China Automotive Systems, Inc.
Q3 2021 Earnings Call Transcript

Published: 12 Nov 2021

[Operator:]

Good day ladies and gentlemen, and welcome to the China Automotive Systems Third Quarter 2021 Earnings 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, Mr. Kevin Theiss. Sir, the floor is yours.

[Kevin Theiss:]

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2021 third quarter conference call. Joining us today are Mr. Jie Li, 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'll 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 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 year ended December 31, 2020, 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. If the outbreak of COVID-19 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 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 uncertainty in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially adversely impact our business financial condition and results of operations. A prolonged disruption or any further unseen 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, 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, future events or otherwise. On this call, I will provide a brief overview and summary of the third quarter and first nine months results for the period ended September 30, 2021. Management will then conduct a Q&A session. The following 2021 third quarter first nine months financial results are unaudited, and are reported using U.S. GAAP accounting. For the purposes of our call today, I will review the financial results in U.S. dollars. We'll begin with a review of recent dynamics of the Chinese economy, automobile industry and China Automotive's market position. Chinese passenger car sales declined by 13% year-over-year, and commercial vehicle sales declined by 24% year-over-year in the third quarter of 2021 according to statistics from the China Association of - Automobile Manufacturers, CAAM. Auto sales in the U.S. also declined by approximately 13% year-over-year in the third quarter of 2021 as a major player in the Chinese auto parts segment, our revenue was affected by the auto market headwinds, but our business only decreased by 5.4% year-over-year in the third quarter of 2021. Our sales decrease reflected weaker demand in China and the widespread shortage of automobile semiconductor chips. Our sales to the large auto markets were uneven in the third quarter of 2021. Net sales of traditional hydraulic steering products declined by 19.3% year-over-year to $78.8 million, while net sales of our newer EPS models climbed by 76.2% year-over-year to $29.4 million and represented 27.2% of total net sales versus 14.6% of total net sales in the third quarter last year. Net sales to the Chinese commercial vehicle market declined, by 34% year-over-year in the third quarter of 2021. Our net sales to our customer Shenyang Brilliance Jinbei grew slightly while net sales of another major automotive manufacturer in China were $7.9 million compared to $3.2 million a 144.6% increase year-over-year. Net sales into North America decreased by 16.2% year-over-year our sales in Brazil increased by 157% year over year. In the third quarter of 2021, the cost of products sold declined by 9.1% year-over-year as our gross margin grew to 15.5% compared with 11.9% in the third quarter of 2020. For the first nine months of 2021 ended September 30 according to statistics from CAAM automobile sales, rose 8.7%. With passenger vehicle sales up 11% and commercial vehicle sales rose a 0.5% due to a 26% increase in bus sales, partially offsetting a 1.6% decline in the larger truck market sales. New energy vehicle sales rose 185.3% in the first nine months of 2021. For the first nine months of 2021, our net sales increased by 32.4% year-over-year to $359.2 million. Gross profit increased by 60.8% year-over-year to $52.4 million and gross margin increased to 14.6% compared to 12% for the corresponding period in 2020. We are encouraged by our growth of our EPS products, even as we continue to upgrade our traditional hydraulic products. Our EPS products are contributing a higher percentage to our total sales and we believe that trend will continue. We are especially pleased with our sales into the Chinese electric vehicle market where we expect to sell over 200,000 EPS units in 2021 including to EV producers, Great Wall, Chery Auto, Beijing Auto, JAC motors. And we added more technology to a new proprietary EPS product earlier in 2021. These technologies integrate and communicate with the vehicles' main data to create lane keeping assist LKA, automatic parking assist APA, lane centering LCK and traffic jam assistance TJA functions as part of the company's advanced driver assistance program ADAS or more commonly referred to as autonomous driving system. In Europe, we also entered into the OTOP, Off Tool, Off Process phase for new steering system for Alfa Romeos first luxury compact plug in hybrid SUV model, the 2021 Tonale. This is the company's first plug-in-hybrid powertrain and the expectation is for orders approximately 100,000 annual units. The Alfa Romeos project is the company second in Europe. To further our technology base, especially for vehicle controller autonomous driving, we are purchasing 40% of Sweden Sentient AB. This high technology company specializes in software and hardware design for advance steering functions. Sentient products for motion control has been in production since 2013, and has been tested on EPS, angle-overlay systems, steer-by-wire and fully autonomous vehicle that's the NHTSA level three to five. We believe that Sentient's acquisition is a key to advance our autonomous driving products into the marketplace. Also our wholly-owned subsidiary Hubei Henglong Automotive Systems Group received the highest rate of safety designation the ISO26262

[Operator:]

Your first question for today is coming from William Gregozeski. Please announce your affiliation then pose your question.

[William Gregozeski:]

Hi guys, can you explain on the on the chip shortage which segments were most impacted by that?

[Jie Li:]

Yes, the chip shortage is definitely a widespread phenomenon throughout the auto industry in China. The impact we see are two-folds one, is to the OEM side. We do see the OEM automakers are experiencing production decline especially in the quarter because of chips shortage. And our supplier side like us our main product our all products use semiconductor chips, our electric power steering EPS product and these product - and we are less impacted for a particular reason we have a very unique sourcing capability. We have a few different channels and we work with those suppliers very closely. So - and we're able to mitigate the impact that's why you see our EPS sales during this difficult time especially the semiconductor sector going through such a change and our EPS sales has increased significantly.

[William Gregozeski:]

Okay which operating segment though was there, I mean is it shipments to the U.S. or what was most impacted or was it just spread pretty evenly for you guys?

[Jie Li:]

Okay mostly in China our U.S. customers are relatively smaller volume in terms of these type of product.

[William Gregozeski:]

Okay, all right. On the KYB JV looks like the gross margins went above 10% in the quarter can we expect to see that continue to increase?

[Jie Li:]

Okay, this joint venture yes, we are seeing the improvement in the gross margin category and we anticipate it will continue to improve mainly these kinds of expectations mainly driven by two factors one is as you see we are increasing productions, the utilization rate is climbing and as we know, the scalability, the economy of scale will help to lower per unit cost and then in turn will increase our gross margin. On the other hand, the technology content also has been increased for - in that particular joint venture. And so, in terms of product offerings, when we first started we only providing a CVPs product. Now we have expanded DP-EPS product, DP-EPS product and our EPS product. So, we have a wide range of product now to meet our customer demand and a lot of those new product, newer products are more - have more technologies and that also give us a better margin contribution as well.

[William Gregozeski:]

Okay, all right. Are you guys able to provide any kind of expected mix for you know where you expect to end the year between traditional and EPS this year and are you expect to end it next year?

[Jie Li:]

Say it again what was the question EPS mix.

[William Gregozeski:]

Yes, the mix between traditional and EPS what you expect that mix to be at the end of 2021 and the end of 2022?

[Jie Li:]

So, the EPS sells as of end of third quarter the first nine months sales accounted for 27.2% of total sales. We are anticipating this will increase to 30% by 2022. Hydraulic will take - still takes about 70% of the steering product sales.

[William Gregozeski:]

Okay, all right. And last question do you have any significant CapEx plans coming up?

[Jie Li:]

Okay, we don't see a huge increase on CapEx. We will increase some of the production capacity for EPS product. We will continue to put some money into the maintenance CapEx. So together we're seeing about $50 million CapEx for 2022.

[William Gregozeski:]

Okay, all right. Thanks guys.

[Jie Li:]

Thank you

[Operator:]

There are no questions in queue.

[Kevin Theiss:]

We like to thank everyone for participating today, be safe and look forward to speaking with you again.

[Operator:]

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.