Earnings Call: Q1 2021

May 12, 2021

Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2021 Q1 conference call. Joining us today are Mr. Huizhi Wu, Chief Executive Officer and Mr. Jade 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 to wrap this call, we may make statements and 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 ks annual report for the year ended December 31, 2020, as filed with the Securities and Exchange Commission and another document filed by companies 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 deteriorating market outlook for automobile sales, the slowdown in the regional national economic growth, which are reported in the financial condition of our customers and other factors that we cannot foresee. Any of these factors and other factors are beyond our control, could have an adverse effect on the overall business environment, cause uncertainties in the regions where we can have business cause our business to suffer in ways that we cannot predict and materially adversely impact our business from the interconditioning results of operations. For a long disruption of 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, increase costs and reduce 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 Q1 results for the period ended March 31, 2020. Financial will then conduct a question and answer session. The following 20 2Q1 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. Let's begin with a review of recent dynamics of the Chinese economy, the automobile industry and China Automotive's market position. We are pleased to report that our net sales rose 77 percent to $143,000,000 from $73,600,000 in the Q1 of 2020. Sales of our hydraulic price grew by 61.2 percent as electric power steering products rose 204.9% and represented 19% of total sales, but very good 11% in the Q1 of 2020. This growth is partially due to the Chinese economy eventually reaching full recovery from the impact of the COVID-nineteen pandemic in the Q4 of 2024. In the Q1 of 2021, China's GDP grew 18.3 percent year over year. Chinese industrial production grew by 20 2 percent year over year, and overall exports and imports grew by over 30% year over year in the Q1 of 2021. According to statistics in the China Association of Automobile Manufacturers, CAAM, automobile sales in China rose by 75.6% year over year in Q1 of 2021 as passenger vehicle sales grew 75.1% year over year, commercial vehicle sales improved by 77.8% year over year, electric vehicle sales climbed 2 80% year over year and automobile export sales were up 74.6% year over year. Off sales of all passenger vehicle segments were higher year over year and SUVs continued to outsell vans. Improved commercial vehicle sales were generated by a combination of the move to the national safety issue standards, stronger antioverloading enforcement and the initiation of infrastructure projects, The sale of Chinese national branded vehicles in the Q1 of 2021, a key market for CAAS, increased by 81.5% year over year and represented 41.5% of total automobile sales in China. These growth numbers partially affect the comparison to the low sales in the Q1 of 2020 generated by the COVID-nineteen restrictions in China. However, the 2021 Q1 ended strongly with March automobile sales alone rising by 73.6% quarter to quarter and by 74.9% year to year. Our sales grew 3 main markets: the Chinese OEM passenger vehicle market, the Chinese OEM commercial vehicle market and the export market, all achieved growth in the Q1 of 2021. Due to our operating units in January, sales grew from profits in the 1st quarter as well. Sales of the Chinese passenger vehicle market rebounded strongly compared to the same quarter last year. As previously announced at the end of 2020, we have been buying more EPS products into the electric vehicle market as a number of large OEMs have begun using our products, including Great Wall, Cherry Auto, Beijing Auto and JAC Motors. The outlook is for approximately 200,000 of our EPS units to be supplied to the EU market in 2021. Sales of our commercial vehicle products have increased in both the Chinese OEM and the North American aftermarket. Sales to our Tier 1 customers in North America grew by 26.3% year over year in the Q1 of 2021. Gross profit increased 75.9 percent year over year with a stable gross margin. Total operating expenses decreased 57.4% year over year. This combination resulted in an increase in operations climbing by 311.1 percent year over year compared with the Q1 of 2021 I'm sorry, 2020. For the Q1 of 2021, our net income attributable to parent company's common shareholders was $3,100,000 and basically diluted income per share of $0.10 compared to a slight net loss in the Q1 of 2020. With the rate of technology change in the automobile industry rising, we increased our research and