Q3 2022 China Automotive Systems Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the China Automotive systems third quarter 2022 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 you Mr. Kevin sees.
Investor Relations, Kevin the floor is yours.
Thank you everyone for joining us today welcome to China Automotive Systems' 2022 third quarter conference call. Joining us today are Mr. Jay Lee Chief Financial Officer of China Automotive systems. He would be available to answer questions. Later in 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 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.
The year ended December 31, 2021 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.
The outbreak of COVID-19 is not effectively.
And time to control our business operations and financial condition may be materially and adversely affected as a result of a deteriorating market outlook for automobile sales slowdown in regional and national economic growth.
We can 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.
Overall business environment caused uncertainty in the region.
Where we conduct business.
How's that business the soccer in ways that we cannot predict.
And adversely impact our business.
Financial condition and results of operation.
Disruption disruption.
Or any further unforeseen delays in our operations at the manufacturing delivery and assembly process.
If any of our production facilities.
Continue to result in delays in the shipment of products to our customers increased costs and reduced revenues. 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.
Well at this call I will provide a brief overview and summary of the third quarter and first nine months results for the period ended September 32020 to.
Management will then conduct a Q&A session.
2022 third quarter and first nine months financial results are unaudited and all resulting in reported U S GAAP accounting.
For the purposes of today's call I'll review the financial results in U S dollars.
We will begin with a review of the recent dynamics of the Chinese economy, the automobile industry and China Automotives market position.
China's GDP growth of three 9% year over year in the third quarter of 2022 was higher than our revised consensus projections.
Three 4% growth.
And much higher than the 4% increase in the second quarter of 2022.
Chinese industrial production trended upward at a six 3% rate in September 2022.
84, 3% rates in August and a three 8% rate in July 2022.
Wherever the Chinese real estate market remains in turmoil in the outlook for exports is uncertain given foreign exchange volatility.
Economic outlook for key trading partners.
Total vehicle sales in the third quarter.
<unk> increased by 24, 9% year over year with passenger vehicles up 36, 6% year over year and commercial vehicles down 10, 6% year over year. According to data from the Chinese Association of automobile manufacturers <unk>.
Truck sales continued to be weak with a 10, 8% year over year decline.
These results were achieved despite Chinese supply chain is continuing to be affected by COVID-19, lockdowns and travel restrictions affecting almost all provinces to some degree.
Delays in raw material shipments and finished good deliveries, including for automobile microchips and other components are still concerns for the automobile industry.
For the first nine months ended September 32022 C. A M reported automobile sales increased by four 4% year over year.
Passenger vehicle sales rose by 14, 2% year over year with sedans, 16.7% year over year higher.
Suvs, 15% higher year over year.
However, on a year over year basis, MPV sales declined by seven 8% and cross vehicles were down by 14, 6% respectively.
For commercial vehicles ALC AAM.
Data showed an overall sales decline of <unk>.
342% year over year for the first nine months of 2022.
Truck market declined by 35, 3% year over year and bus sales were down by 23, 9% year over year.
Despite the mixed results in the Chinese auto vehicle markets.
22 third quarter, our net sales.
Sales grew by 26, 8% year over year.
Sales of our traditional hydraulic products remain strong.
Ooh subsidiary sales, primarily to Chery auto were up 52% year over year.
And net sales into Brazil increased by 51, 9% year over year.
Additionally, sale of electric power steering EPS by a headlong T Y B operation Rose by 93, 7% year over year.
However, our sales to our tier one customers in North America were down slightly.
In our commercial vehicles steering sales were flat.
A solid result, given the decline in commercial vehicle sales in the third quarter.
Most of our business segments achieved sales growth, our commercial vehicle products Division reported lower sales, which reflected the weak overall sales in the commercial vehicle sector.
Our gross profit grew by 24, 4% year over year, but the gross margin declined slightly to 15, 2% from 15, 5% in the third quarter of 2021, mainly due to changes in the product mix Reese.
Research and development expenses R&D increased by 66, 7% year over year to $9 $5 million in the 2022 third quarter as we grew our investments in new product development and to further build our technology base.
Higher gross profit stricter cost controls and higher other income helped generate income from operations of $4 $9 million in the third quarter of 2022 compared to $6 million in the third quarter of 2021.
Our 2022 third quarter income per share.
Was 24 cents versus the loss per share of <unk> in the third quarter last year.
For the nine month period, our income per share was <unk> 55, compared with a 20.
A year ago.
Net cash provided by operating activities was $31 $7 million in the first nine months of 2022 compared with net cash used in operating activities of $5 9 million in the first nine months of 2021.
We continue to develop our E RCB systems with our advanced driver assistance.
Assistant systems L. Four platform known as the AP Oh for.
Execute level four autonomous driving systems.
RCB as a wholly electric intelligence steering system for light and medium duty trucks and heavy duty commercial vehicles.
Add the technologies of our subsidiary in Sweden, Centene, a b to improve or any new steering technology for autonomous driving products.
