Q4 2021 China Automotive Systems Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the China automotive systems fourth quarter and fiscal year 2021 conference call.
At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Kevin Theiss, Sir the floor is yours.
Thank you.
Well. Thank you everyone for joining us today welcome to China Automotive systems, 2021, fourth quarter and full year 2021 conference call.
Joining us today.
Chairman Chen.
And Mr. Xu Chief Executive Officer, and Mr. Jay Lee Chief Financial Officer of China Automotive systems.
So that would be available to answer questions later during the conference call with the assistance of translation.
Before we begin I'll remind all listeners that throughout this call. We may make statements that may contain forward looking statements.
Forward looking statements represent the Companys 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.
10-K annual report for the year ended December 31, 2020, as filed with Securities and Exchange Commission.
And for the year ended December 31 2021.
And in other documents filed by the company from time to time to Securities and Exchange Commission.
If the outbreak of COVID-19 is that 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.
Slowdown in regional and national economic growth weakened.
Weekend 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.
Actual condition and results of operations.
Lola prolonged disruption.
Any further unforeseen delay in our operations of the manufacturing delivery and assembly process 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.
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 here.
Future events or otherwise.
On this call I will provide a brief overview.
Excuse me and summary of the fourth quarter and full year results for the periods ending December 31 2021.
Management will then conduct a question and answer session.
Following 2021 and fourth quarter financial results are unaudited.
And the year results are audited.
All results are reported using U S GAAP accounting.
For the purposes of our call today I'll review the financial results in U S dollars.
Okay.
Okay.
We will begin with a review of the recent dynamics of the Chinese economy, the automobile industry and China Automotives market position.
How does GDP growth slowed to 4% in the fourth quarter of 2021, compared with a year ago.
A number of concerns affected the growth rate in the fourth quarter, including lower real estate and construction activities, new outbreaks of COVID-19, causing supply interruptions and lower retail spending Manny.
Manufacturing slowed as more a momentary power shortages arose.
Supply of automobile computer chips was unable to meet demand.
And this is challenging.
<unk>.
Chinese automobile sales decline year over year, each month in the fourth quarter of 2021.
According to statistics from the China Association of automobile manufacturers <unk>.
A M passenger vehicle sales in October were down 5% year over year November sales by four 7%.
And down by seven 1% in December compared with 2020.
Chinese commercial vehicles sales decline at higher rate each month sales of commercial vehicles in October declined by 29, 7% year over year with truck sales down by 31, 8%.
In November .
Commercial vehicle sales were down by 33% with truck sales down 31, 9%.
And December 31 sales decreased by 20% with truck sales declining by 21%.
Reflecting the auto industry headwinds our sales in the fourth quarter of 2021 decline, but by only five 2% to $138 8 million from $146 $5 billion in the fourth quarter of 2020.
Fourth quarter income from operations rebounded to profitability compare to a loss a year ago.
We reduced our selling expenses and the significant decline in general and administrative expenses in the fourth quarter of 2021.
Was due to a onetime nonrecurring expected credit loss provision of $6 $4 million related to a customer's bankruptcy reorganization proceedings in the fourth quarter of 2020.
Net income attributable to Companys common shareholders was $5 million per diluted net income per share of 16 cents.
In the fourth quarter of 2021 compared to a net loss in the fourth quarter last year and a net loss in the third quarter of 2021.
For the full year C. A M statistics reveal the overall sales of automobiles in China grew by only three 8% year over year sale.
Sales of Chinese passenger vehicles were six 5% higher in 2020 one than in 2020.
As a day in sales rose by seven 1%.
<unk> sales increased by six 8%.
MPV sales were.
0.1% higher and crossover vehicle sales grew by <unk>, 8%.
Sales in our commercial vehicle markets declined by $6 six.
In 2021 as the bus industry sales increased by 12, 6%, but the larger truck market declined by eight 5%.
Full year 2021 sales of commercial vehicles.
Impacted by the government mandated national implementation of the more expensive and stricter national six emission standards in July of 2021 .
New emission standard created a significant pre buy of national five vehicles, followed by a downturn in sales of new trucks in the second half of 2021.
Our net sales and <unk>.
21 increased by 19, 3% to $498 million as a passenger vehicle steering gear sales increase.
By 26, 5% year over year lower sales to commercial vehicle markets suffered a decrease of 16%.
North American revenues grew by 10, 4% in our Brazilian operation also had strong growth.
