Q4 2022 China Automotive Systems Inc Earnings Call
Good morning, everyone and welcome to the China automotive systems fourth quarter and fiscal year 2022 conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your.
Please note. This conference is being recorded I will now turn the conference over to your host Mr. Kevin <unk> of Investor Relations, Kevin you may begin.
Thank you everyone for joining us today, welcome to China, automotive systems, 2022 fourth quarter and year.
Conference call.
Joining us today are Mr. Jay Lee 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 forward looking statements represent the company's estimates and assumptions only as of the date of this call.
As a result, the companys actual results.
Could differ materially from those contained in it.
These forward looking statements due to a number of factors and Korean.
As described under the heading risk factors in the company's Form 10-K annual report for the year ended December 31 2022.
Filed with the Securities and Exchange Commission and other documents filed by the company from time to time with the Securities and Exchange Commission.
The outbreak of COVID-19 is not effective and timely control our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales are slow.
No doubt in our regional National and international economic growth.
We can liquidity and financial condition of our customers and other factors that we cannot foresee.
Any of these factors and other factors beyond our control could have adverse effect on the overall business environment cause uncertainties in the regions, where we conduct business.
Cause that business the software are ways that we cannot predict.
And in fact, our business financial condition and results of operations.
Prolonged disruption of any.
Further unforeseen delay in our operations or.
Or the manufacture and delivery and assembly process within any of our production facilities.
As a 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.
As a result of new information future.
For events or otherwise.
On this call I will provide a brief overview and summary of the fourth quarter and fiscal year results for the period ended December 31, 2022 management will then conduct a Q&A session.
The 2022 fourth quarter are unaudited.
The fiscal year financial results are unaudited and all resorts all results are reported U S GAAP accounting for.
For the purposes of our call today I'll review the financial results in U S dollars.
We'll begin with review of the music dynamics of the Chinese economy, the automobile industry and our market position.
China's GDP.
<unk> growth was four 8% in the first quarter of 2022.
Marking a historical soft period.
<unk> declined further to 4%.
I'm, sorry, 0.4% growth in the second quarter of 2022 before rebounding at three 9% in the third quarter.
However, GDP growth slowed to two 9% in the fourth quarter of 2022.
Quarter over quarter economic growth between the third and fourth quarters of 2022 was essentially flat.
For fiscal year 2022, Chinese economic growth was a low 3%.
Down sharply from the eight 4% growth experienced in 2021.
Total retail sales in China declined by <unk>, 2%.
Partially due to the effects of COVID-19 Lockdowns.
And the investment in our real estate development declined by 10% in fiscal 2022.
The COVID-19 outbreak worsened in 2022 first quarter, resulting in Lockdowns in several cities across China. The impact of COVID-19 affected the economies throughout the 2022 year, but lessened in the second half what the economy is better growth.
Fly chain interruptions increased in early 2022, which hindered production.
Especially with clear the whole computer chip shortages affecting automobile production.
Foreign exchange volatility and the economic outlook for key trading partners, where concerns throughout 2022.
According to the data from the Chinese Association of automobile manufacturers.
C a M.
Automobile sales increased by only 2% year over year in the first quarter of 2022.
Decreased by 13, 3% year over year in the second quarter of 2022 increased by 29, 4% year over year in the third quarter.
And then declined by three 3% year over year in the fourth quarter of 2022.
In 2022 total automobile sales grew by only three 4% year over year.
Passenger vehicle sales.
Those by 11, 2% year over year with sedans up 12, 5% MPV down 11, 3%.
These up 13.5%.
In cross passenger vehicles, 23% lower.
And 2022 commercial vehicle sales fell 31, 9% as bus sales were $19, 9% lower than the much larger market for truck sales declined by 33, 4%.
Sales of new energy vehicles increased by 93, 4% as new energy passenger vehicle sales rose by 94, 3% in the much smaller new energy commercial vehicle sales were $78, 9% higher.
We introduced our proprietary.
EPS product in 2021 to further develop our own advanced.
Driver assist.
Systems 80, Aes this EPS product communicates with the vehicles main data to create lane keeping assist.
Automatic parking assist.
<unk> sensory and traffic jam assist functions.
A number of auto manufacturers have already adopted our proprietary EPS primarily for their passenger vehicles.
In January 2022, we also signed with Scania a b to.
To develop and E RCB steering systems for Scania trucks, and buses to better penetrate the commercial vehicle market in China.
With our advanced driver assist systems L for platform.
<unk> AP Oh four.
Our proprietary EPS system enables vehicles to execute level four autonomous driving.
E RCB steering system has become the world's first mass produced fully electric intelligent power steering system for commercial vehicles.
The technologies from our subsidiary in Sweden, Cynthia J D power.
