI tax expenses.

Net income attributable to parent company's common shareholders was $5.5 million in the third quarter of 2024 compared to net income attributable to parent company's common shareholders of $9.5 million in the third quarter of 2023. Diluted earnings per share was $0.18 in the third quarter of 2024 compared to $0.31 in the third quarter of 2023.

The weighted average number of diluted shares outstanding was 30,185,702 in the third quarter of 2024 compared to 30,189,363 in the third quarter of 2023. Now reviewing the results for the first nine months of 2024.

Net sales increased by 10.8% year-over-year to $462.2 million in the nine months -- first nine months of 2024 compared to $417.2 million in the first nine months of 2023, primarily due to an increase in sales of both traditional steering and EPS products.

Nine months gross profit increased by 15.4% year-over-year to $79.7 million from $69.1 million in the corresponding period last year. Nine month gross margin increased to 17.2% from 16.6% in the first nine months of 2023.

Gain on other sales was $2.2 million -- I'm sorry, $2.8 million in the first nine months of 2024 compared to $3.6 million in the course period. Income from operations increased by 22.7% year-over-year to $31.6 million in the first nine months of 2024 from $25.7 million in the first nine months of 2023.

Net income attributable to parent company's common shareholders was $20.9 million in the first nine months of 2024 compared to net income attributable to parent company's shareholders of $26.8 million in the corresponding period in 2023.

Diluted earnings per share in the first nine months of 2024 were $0.69 compared to diluted earnings per share of $0.89 in the first nine months of 2023. Now I'll go over some balance sheets and other financial highlights. As of September 30, 2024, total cash, cash equivalents and pledged cash was $138.8 million.

Total accounts receivable, including notes receivable, were $314.2 million. Accounts payable, including notes payable, were $271.8 million and short-term loans were $59.7 million. Total parent company stockholders' equity was $388.6 million as of September 30, 2024, compared to $367.8 million as of December 31, 2023.

Our current ratio was approximately 1.4 and the working capital, that's total current assets plus total current liabilities was $156.6 million as of September 30, 2024. Net cash provided by operating activities was $16.5 million in the 2024 first nine months compared with $10.7 million in the first nine month period of 2023.

Payments to acquire property, plant and equipment were $18.3 million compared to $12.2 million in the first nine months of 2023. The business outlook. Management has raised the revenue guidance for the full year 2024 to $630 million from $605 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 are now ready to begin the Q&A session..

[Operator Instructions] Your first question for today is from [ Gary Nash ] a Private Investor..

Good day, good evening to everyone. First of all, can everyone hear me clearly because I was having some issues in hearing on the side.

Can everyone hear me clearly?.

Yes..

Okay, great. Thanks. I have two questions.

My first question is, please, if you would please describe the onetime income tax expense settlement for the subsidiaries in China?.

Yes. So Gary, to your question on the onetime tax in China, that's related to third quarter 2024, we declared a dividend of USD 0.80 special dividend. And that came from our CAAS's China subsidiary and distribute the dividend to the parent company, and then we distribute to the shareholders.

This process will have triggered a onetime tax called withholding tax you had to pay to the Chinese government. It totaled at $1.4 million. It's one time. It's a dividend related to distribute the profit they earn in China over the years and to the shareholders outside of China..

Okay. Thank you.

And my second question is, if you indulge me, why did the GILTI taxes increase in the third quarter of 2024?.

Great. Gary, your second question on the GILTI tax. This particular tax, GILTI tax is enacted by Trump administration starting in 2017. And a product -- that's a product from their tax reform back in 2017. Since it's a tax design for a foreign subsidiary of a U.S. company, their profit earned outside the U.S. subject to such tax.

As a result of that, in compliance, we have accrued and paid such tax since 2020, every year. And how do we calculate this particular tax? This calculation is based on previous year's pretax profit or pretax income, okay? So to give you some detailed math numbers. In 2022, the pretax income was $23 million.

And so for 2023, and we use that $23 million as a base to calculate and then we will accrue and pay every quarter, that amounted to approximately $1.2 million. However, as you already know, as a shareholder, 2023, our business has grown significantly, so was our profit. Our profit went to $48 million.

And as a result of that, and we're going to use that as a base to calculate the GILTI tax for 2024. And the result of that is $1.7 million per quarter for 2024. So this is the reason why you see there is such a significant increase of GILTI tax item in Q3 2024..

Okay, all right. Thank you very much. That was very helpful. I appreciate it..

Thank you..

Thank you. Your next question is from Jonathan Navis, a Private Investor..

Hello.

How's everybody doing?.

Good, thank you..

All right. My question is foreign exchange volatility sometimes creates income or losses.

What is the company doing to reduce the impact of foreign exchange volatility on quarterly profits?.

Regarding your question on the ForEx and potential impact to the earnings. To be honest, we do have a pretty bigger footprint, global footprint, we do have a task on this particular area as we have business in United States, we have business in Brazil, we have business in China, and we have other areas of business in different regions of the world.

Because of these, we have to deal with different currencies. We have started last year to experiment and to try some of the financial tools to mitigate the ForEx impact. And however, the various tools we tried or the result hasn't been very satisfactory.

And so the next step we're going to do is we have stopped using those tools because we haven't seen the result we wanted. So going forward, we are in a discussion with a number of large financial institutions global to see if there can have some better tools and solutions for us to help us to manage the ForEx risk..

All right, thank you very much..

[Operator Instructions] Your next question for today is from Jessica Lin, a Private Investor. Hello, good morning..

I was just wondering what business segments are expected to contribute to the increase in sales guidance to the $630 million for 2024?.

So to your question, it's actually there's no particular area or segment has contributing to the overall increase of our guidance. But we can give you a little color on why is that because every area of the business has experienced healthy growth. We're very pleased to share with our shareholders.

And as early as April, May period of time, after further assessment of the market opportunities and also the challenges, and we decided we're going to take a proactive pricing strategy. We made some adjustment on the pricing and that's being very targeted and our goal is to increase market share.

As a result of that, as you see in our third quarter results, our domestic China market sales has booked about $146 million, and that represents about 19% year-over-year growth in domestic China. And if you follow the industry stats, you know the third quarter, the Chinese auto market hasn't been doing so well as a whole industry.

But we are able to register such a growth is because our strategy has been working. So we are, in fact, gaining market share. And that's witnessed by our growth in our traditional hydraulic product that's also reflected in our growth, in our new flagship product, which is electric power steering product, EPS product.

And we're also growing our market share inside our largest customer, BYD. And also, we're growing in the export market as well. So overall, we are working with the best customers, and we are producing the right type of product to meet their demand.

And so as a result of that, we are more confident to see the fourth quarter, and that's why we decided to increase the whole year guidance from the low $600 million to $630..

Thank you so much..

[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..

Thank you, everybody, for attending today's call, and we look forward to speaking with you on the next quarterly call..

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