Earnings Call: Q2 2021

Aug 12, 2021

As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Kevin Theiss, Investor Relations. Thank you, sir. You may begin. Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2021 Q2 conference call. Joining us today are Mr. Quizhou Wu, Chief Executive Officer and Mr. Jay 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 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 the forward looking statements due to a number of factors, including those described under the heading Risk Factors in the company's Form 10 ks Annual Report for the year ended December 31, 2020, as filed with 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-nineteen 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 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. For long disruption or any further unforeseen delay in our operation 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 costs and reduced revenue. Company Express 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 Q2 and 1st 6 months results of the period ended June 30, 2021. Management will conduct a question and answer session. The following 2021 Q2 and 1st 6 months financial results are unaudited and are reported using U. S. GAAP Accounting. For the purposes of our call today, I'll review the financial results in U. S. Dollars. We will begin with a review of the recent dynamics of the Chinese economy, automobile industry and China Automotive's market position. Our net sales rose by 45% year over year in Q2 of 2021 following a year over year 77% rise in the Q1 of 2021. For the 6 months of 2021, our net sales increased by 60.1% year over year to $250,900,000 Our advanced hydraulic steering products and parts grew by 43.9% year over year in the Q2 of 2021 to $97,400,000 Net sales of electric power steering, EPS, increased almost 50% year over year to $23,200,000 and represented 19.2% of total sales. The Chinese economy continues to expand from the impact of the COVID-nineteen pandemic in 2020. GDP grew by 7.9% year over year in the second quarter of 2021, down from the 18.3% in the Q1 of 2021, but still solid economic growth. GDP for the first half of twenty twenty one was 12.7% higher than a year ago. According to statistics from the China Association of Automobile Manufacturers, CAAM, Chinese automobile sales in April rose by 8.6% year over year, led by a 10.8% increase in passenger vehicles. In May, automobile sales declined by 3.1% with a 12.4% decrease in June. For the 6 months ended June 30, 2021, CIM reported that Chinese automobile sales grew 25.6% year over year with passenger vehicle sales from approximately 10,000,000 units, representing a 27% gain ahead of last year. As sedan sales increased 26.2%, MPV unit sales were up 25.2 percent and SUV sales grew by 28.6%. In the 1st 6 months of 2021, new energy vehicles, NEV, sales were approximately 1,200,000 units representing a 201.5 percent year over year growth. The sale of NEV passenger vehicles increased by 217.4 percent to 1,100,000 units and NEV commercial vehicle unit sales reached 66,000 units, up 61.5% in the 1st 6 months of 2021. In the 1st 6 months of 2021, the sales of Chinese domestic branded vehicles, our main market increased by 46.8 percent year over year to 4,200,000 units, taking a 42% market share, up 5.7%. For the 1st 6 months of 2021, commercial vehicle sales in China increased by 20.9% year over year with bus sales rising by 39.7% and the much larger truck market up 19.4% according to CAAM statistics. The traditional bus market benefited from the phasing out of generous EV subsidies and truck growth was partially generated by a significant pre buy of National 5 emission compliant vehicles before the stricter National 6 emission standards are nationally mandated in July 2021 for diesel engines. Additionally, truck sales benefited by stronger anti overloading enforcement and new infrastructure projects. These growth percentages partially reflect comparisons to the lower than normal sales in the first half of twenty twenty caused by the COVID-nineteen disruptions in China and abroad. Each of our operating units achieved double digit growth except our sales to the commercial vehicle market, which had a slight downturn in the Q2 of 2021. Exports to our Tier 1 customers in North America grew by 179.8 percent as the auto market there rebounded from pandemic lows. As previously announced, we have been selling more EPS products into the electric vehicle producers including Great Wall, Cherry Auto, Beijing Auto and JAC Motors, the outlook continues for approximately 200,000 of our EPS units to be supplied to the EV market alone in 2021. Our gross profit increased by 102.6 percent year over year to $15,800,000 with a gross margin of 13.1%, higher than the 9.4% reported for the Q2 of 2020. Total operating expenses increased 18.9% year over year. Income from operations was $119,000 compared to a loss of $5,200,000 in the Q2 of 2020. A combination of net other income, financial income and equity in the income of affiliated companies helped generate net income attributable to parent companies common shareholders of $3,200,000 compared with a loss of $4,100,000 in the Q2 of 2020. In the Q1 of 2021, we introduced our new proprietary EPS system, which integrates and communicates with the vehicle's 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 systems known as ADAS or more commonly referred to as autonomous driving system. To further our ADAS capabilities, in June 2021, we also announced our plan to purchase the 40% interest in Sentient AB, a Swedish automotive technology company specializing in software development and hardware design for advanced steering functions, vehicle motion control and autonomous driving. Sentient currently holds 10 patents and its software functions for steering, vehicle motion control and autonomous driving can be integrated with its proprietarily