Promise to further enhance our E R EPS steering technology, especially for vehicle motion control for autonomous driving products targeting in both passenger and commercial vehicles.
Cynthia has already was installation contracts with global truck Oems with their technologies.
We have produced shipped and installed more than 3 million power steering sets, including EPS units to be widely auto over 20 year partnership.
Late 2022, we expanded our strategic partnership with BYD, the largest Chinese EV producer for future autonomous driving products.
<unk> design contracts will be y D for the EPS.
<unk> EPS and our EPS from BYD for all X series of products.
We've introduced a new series of EPS products, where BYD.
Together with BYD Engineers C. A S. As R&D engineers use computer aided design and artificial intelligence to shorten the design cycle to five months for our DP EPS products, we completed the deep <unk>.
<unk> integration into the chassis General Assembly for Byd's model Tang in late 2022.
Well, we develop new products and grow global market share, we are maintaining our financial strength as our free cash flow increased to $27 $7 million compared with $19 million in 2021.
For 2022, we repurchased 666074 common shares under our repurchase buyback program.
As the Chinese automobile market is recovering our north American and Brazilian operations continue to expand our EPS products are gaining greater market acceptance and our NPV technologies are acquiring more capabilities are.
Our changing sales product mix is improving our margins.
New COVID-19 policies has had a dramatic and positive impact on the Chinese economy.
You, vitalize, and social and business activities and restoring supply chains.
We expect to recovery of the economy.
Will strengthen over time, leading to greater automobile sales.
Okay.
Now, let me review the financial results in the fourth quarter of 2022.
Net sales decreased by seven 2% to $128 8 million compared to $138 $8 million in the same quarter of 2021.
The net sales decrease was mainly due to a change in the product mix and lower demand for passenger automobiles and commercial vehicles in the fourth quarter of 2022 compared to the fourth quarter of 2021.
Gross profit increased by 26, 9% to $25 million in the fourth quarter of 2022 compared to $19 $7 million in the fourth quarter of 2021.
Gross margin in the fourth quarter of <unk> 22 was 19, 4% compared to 14, 2% in the fourth quarter 2020.
Primarily due to a change in product mix.
Yes.
Okay.
Selling expenses were $4 $6 million in the fourth quarter of 2022 compared to $3 $4 million in the fourth quarter of 2021.
<unk> expenses represented three 6% of net sales in the fourth quarter of 2022 compared to two 4% in the fourth quarter of 2021.
General and administrative expenses were $10 8 million in the fourth quarter 2022, compared to $7 $6 million in the same period in 2021.
G&A expenses represented eight 4% of net sales in the fourth quarter 2022 compared to five 5%.
Net sales in the fourth quarter of 2021.
This was mainly due to the increase in provision of allowance for doubtful accounts.
Research and development expenses, R&D or $10 $6 million in the fourth quarter of 2022 compared to $9 $9 million in the fourth quarter of 2021.
R&D expenses represented eight 2% of net sales in the fourth quarter of 2022.
Compared to seven 1% in the fourth quarter 2021.
Due to an increase in salaries and wages as a result of the increased R&D activity.
New projects.
Loss from operations was $2 $6 million in the fourth quarter of 2022 compared to income from operations of $6 million in the fourth quarter of 2021.
<unk> expense was <unk> $3 million in the fourth quarter of 2022 compared to <unk> $5 million in the fourth quarter towards 'twenty one.
Financial income was $1 $4 million in the fourth quarter 2022, due to exchange fluctuations of the U S dollar to the Chinese RMB and the Brazilian real.
Compared to financial expense of $1 $5 million in the fourth quarter of 2021.
Loss before income taxes and equity in earnings of affiliated companies was $2 $7 million in the fourth quarter of 2022 compared to a loss of <unk> 4 million in the fourth quarter of 2021.
Income tax benefit was $1 $9 million in the fourth quarter of 2022 compared to an income tax expense of $7 million in the fourth quarter of 2021, mainly due to the loss before income tax expenses and equity in earnings of affiliated companies in the fourth quarter of 2022.
Net income attributable to parent company's common shareholders was $4 $3 million.
In the fourth quarter of 2022 compared to net income attributable to parent company's common shareholders of $5 million in the fourth quarter of 2021.
Diluted income per share was <unk> 14.
In the fourth quarter 2022, compared to diluted income per share of <unk> 16.
In the fourth quarter of 2021.
The weighted average number of diluted common shares outstanding was $30 million 229987 in the fourth quarter of 2022 compared to $30 million 853822 in the fourth quarter of 2021.
Now we will review the full year 2022 highlights net sales increased by six 3% year over year to $529 $6 million in 2022 compared to $498 million in 2021.