Sales to our Chery automobile.
Customer grew by 92%.
Our advanced hydraulic product sales rose by seven 6%.
In our electric power steering EPS revenue increased 86%.
Including a 53, 1% gain in our hemlock Ky be subsidiary in 2021.
EPS sales represented 23, 2% of total revenues.
Paired with 14, 8% a year ago.
Right Wall Chery auto Beijing Auto and Jay AC Motors began using our EPS products in 2021.
Okay.
We introduced a new proprietary EPS product in.
In 2021, which integrates and communicates with the vehicles main data to create lane keeping assist L. K a.
Automatic parking assist lane.
Lane centering L C K and traffic Jam assist T J a functions as part of the company's advanced driver assistance.
Systems a D. A S. This system is an industry milestone for the first time, a Chinese domestic steering producer drove the entire product development cycle in house.
To further enhance our NV products.
We purchased a 40% interest in Sweden's sentient a be a world leader in steering and vehicle control software and hardware specialized advanced steering functions vehicle motion control and the fast growing autonomous driving market.
To enhance our position.
In Europe , and European and Asian markets, we introduced new steering for Alfa Romeos first luxury plug in hybrid SUV the model 2021 to know.
Assisted cases technology in European vehicles present, new targets for advanced N E V steering products.
Our wholly owned subsidiary <unk> handle on automotive systems group.
We see the ISO 26262.
2018, a S I L D.
Which is the automotive safety integrity level certification from S. G. S. T E D.
I S O 2626 to 2018.
A S I L safety standards range from a T D with D being the most stringent safety standards are D. Certification provides further evidence to our technology proficiency and separates us from many peer companies.
Net sales were $19, 2% higher year over year in 2021 gross margin increased to 14, 5% with greater sales of advanced hydraulic, especially EPA product sales.
Returned to profitable operation.
Yes.
With a look compared with a loss.
Last year as operating expenses grew by only four 6% despite a nearly 10% increase in research and development spending.
Net cash flow from operating activities was $28 $3 million in 'twenty, 'twenty, one and total cash and cash equivalents pledged cash and short term investments were $161.3 million or.
<unk> $5.23 per share.
Our EPS product line sales grew as more technologies were added and thinking a b will add even more advanced technology to enhance the capabilities of our energy products in the future.
The Chinese economy automobile in the steel industry still have challenges ahead, but passenger vehicle sales have risen in the first two months of 2022.
Banks have lowered our rates and government policies are now more growth oriented.
We'll use our strong financial resources and advanced product to grow our market presence with global Oems in markets around the world.
Now, let's review the financial results in the fourth quarter of 2021.
Okay.
In the fourth quarter of 2021.
Net sales decreased by five 3% to $138 $8 million compared to $146 $5 million in the same quarter of 2020.
The net sales increase was mainly due to a change in our product mix and lower demand for automobiles in the fourth quarter 2021, compared with the fourth quarter of 2020.
Gross profit was $19 $7 million in the fourth quarter 2021, compared to $22 $8 million in the fourth quarter of 2020.
Gross margin in the fourth quarter of 2021 was 14.2% compared to 15, 6% in the fourth quarter of 2020.
Primarily due to lower sales volume and a change in product mix.
Gain on other sales was $1.8 million in the fourth quarter of 2021 compared to $1.4 million in the fourth quarter of 2020.
Selling expenses were $3 $4 million in the fourth quarter of 2020 , one compared to $5 $6 million in the fourth quarter of 2027.
Selling expenses represented two 4% of net sales in the fourth quarter 2021, compared to three 8% in the fourth quarter of 2020.
General and administrative expenses G&A expenses were $7 $6 million in the fourth quarter of 2021 compared to $14 3 million hours in the same period in 2020.
G&A expenses represented five 5% of net sales in the fourth quarter.
2021 compared to nine 8% of net sales in the fourth quarter of 2020.
The significantly higher G&A expenses in the fourth quarter of 2020 were mainly attributable to a onetime nonrecurring expected credit loss provision of $6 $4 million related to a customer's bankruptcy reorganization proceedings.
Research and development expenses R&D were $9 $9 million in the fourth quarter of 'twenty, 'twenty, one compared to $8 $3 million in the fourth quarter of 2020.
R&D expenses represented seven 1% of net sales in the fourth quarter of 2021 compared to five 7% in the fourth quarter of 2020 higher R&D expenses were mainly related to higher investments in EPS and an E V products.