designed hardware solutions including Powerfax. SW, ECU, motor and housing and complete steering gear systems. Sentient's motion control technology has been tested and demonstrated on EPS, angle overlay systems, steer by wire and fully autonomous vehicles, that's NHTSA level 3 to 5. Sentient's products have been in production since 2013 to provide drivers a superior steering experience. In July of 2021, we announced that we entered into the OTOP, which is off tool, off process phase for a new steering system developed for Alfa Romeo, a leading European brand. This new steering system will be for Alfa Romeo's 1st luxury compact plug in hybrid SUV model, the 2021 Tonale, which features the company's 1st plug in hybrid powertrain. Approximately 100,000 annual units are expected to be ordered for this new CAAS steering system. The OTOF and Alfa Romeo is CAAS' 2nd project in Europe and also the 1st project with a high end brand under the Stellantis Group of vehicles. Also, we are proud that our wholly owned subsidiary, Hubie Henlong Automotive Systems Group Limited received the ISO 26262-twenty 18 ASIL D Certification. This is automotive safety integrity level from SGS TUV. SGS is recognized as the world's leading inspection and verification, testing and certification company. Classifying both software and hardware components with different safety risk, ISO 26,262:2018 ASIL features safety standards from A to D with D being the highest and most stringent safety standard. Our D certification distinguishes us from many other peer companies. Our strong financial strength provides resources to support the development of new technologies to enhance future growth and shareholder value. Our total cash and cash equivalents and pledged cash was $117,300,000 as of June 30, 2021. Total parent company stockholders' equity rose to $312,200,000 at June 30, 2021 from $303,200,000 at the end of 2020. We have financial strength, a large customer base and a growing portfolio of advanced technology to further build our company and shareholder value. Now let me review the financial results in the Q2 of 2021. Net sales increased by 45 percent to $120,600,000 in the Q2 of 2021 compared to $83,200,000 in the Q2 of 2020. Net sales of traditional steering products and parts increased by 43.9 percent to $97,400,000 for the Q2 of 2021 compared to $67,700,000 for the same period in 2020. Net sales of electric power steering EPS products rose 49.7 percent to $23,200,000 from $15,500,000 for the same period in 2020. EPS product sales were 19.2 percent of the total net sales for the Q2 of 2021 compared with 18.6 percent for the same period in 2020. Export sales to North American customers rose 179.8 percent to 31,900,000 in the Q2 of 2021 compared with $114,400,000 I'm sorry, compared with $11,400,000 in the Q2 of 2020. Gross profit rose by 102.6 percent to $15,800,000 compared to $7,800,000 in the Q2 of 2020. Gross margin in the Q2 of 2021 was 13.1% compared with 9.4% in the Q2 of 2020. The increase in gross margin was mainly due to higher net sales and increased gross profit in the company's Hubei Head Lung operations. Gain on other sales was $700,000 compared to $800,000 in the Q2 of 2020. Selling expenses increased by 46.7 percent to $4,400,000 compared to $3,000,000 in the Q2 of 2020. The increase in selling expenses was primarily due to higher personnel expenses. Selling expenses represented 3.6% of net sales in the Q2 of 2021, also compared to 3.6% in the Q2 of 2020. General and administrative expenses, G and A, were $6,100,000 compared to $4,800,000 in the Q2 of 2020. G and A expenses represented 5.1 percent of net sales in the Q2 of 2021 compared to 5.8 percent of net sales in the Q2 of 2020. Research and development expenses, R and D, were $5,900,000 compared to $6,100,000 in the Q2 of 2020. R and D expenses represented 4.9 percent of net sales in the Q2 of 2021 compared to 7.3% in the Q2 of 2020. Our other income net was $1,500,000 for the Q2 of 2021 compared to $1,300,000 for the 3 months ended June 30, 2020. Income from operations was $100,000 in the Q2 of 2021 compared to a loss of $5,200,000 in the Q2 of 2020. Interest expense was $300,000 in the Q2 of 2020, substantially consistent with $400,000 in the Q2 of 2020. Net financial income $200,000 in the Q2 of 2021 compared to net financial expense of $600,000 in the Q2 of 2020. The change in net financial expense was primarily due to achieving a foreign exchange benefit in the Q2 of 2021 compared with a foreign exchange expense in the Q2 of 2020. Income before income tax expense and equity and earnings of affiliated companies was $1,500,000 in the Q2 of 2021 compared to a loss before income tax expense and equity in the earnings of affiliated company of $4,400,000 in the Q2 of 2020. Net income attributable to parent company's common shareholders was $3,200,000 in the Q2 of 2021 compared to a net loss attributable to the parent company's shareholders of $4,100,000 in the Q2 of 2020. Diluted earnings per share was $0.10 in the Q2 of 2021 compared to diluted net loss per share of $0.13 in the Q2 of 2020. The weighted average number of diluted common shares outstanding was $30,855,406 in the Q2 of 2021 compared to $31,174,045 shares in the Q2 of 2020. Now let's go over some 6 month financial highlights. Net income increased 60.1% to $250,900,000 in the 1st 6 months of 2021 compared to $156,700,000 in the 1st 6 months of 2020. 