The increase was mainly due to higher sales of passenger vehicles in China with sales to chery automobile up 54, 5% year over year.
Total sales of electric power steering EPS systems.
<unk> increased by 35, 6% year over year.
EPS sales represented 29, 5%.
Of total revenue in 2022 compared to 23, 2% 2021.
Net sales of vehicles steering system to the Companys North American customers was approximately the same in 2022, but Brazil hand loans net sales grew by 54, 1% year over year to $39 $3 million.
Gross profit in 2022 increased by 15, 7% year over year to $83 4 million compared to $72.
$1 million in 2021.
The gross margin increased to 15, 7% from 14, 5% in 2021, mainly due to changes in the product mix.
Gain on other sales in 2022 decreased to $3 $7 million compared to $4 $4 million in 2021.
That would expenses declined by seven 7% year over year to $16 9 million in 2022 compared to $18.3 million in 2021, mainly due to lower transportation expenses.
<unk> expenses.
Presented three 2% of net sales in 2022 compared to three 7% in 2021.
G&A expenses increased by 7% year over year to $26 $1 million.
In 2022 compared to $24 $4 million in 2021.
G&A expenses represented four 9% of net sales in 2019 compared to four 9% of net sales in 2021.
R&D expenses were $36 1 million in 2022 compared to $28 2 million in 2021. The increase was primarily due to higher investment in EPS products and other new products R&D expenses were six 8% of net sales in 2022 compared to five 7%.
Net sales in 2021.
Operating income increased by 45, 5% year over year to $8 million in 2022 compared to $5 $5 million in 2021.
Increase in operating income was mainly due to higher gross profit.
Interest expense was $1 $5 million in 2022 consistent.
With a $1 $4 million in 2021.
Net financial income was $10 $8 million in 2022 compared to net financial expense of $2 $4 million in 2021 <unk>.
Primarily due to an increase in foreign exchange gains as the U S dollar fluctuated against the Chinese RMB and Brazilian real.
Income before income tax.
Expenses and equity in earnings of affiliated companies was $23 million.
The $8 4 million in fiscal year 2021.
Yes.
Change was primarily due to higher operating income and net financial income in 2020 to income tax expense was $31 million in 2020, compared with $4 million in 2021.
Net income attributable to parent company's common shareholders was $21 $2 million in 2022 compared to net income attributable to parent company's common shareholders of $11 $1 million in 2021.
Diluted net income per share increased by 91, 7% year over year to <unk> 69 in 2022 compared to 36 in.
In 2021.
The weighted average number of diluted common shares outstanding was $30 641274 in 2022.
Third to $30 million 855431 common shares in 2021.
Okay.
Next we'll go over a few balance sheet items as of December 31, 2022, total cash equivalents pledged cash and short term investments were $171 8 million.
Total accounts receivable, including notes receivable were $224 3 million accounts payable, including notes payable were $235 $1 million in short term bank loans were $45 $7 million.
Total parent company stockholders' equity was $311 $7 million.
As of December 31, 2022, compared to $321 million as of December 31, 2021.
Cash flow from operating activities was $48 million in 2022 compared to $28 $3 million in 2021.
Cash paid to acquire property plant and equipment land use rights was $23 million in 2022 compared to $9 $3 million in 2021.
The business outlook management has provided revenue guidance for the year 2000 $23 million to $560 million. This target is based on the Companys current views on.
Operating and marketing conditions, which are subject to change.
With that operator, we are now ready to begin the Q&A session.
Thank you Kevin at this time, we'll be conducting a question and answer session. If he would like to ask a question. Please press star one on your keypad a confirmation tone will indicate your line is in the queue. You May press star two if you'd like to remove your question from Nicky.
All participants using any speaker equipment, it may be necessary to pick up your handset before you press the keys gateway time that while we poll for questions.
Thank you. Your first question is coming from Phil go does that ski of Greenwich playful Phil Your line is life.
Hi, Thank you I have four questions for you today first off gross margins in the fourth quarter were much higher than expected.
Is this a sustainable long term margin figure based on the higher EPS contribution.
Okay.
Sure Phil.
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The EPS.
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Particularly in the auction platform.
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Since you tend to go away.
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Assuming that young team, but can you send the one that particular ammonia D. J Chilean mix again, because again I'm just so we can ship it yourself.
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Molly Junior we saw timber.
Yeah, well I'm curious if I'm just so we don't see margin and quickly Bob I'm just debuted in Boise.
So EPS okay.
So Angela.
Full year 2022 gross margin was 16%.
But our fourth quarter as you saw.
Our fourth quarter gross margin of 19%.
It is mainly attributable to the electric power steering.
Volume increase.
And we also foresee 2023.
EPS.
Electric power steering product volume will continue to increase.
In that.