Income from operations was $6 million in the fourth quarter 2021, compared with a loss from operations of $4 million in the fourth quarter of 2020.
Increase in the income from operations in the fourth quarter of 2021 was mainly due to a 25, 9% year over year decrease in total operating expenses as both selling and G&A expenses declined significantly.
Interest expense was $5 million in the fourth quarter, 2021 compared to <unk> $4 million in the fourth quarter of 2020.
Financial expense was $1 $5 million in the fourth quarter, 2021 compared with $2 million in the fourth quarter of 2020.
Loss before income tax expense and equity in earnings of affiliated companies was $4 million in the fourth quarter of 2021 compared to a loss of $5 $7 million in the fourth quarter of 2020.
Income tax expense was <unk> $7 million in the fourth quarter 2021 compares.
Compared to an income tax expense of $1 $9 million for the fourth quarter of 2012.
Mainly due to a change in the valuation allowance recognized in the fourth quarter of 2021 .
Net income attributable to parent company's common shareholders was $5 million in the fourth quarter of 2021 compared to a net loss attributable to the parent company's common shareholders of $3 $2 million in the fourth quarter of 2020.
The net loss in the fourth quarter of 2020 was mainly due to a onetime nonrecurring $6 $4 million expected credit loss provision for a customer's bankruptcy reorganization net of minority interest.
Diluted per share.
Diluted income per share was <unk> 16 in the fourth quarter of 2021 compared to diluted loss per share of <unk> 10 cents in the fourth quarter of 2020.
The weighted average number of diluted shares outstanding was $30 million 853822 in the fourth quarter of 2021 compared to 31 million 851776 in the fourth quarter of 2020.
Now I'll review the full year 2021 highlights net sales increased by 19, 3% to $498 million in 2021 compared to $417 $6 million in 2020.
The increase was mainly due to recovery in net sales in the first half of 2021 from the COVID-19 pandemic impact on automobile sales in China and North America.
In 2021 sales of hydraulic products increased by 7.6 year over year, while total sales of EPS systems increased by 86% year over year.
EPS sales represented 22% of total revenue in 2021, compared with 14, 8%.
In 2020 net sales of vehicle steering systems to the company's North American customers increased by 10, 4% year over year in 2021 .
Gross profit in 2021 increased by 34.
4% to $17 1 million compared to $55 3 million in 2020, the gross margin increased to 14, 5% from 13, 3% in 2020, mainly due to changes in the product mix.
Gain on other sales amounted to $4 $4 million a.
Generally consistent with $4 $3 million in 2020, selling expenses were $18 $3 million in 2021 compared to $14 5 million in 2020, mainly due to higher transportation expenses.
<unk> expenses represented $3 $7 million of net sales in 2021 compared to $3 $5 million in 2020.
G&A expenses declined 11, 6% to $24 $4 million in 2021.
$27.6 million in 2020.
The decrease was mainly due to a decreased provision allowance for doubtful accounts related to one customer's bankruptcy reorganization in November 2020, which was partially offset by higher personnel costs.
G&A expenses represented four 9% of net sales in 2020 , one compared to 6.6% of net sales in 2020.
R&D expenses were $28 2 million in 2021 compared to $25 $7 million in fiscal year 2020.
The increase was primarily due to a higher investment in E. P S products.
R&D expenses were five 7% of net sales in 2021 compared to six 2% of net sales in 2020.
Income from operations was $5 $5 million in 'twenty, and 'twenty, one compared to a loss.
From operations of $8 $1 million in 2020.
The income was mainly due to a 34% increase in gross profit with an offsetting impact of a four 6% increase in total operating expense in 2021.
Loss in 'twenty, and 'twenty was primarily due to lower net sales and a one time nonrecurring expected credit loss provision related to a customer's bankruptcy reorganization.
Interest expense was $1.4 million in 2021, a slight decline from the $1.6 million in 2020.
Yeah.
Net financial expense was $2 $4 million in 2021, compared with $4 9 million in 2020, primarily due to a decrease in foreign exchange losses.
Income before income tax expenses and equity in earnings of affiliated companies was $8 $4 million.
Compared to a loss before income tax expenses and equity in earnings of affiliated companies of $12 $2 million in fiscal year 2020. The change was primarily due to generating income from operations on lower net financial expenses in 2021.
Net income attributable to parent company shareholders was $11 $1 million in 2021.