6 months gross profit was $35,600,000 compared to 19 $1,000,000 in the corresponding period last year. 6 months gross margin was 14.1% compared with 12.1% in the 1st 6 months of 2020. The gain on other sales was $2,000,000 in the first 6 months of 2021 compared to $1,400,000 in the corresponding period last year. Income from operations was $4,300,000 in the 1st 6 months of 2021 compared with the loss from operations of $4,200,000 in the 1st 6 months of 2020. Net income attributable to parent company's common shareholders was $6,400,000 in the 1st 6 months of 2021 compared to net loss attributable to parent company's common shareholders of $4,100,000 in the corresponding period in 2020. Diluted earnings per share was $0.21 in the 1st 6 months of 2021 compared to a diluted loss per share of $0.13 in the 1st 6 months of 2020. Now we'll review a few balance sheet items. As of June 30, 2021, total cash and cash equivalents and pledged cash was $117,300,000 Total accounts receivable including notes receivable were $228,500,000 accounts payable including notes payable were $220,400,000 and short term loans were $36,400,000 Total parent company's stockholders' equity was $312,200,000 as of June 30, 2021 compared to $303,200,000 as of December 31, 2020. The business outlook. Management has raised revenue guidance for the full year 2021 to $495,000,000 from $485,000,000 This target is based on the company's current views on operating market conditions, which are subject to change. With that operator, we're ready to begin the Q and A. At this time, we will be conducting a question and answer session. Our first question comes from the line of William Gregozeski with Greenridge Global. You may proceed with your question. Hey, guys. Great quarter. With the EPS sales jumping, can we expect to see EPS sales growth outperform traditional steering products going forward? In terms of growth rate, as the EPS growth is now sales growth is now pacing at 49.7%. It's clearly factored in hydraulic steering systems. But in terms of revenue, EPS still only accounts for 19.2 percent total revenue. Longer run, we do see EPS will account more revenue accounts for more revenue than the traditional hydraulic product. But it will take some time. We see probably in the next within the next 3 years. Okay. All right. What was the reason for the commercial sales being down in the quarter? Okay. It comes down to the year over year sales of the commercial vehicle. The Q2 2020 coming off the tail of the recovery of COVID, the Chinese government issued a number of stimulus packages, which propel a very robust sales Q2 last year. That make a that build a very high base for the Q2 this year to compare with. So it's for that reason, in terms of sales units, year over year comparison, it seems to have down, but still running at a very high rate in terms of overall commercial vehicle sales. As you know, most of our commercial vehicle steering systems are selling in the domestic market, so that's being that's the main reason being affected. Okay. All right. Are you guys seeing any or having any issues or seeing concerns with the chip shortage? Okay. Yes, we do see we do experience some impact from chip shortage. During the Q2, we are we saw about 20% to 30% shortage on the supply side, which is affecting our sales. Otherwise, our sales would have been even faster than the current growth rate on a year over year basis. Many OEM automakers are waiting for our EPS product, but because of this gap on the supply side due to this chip supplier chip shortage, and we had to let them wait. So that's affecting somewhat affecting our EPS sales in the Q2 this year. But starting July, we see some of the large chip producers are have increased their production. So we expect in the Q3 and Q4 coming up Q3, Q4, the pressure will be lessened. And we are still seeing overall probably would be 10% chip shortage than what we would have sold to the EPS product market. So but overall, we'll see EPS sales is going to be very, very strong this year. Okay. Can you provide a quick update on how things are going in Brazil? We're seeing a very strong growth in Brazil. In the Q2 of this year, our sales from Brazil market was 6,200,000 dollars compared with $500,000 in the same quarter last year, mainly due to the COVID impact in that market. And in this first half of this year, our total revenue from Brazil is exceeded has already exceeded 10,000,000 compared with US2.5 million dollars last year. And for that reason and our overall order book, we expect full year 2020, our Brazil sales will be around $23,000,000 to $25,000,000 that compared with $6,000,000 or $7,000,000 in 2020. So that's a major increase. And we already expected a high growth, but now we're seeing the growth is outpacing our initial estimate. All right, great. That's great. Last question is on Centene. Can you talk a little bit more about that and what your plans are for it? Okay. So as we discussed in the past, Centit is the company we acquired is the software and hardware leader, specializing steering functions and vehicle motion controls. And it's an integral part of autonomous driving. So we're very, very excited about it. And in terms of the areas where we'll be working with them, there are 2 areas. 1 is in European market. We're going to work together from hardware perspective. CAS will from hardware perspective, we'll support the best in class hardware and custom made for their softwares. And so, our engineering team will be working closely with Santen team to integrate their software into our hardwares and help them to win more our goal is to help them to win more contracts in the European market. In China, we are since Centennial has the L3, L4 product software designs and some of the hardware solutions, So we are marketing this product to the Chinese OEMs. We're aggressively marketing this. So we're looking to expand it in the Chinese market now with this technology. And we see we already see some interest from OEMs. So this is going to be the future of our company. All right, great. Great. Thank you. Thank you. Thank you. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Kevin Theiss for closing remarks. Well, we thank you for joining us in today's conference call. Please be safe and we look forward to speaking with you again. Thank you. Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.