In passenger and commercial vehicles.
As of September 32022.
We had cash and cash equivalents and pledged cash of a $131.7 million and working capital of $153 4 million.
For the third quarter of 2022, we repurchased.
382418 common shares under our repurchase buyback program at an average cost of $3 59.
Our share repurchase program can use up to $5 million Dubai outstanding common shares through March 32023, other price not to exceed $4 per share.
Free cash flow increased to $19 $8 million compared with negative $11 $7 million in the first nine months of 2021.
We are particularly encouraged by the September sales of vehicles in China, all categories of passenger and commercial vehicles as well as new vehicles tracked by a M expires the month over month increase in unit sales in September .
These sales increases, resulting from an improved supply chain, a favorable government policies, including a 50% reduction in national purchase tax for some vehicles.
Some of the favorable government programs may end at the end of 2022.
So the remainder of 2022 may exhibit continued growth of automobile units as purchasers take advantage of these incentives.
Now, let me review the financial results and third quarter of 2022.
Net sales increased by 26, 8% to $137 2 million.
Compared to $108.2 million in the same quarter of 2021.
The increase in net product sales was due to a 17, 3% gain in the company's sales and hydraulic products and an increase of 52, 4% and EPS net product sales.
EPS net sales were $44 $8 million or 32, 7% of net sales compared with $29 $4 million or 27, 2% of net sales in the third quarter of 2021.
Net product sales in North America decreased by four 8% to $29.5 million due primarily to changes in the product mix compared with $31 million for the same quarter in 2021.
<unk> net product sales in Brazil rose by 51, 9% to $11 $5 million due to higher demand.
Gross profit was $29 million in the third quarter of 2022 compared to $16 $8 million in the third quarter of 2021.
Gross margin was 15, 2% compared to 15, 5% for the same period in 2021, mainly due to the change in product mix.
Selling expenses were $4 million in the third quarter of 2022 compared to $4 $8 million in the third quarter of 2021.
The lower selling expenses were mainly due to a decrease in transportation expenses.
<unk> expenses represented two 9% of net sales in the third quarter of 2022 compared to four 4% in the third quarter of 2021.
Yeah.
General and administrative expenses were $4 9 million in the third quarter of 2022 compared to $6 2 million in the same quarter of 2021.
The decrease was primarily due to a decline in the provision for credit losses provided for accounts receivable.
G&A expenses represented three 6% of net sales in the third quarter 2022, compared with five 7% of net sales in the third quarter of 2021.
Research and development R&D.
Increased by 66, 7% to $9 $5 billion in the third quarter of 2022 compared to $5 $7 million in the third quarter 2021.
R&D expenses represented six 9% of net sales in the third quarter of 2022, compared with five 3% of net sales in the third quarter of 2021.
Higher R&D expenses were primarily due to increased investment for new projects.
Income from operations was $4 $9 million in the third quarter of 2022 compared with income from operations of $6 million in the same quarter of 2021.
Higher income from operations was mainly due to increased gross profit.
A higher gain on other sales and greater cost controls in the third quarter of 2022.
Other income was point $7 million in the third quarter 2022, compared with $2 $4 million in the third quarter of 2021, primarily due to lower government subsidies subsidies received in the third quarter of 2022.
Net financial income was $4 $8 million compared with net financial expense of <unk> $8 million in the third quarter of 2021, mainly due to the foreign exchange volatility of the U S dollar against the RMB and the Brazilian real.
Income before income tax expenses and equity in earnings of affiliated companies was $10 million.
Third quarter 2022 comparative.
Income before income tax expenses and equity in earnings of affiliate affiliated companies of $1 $9 million in the third quarter of 2021.
The higher income before income tax expenses and equity in earnings of affiliated companies was mainly due to increased income from operations compared with the third quarter 2021.
Income tax expense was <unk> $9 million in the third quarter of 2022 compared to an income tax expense of $2 $4 million for the third quarter of 2021, which was mainly due to the valuation allowance recognized in the third quarter of 2021.
Net income attributable to parent company's common shareholders was $7 $5 million in the third quarter of 2022 compared to a net loss attributable to parent company's common shareholders of $3 million in the third quarter of 2021.
Diluted income per share was <unk> 24 in the third quarter 2022, compared with diluted loss of one thing and the third quarter of 2021.
The weighted average number of diluted common shares outstanding was $30 million 640260 in the third quarter of 2022.
Compared to $30 million 851776 in the third quarter of 2021.
Now I'll briefly go over the nine months financial highlights net sales for the first nine months of 2022 increased by 11, 6% to 408.
Compared with $359 $2 million in the first nine months of 2021.
Gross profit for the first nine months of 2022 increased by 11, 4% to $58 4 million compared to $52 4 million in the corresponding period last year.
Gross margin for the first nine months of 2022 was 14, 6%.
Also compared to $14 60.
For the corresponding periods in 2021.
For the nine months ended September 32022 gain on other sales amounted to $5 $3 million compared to $2 $5 million for the corresponding period in 2021 income from operations was $10 5 million.