Compared to net loss attributable to parent company's common shareholders of $5 million in 2020.
The loss in 2020 was mainly due to the lower sales and a one time nonrecurring was $6 $4 million.
Expected credit loss provision from a customer's bankruptcy.
Net of minority interest diluted net income per share was 36 36 cents in 2021 compared to diluted loss per share of <unk> 16 cents in 2020.
The weighted average number of diluted common shares outstanding was $30 million 855431 in 2021.
Compared to 31 million.
77196 in 2020.
Next we'll review a few balance sheet items.
As of December 31, 2021, total cash cash equivalents pledged cash and short term investments were $161.3 million.
Total accounts receivable, including notes receivable were.
$210 $3 million.
Couch payable, including notes payable were $228 million and short term bank loans were $47.6 million.
Total company Stockholders' equity was $320 million as of December 31, 2020, compared to $303 $2 million as.
As of December 31, 2020.
Net cash flow from operating activities was $28 $3 million in 2021, compared with $57 $4 million in 2020.
Cash paid to acquire property plant and equipment.
And land use rights was $9 $3 million in 2021, compared with $15 $8 million in 2020.
The business outlook.
Management provide revenue guidance for fiscal year, 2000, $20 million to $510 million.
Targets 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 session.
Operators are in Lee.
Ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask while posing your question you. Please pickup your handset if we're sitting on speaker phone to provide optimal sound quality.
Please hold while we poll for questions.
Your first question for today is coming from William Craig's housekeeping. Please announce your affiliation then pose your question.
Hey, guys.
Could you did you say that.
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Your question is itself in Brazil up 90%.
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But.
I guess I wanted to confirm that you guys said it was up 90% and then my follow ups were going to be how much is that in dollars and then what the what are the expectations for that going forward.
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Yes.
In terms of dollar did the revenue.
In Brazil, all revenue in Brazil.
Experienced a robust growth in.
2021.
And in the amount the total amount for.
From our Brazil business in 2021.
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Approximately 164 million RMB.
Or 16.
At 26 million U S dollars.
That's mainly attributable to our growth.
And in.
In numerous key account, we signed some large customers.
And looking into 2022 .
We believe.
We will have.
Further gross and clinically too.
Okay, great great.
On the EPS products, where the margin.
Margins continue to rise in the fourth quarter and is that still expected to see margin improvement going through 2022.
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Yes. The answer is yes, GPS margin will continue to improve and increase in 2022.
We foresee a 20% to 30% volume increase.
In 2022.
Uh huh.
Mainly due to very strong demand.
And so clearly demand outstripped the supply.
On the EPS product.
So that gave us some.
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The fountain in terms of pricing.
And also the.
With the gross of the volume.
We are achieving better economy of scale.
So that will also help out.
Our gross margin.
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Okay. So overall, we see.
The overall Chinese auto market.
No.
Experienced a slight increase in 2022.
Despite the volatility.
Which we.
I expect there will be.
Volatility.
And to us.
The course of a year.
For example, we you.
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Uh huh.
Lockdown in this large city like Shanghai.
However, we'd see Chinese governments.
We are rolling out more favorable policy to stimulate the economy.
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And there are talks about <unk>.
Lower taxes.
And also.
New policy to to help with the property market.
And so overall.
We think.
The.
The government's policy will offset.
The challenges.
And.
So we will give us.
The whole auto industry.
Our mall net net positive.
Push for 2022, that's why we see a slight increase in 2022.
From a year before.
Okay, Great and last question is can you provide a little more detail about the $5 9 million equity in earnings of affiliated gain and loss in the fourth quarter.
Okay.
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That gain was.
Associate associated with our investment.
We we have announced in the past.
The eight years.
We are.
We invested in three.
Investment funds.
Some are.
Early stage venture funds.
<unk> specialize in automotive space.
One of the portfolio company.
Number of company a few companies went public.
Last year, and they've done very well in particular.
This one company from city of Chongqing, and then went Tuesday.
Tech.
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When the IPO on the Tech Board.
And there they are there.
They're paid named witnesses in the Hydro gene technology for the automotive sector, which is a very very.
Hot sector.
So the stock has experienced very strong growth.
Since their IPO and so.
So we are.
Indirectly benefiting from it.
Okay perfect. Thank you guys.
Thank you.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
Okay.
Okay.
There are no questions in queue at this time.
Okay I want to thank everybody for joining us today and please be safe and we look forward to talking to you in the future.
Yes.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.