development by 28.6 percent year over year in the Q1 of 2021. We announced a new proprietary EPS system during the Q1, which integrates its new case with the vehicle's main data to create lane tracking assist, automatic parking assist, lane filtering and traffic jam assist functions as part of the company's Advanced Driver Assistance Program, ADAM, or more commonly referred to as autonomous driving system. This system is accompanied from Chinese automobile industry milestones. For the first time, the Chinese domestic steel producer drove the entire product development cycle in house from design to testing. We also developed the key proprietary algorithms for the steering control software. A number of purchase orders have been received from the silicon steering systems from the investment in foreign OEMs such as Great Wall, JAC, Cherry Auto and CS Chrysler on the deals. We will continue to improve our current products as well as introduce other new products in the future to provide advanced products to our customers. Building financial strength, I made the top priority to provide the resources to support future growth and enhance shareholder value. Our total cash and cash equivalents and pledged cash was $122,000,000 as of March 31, 2021. Total parent company stockholders' equity rose to $304,400,000 on March 31, 2021 and $103,200,000 at the end of 2020. We expect the Chinese economy will continue to grow in 2021, but at a slower rate than the 18.3% experienced in the Q1 of 2021. We have been experiencing greater demand for our advanced EPS and autonomous timing products, and the sale of our advanced hydraulic product continues to expand in both domestic and international markets. Let me review the financial results in the Q1 of 2021. Net sales increased by 37 percent to $103,200,000 in the Q1 of 2021 compared to $73,600,000 in the Q1 of 2020. The net sales increase was mainly due to the recovery of the Chinese economy and Chinese automobile demand post COVID-nineteen. Net sales of traditional steering products and parts increased by 51.6 percent to $105,600,000 for the Q1 of 2021 compared to $65,500,000 for the same period in 2020. Net sales in electric power steering products were 204.9 percent to $24,700,000 from $8,100,000 for the same period in 2020. EPS product sales were 19% of the total net sales for the Q1 of 2021 compared with 11% for the same period in 2020. Export sales rose 30.4% to $40,700,000 in the Q1 of 2021 compared with $31,000,000 in the Q1 of 2020. Gross profit was up 75.9 percent to $19,700,000 compared to 11 $200,000 in the Q1 of 2020. Gross margin in the Q1 of 2021 was 15.1%, generally consistent with the 15.2% in the Q1 of 2020. Gain on other sales was $1,300,000 compared to $600,000 in the Q1 of 2020. Selling expenses were $5,600,000 compared to $2,100,000 in the Q1 of 2020. The decrease in selling expenses was primarily due to higher sales volumes and increased air freight charges. Selling expenses represented 4.3% of net sales in the Q1 of 2021 compared to 2.9% in the Q1 of 2020. General and administrative expenses, G and A, were $4,600,000 compared to $3,400,000 in the Q1 of 2020. The increase in G and A expense was primarily due to higher personnel costs due to the increase in net sales. G and A expenses represented 3.5% of net sales in the Q1 of 2021 compared to $4,600,000 I'm sorry, 4.6 percent of net sales in the Q1 of 2020. Research and development expenses, R and D, were $6,700,000 and was compared to $5,200,000 in the Q1 of 2020. R and D expenses represented 5.1% of net sales in the Q1 of 2021 compared to 7.1% in the Q1 of 2020. Other income net was $1,700,000 for the Q1 of 2021 compared to $2,100,000 for the 3 months ended October 31, 2020. The increase of $1,600,000 was mainly due to government subsidies of $1,400,000 received in the 1st 3 months of 2021. Income from operations was $4,200,000 in the Q1 of 2021 compared to $1,000,000 in the Q1 of 2020. This growth was primarily due to a higher year over year increase in sales and gross profit compared with the increase in operating expenses. Net interest expense was $300,000 in the Q1 of 2021 compared to $400,000 in the Q1 of 2020, primarily due to less loans. Net financial expense was $200,000 in the Q1 of 2021 compared to $500,000 for the Q1 of 2020. The reduction in net financial expense was primarily due to less foreign exchange losses. Income, which will impact expenses and equity earnings of affiliated companies, was $5,300,000 excuse me, in the Q1 of 'twenty one or 2021 compared to $200,000 in the Q1 of 2020. The increase in income before income tax expenses and equity and earnings of the associated companies in the Q1 of 2021 was mainly due to higher income from operations and higher other income. Net income attributable to parent company's common shareholders was $3,200,000 in the Q1 of 2021 