Dollars compared to net income I'm, sorry, compared to income from operations of $4 $9 million in the first nine months of 2021.
Net income attributable to parent company's common shareholders was $16 $8 million compared with net income attributable to parent company's common shareholders of $6 $1 million in the corresponding periods last year diluted income per share was <unk> 55.
In the first nine months of 'twenty, two compared with diluted income per share.
<unk> 20 for the corresponding periods in 2021.
Now I'll review, a few balance sheet items as of September 32022 total cash.
And cash equivalents and pledged cash deposits were $131 7 million total accounts receivable, including notes receivable were $208 6 million accounts payable, including notes payable were $210 $2 million.
Total parent stockholders' equity was $302 $2 million as of September 32022, compared to $321 million as of December 31, 2021.
Net cash provided by operating activities was $31 $7 million in the first nine months of 2022 compared with net debt used in operating activities of $5 $9 million in the first nine months of 2021.
Payments to acquire property plant and equipment were $11 8 million.
Compared with $5 $3 million in the first nine months of 2021.
For the business outlook management has increased its revenue guidance for the full year 2000 $22 million to $540 million. This target is based on the Companys current views on operating.
Mark 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 Kevin ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on Youll find handset, we all still outpacing. Your question you. Please pickup your handset if you're listening on to speak fine to provide optimum sound quantity. Please hold while speed poll for questions.
Thank you. Your first question is coming from William Grant does that ski from Greenwich label. William Your line is life.
Hi, guys, great great quarter I have a couple of question.
Sales to the U S for the lowest in about two years is there any reason for that and are we going to see that reverse coming up here.
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Yeah.
Okay.
The change this quarter.
The change of sales to the North America market.
<unk> is primarily due to the product mix change.
We sell.
A wide range of PAH.
Hearing product.
Based on our functions and different pricing too. So in this particular quarter, we happened to sell more lower priced.
Product.
<unk>.
We believe this can change as well.
Going forward now.
Other thing.
It's also been developing.
We have been working on a few other new opportunities.
We're developing new customers in North America as well so.
We'll give you a report where we are.
We have a major breakthrough.
Okay, Great and then on the EPS side, obviously huge growth in the quarter. What are you looking at from that in the fourth quarter and in 'twenty three.
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If you look at the first nine months of 'twenty.
'twenty two.
We already.
Okay.
120 million U S dollar since sales.
From the EPS electric power steering products.
Representing.
62, 8% year over year growth.
And we believe this we're going to continue to grow into the throughout the fourth quarter was the similar pace.
Looking into 2023 quickly.
We can.
Achieved another around 50%.
Yes.
From on a year over year basis.
You said five zero percent.
Five zero.
Okay logs.
Great and then are we going to see the margins expand as well.
It really get into the third quarter are we going to see that get up in that upper teens next year.
No.
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As we grow.
As we continue to experience significant growth gross for our EPS.
Electric power steering product.
Volume as the volume continues to pick up we will see the gross margin will start to go up as well as you know.
We will continue to achieve better economy of scale and when the EPS gross margin goes up it's also going to benefit our blended gross margins overall gross margin. So we are.
Optimistic.
Sure.
Next year in terms of gross margin now this particular quarter third quarter, our gross margin.
Slightly.
Soft.
It is mainly due to the.
Yes.
Product mix, because we're selling.
Little higher proportion of low gross margin product.
But.
Looking forward we believe.
With the continued growth of EPS product volume.
N.
Recovering ongoing recovery of the commercial vehicle market.
I believe the margin will recover.
Next year.
Okay, Great and then last question is can you guys provide an update on how things are going with sentient Dan your investment there.
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Okay. So since 10 overall.
We're very pleased with her.
Progression.
First a sign.
Very sizable contract was mobile.
Recently.
We're very proud of them.
We are looking into.
In mid 2023 will start mass production.
And then gradually ramp up to full.
Full production.
Reaching the full production capacity somewhere in 2024.
And.
And we also working together to provide.
Our solution of products to <unk> as you know the largest electric vehicle producer in China is probably in the world right now.
The volume.
Our technical solution in both hardware and software solution is going to be.
<unk>.
Very meaningful it's going to bring me at very meaningful revenue to us we're looking at.
About 200000 units a year.
We're coming from.
This new.
Business opportunity.
So it's pretty exciting for us.
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BYD is at a signed contract or just something you're working on and that's the potential volume.
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Okay, we're in the development contract.
Stage.
Yes. So after that then we'll start to go into the.
Total commercial.
Contract.
Okay, great. Thank you.
Thank you very much.
Once again, ladies and gentlemen is that any remaining questions or comments. Please press star one on your handset now.
Okay.
Any further questions in the queue.
Back over to Kevin for any closing remarks.
We thank you.
For your participation in today's conference call.
Safe and we look forward to speaking with you in the future.
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.
For your participation.
Switching either.
Yes, yes.
Okay.