That said that will.
Further propelled the gross margin.
Expansion.
As you know.
<unk> product.
In the past that the gross margin.
It was somewhat.
In the 15% range and now we're with the higher volume.
I.
I think better economy scale will give us a better margin for EPS.
Yes.
Going forward.
As a result, the blended gross margin will also continue to climb in 2023.
Okay. Thank you.
What are your expectations for hydraulic and EPS sales for 2023 and 2024.
Yes.
Expectations for volume.
Yes.
Okay.
2024.
Our senior team.
The zinc yadav can EPS too.
Takashi sets a member of its own.
A woman Julien.
You can answer the acquiring and Cui, Japan, So you could sort of zone Chino Pant upgrades and life science.
Non core or maybe she does.
You can ask the timing comments, so once we get them up online you assume data sciences.
As a new.
Two quick figure to Omega.
So hopefully you're getting a coupon baby.
Sundance things online.
Okay commencing so HMA.
Thanks for.
Let's look at 2023 first.
We anticipate EPS.
Sales volume will continue to decline.
Another 30% increase in 2023.
As a result, EPS sales will account for about 36% of total.
Sure.
Sales.
In 2023.
Hi, Jeff.
Uh-huh Dol R&M as linear and got it.
Okay, Thats, great EPS, it's uncertain Covid yogurt pizza tissue types incongruent Buckingham assistant Zhang our CFO .
Okay.
Big outstanding absolutely under each day.
It's all a whole yeah, yeah, okay. So in 2020 fall we see.
Our EPS sales volume all reach.
Or surpassed 40% of the total volume.
Okay awesome.
But the third.
R&D expenses increased $8 million in 2022 compared to 2021, how much R&D spending will there be in 2023, and what is going to be the focus of that spending.
Okay.
Alright.
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The whole thing to ask you on the line okay.
So I mean, the one Omega MFA.
So we are going to use again.
You can answer that.
Yes.
D P E b assets in our EPS the info.
So our high yielding a higher CPM with E RCB team teaching time to bone quality care.
Steering the wire S B W.
Siemens write downs are you seeing a tough Canadian bonds.
Kind of wound down our NIM.
On Sunday, and Chilean Knowhow Man <unk>.
Beyond the BD, we'd say.
Some of those older than ideal without new down, particularly.
Okay.
Okay.
Our.
EPS research.
Our R&D research.
It's mainly focus on the EPS product.
And that's including.
D P EPS and our EPS, we also have some R&D into the.
Sure.
Going to the R. R.
I I RCB.
And the E RCB product.
Last piece.
We are.
Putting a lot of effort.
R&D is stealing by wire.
So what we call as B W.
Product and so all these.
Together, we're looking at Tony <unk> III.
R&D expenses.
Comps for approximately six to six 5% of total revenue.
Okay.
Then last question here.
Could you provide an update on how the <unk> orders going and whether there are any updates relate to sentient kind of volatile order.
Okay.
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So unparalleled leads agreement would be ideal.
Julian.
And then Vince just with some funding.
Okay. So yes BYD has.
Ben.
A long term customer.
And now increasingly become.
One of our top priorities.
And in 2022.
We grew was BYD significantly.
And we expect to.
Gross will continue in 2023.
We.
Last year towards end of last year, if you recall, we ink a long term strategic partnership with them.
Toward that.
Comprehensive partnership.
We are now entering into all series of models.
<unk> product.
And so.
In 2022.
We sold a bottle.
The Gainesville, especially once our solar and solar.
Okay.
We sold them all.
$400 to 500000 units.
And we're looking to.
Double.
In 2023.
Okay.
And then were there any updates related to the Sun Kim Baber order.
But really I will stop there.
So now you have some attrition.
Tina.
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On a on an annual salary so junior in Nevada, which I shop, and Dan Quayle Shamas.
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Okay.
Okay.
Our.
<unk> subsidiary in Sweden economists driving.
Arm.
Are doing pretty well.
We booked.
Some revenue a moderate revenue in 2022.
We're looking.
To increase.
Revenue.
They are looking to increase the revenue in the second half of 2023.
Large batch order.
Ill be expected.
In the meantime that that's what the European.
Customer.
Especially we are looking into some they are looking into some of the autonomous driving.
Features we can provide.
So.
Looking forward to work with BYD to materialize those autonomous functions.
And to their new models.
Okay.
Okay. Thank you that's it.
Thank you so much just as a reminder, if you do have any questions. Please press star one on your turnkey pattern.
Okay. It appears we have no further questions in the queue I'm going to hand back over to Kevin for any closing remarks.
We want to thank everyone for joining us today in our conference call. We wish it would be safe and we look forward to speaking with you in the future. Thank you.
Thank you everybody. 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.