compared to a net loss attributable to parenthesis common shareholders of $300,000 in the Q1 of 2020. Diluted income per share was $0.10 in the Q1 of 2021 compared to 0 per share in the Q1 of 2020. The weighted average number of diluted common shares outstanding was 30,857,736 in the Q1 of 2021 compared to $31,174,045 shares in the Q1 of 2020. Now we'll review a few balance sheet items. As of March 31, 2021, total cash and equivalents and pledged cash were $122,000,000 Total cash receivable including notes receivable was $236,600,000 Accounts payable, including notes payable were $223,900,000 and short term bank and government loans were $46,200,000 Total parent healthy stockholders' equity was $304,400,000 at the March 31, 2021 compared to $303,200,000 as of December 31, 2020. For the business outlook, management has raised revenue guidance for the full year 2021 from $470,000,000 to $485,000,000 This target is based on company's current views of operating and market conditions, which are subject to change. With that operator, we're ready to begin the Q and A. Thank you. Okay. Hi, operator. Hi, Melissa. So we have some questions from our analyst, Phil Gokulsky, Twin Ridge Global. Due to the travel schedule, he is unable to attend the call, so he has emailed his questions. So he has the following questions. First question, can you break out the revenue from Brazil in Q1 2021 compared to Q1 2020? And where did the large Stellantis order start? Okay. The answer for the first question, the revenue from Brazil market in 2020 Q1 was about US2 million dollars dollars but it quickly increased to US6 $7,000,000 in the Q1 of 2021. That's representing more than 200% increase. And in terms of when the order started with Stellantis, that order started in the end of 2020, so Q4 2020 in December, more specifically. Then we have the second question. The sales of the EPS products seems to be accelerating. Is this related more to the growth in the market or demand for your EPS products? The growth of our EPS product sales is mainly driven by the demand market demand for our EPS products. If you look at the overall passenger we heard is auto sales in China. In the Q1, it's a phenomenal we saw a phenomenon growth. Overall year over year growth for auto sales is over 70%. But if you look at our EQS product sales, it grew more than 200%. That clearly outpaced the overall market. And mainly attributable this kind of growth is mainly attributable to our large customers like Greywall, Geely, China and their order of EPS product. And these orders are starting to piling in the Q4 of 2020 already, and we see it continuing accelerating in the Q1 of 2021. Now switch to the G and A side. The question 3 is, the G and A expenses was lower than each of the last three quarters. What's the good range we should expect for this going forward? Yes. In the Q1 of 2021, we are we underwent a restructuring. So we have streamlined our operation, especially in the managerial and administrative category and the non especially the non manufacturing staff. We have consolidated we have done some consolidation. So our G and A expenses is about down 20 percent G and A area, we have managed to reduce by 20%. And going forward, you should see a similar trend continue in the following quarters. So for this question 4, The first question is, can you talk more about $1,400,000 loss from affiliated companies? I cannot see a discussion on the course of that in the 10 Q. Okay. The loss from affiliate company is mainly from our investment in the investment fund. We of course, in the past, we invested in a few venture capital funds, mainly targeting in the automotive technology space. And some of our investment went public in the last 12 months. The market has been quite fluctuating in the last few quarters, especially in the Q1 of 2021. So this booking is mainly due to one of the investment. 1 of our portfolio company went public and their stock has suffered a decline in the Q1. And so we have picked up booking in the Q1. Now the last question, what are you budgeting for CapEx in 20212022? And what will be stand out? Okay. The CapEx budgeting for 2021 is about US18 million dollars 2022 is about US20 million dollars The Most of those budget will go into the maintenance CapEx, but also a portion of that will go into the new projects, mostly in the EPS category as we will continue to invest in electric motor technologies. So that would be the most of the use of the CapEx. So with that, operator, we can take questions from the queue. Thank you. There are no questions at this time. Thank you. This concludes today's question and answer session. I'll turn the floor back to Mr. Theiss for any final comments. I want to thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you again. Thank you. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.