China Automotive Systems, Inc.
Q4 2021 Earnings Call Transcript

Published: 30 Mar 2022

[Operator:]

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.

[Kevin Theiss:]

Thank you. Thank you everyone for joining us today. Welcome to China Automotive Systems' 2021 Fourth Quarter and Full Year 2021 Conference Call. Joining us today are Chairman, Chen; and Mr. Qizhou Wu, Chief Executive Officer; and Mr. Jie 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 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 the 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 for the year-end December 31, 2021 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 and national 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 and adversely impact our business, financial condition and results of operations. A prolonged disruption or 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, 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 fourth quarter and full year results for the period ended December 31, 2021. Management will then conduct a Q&A session. The following 2021 fourth quarter results are unaudited, and the year results are audited and all results are reported using US GAAP accounting. For the purposes of our call today, I'll review the financial results in US dollars. We will begin with a review of the recent dynamics of the Chinese economy, the automobile industry and China Automotive's market position. China's 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. Manufacturing slowed and momentary power shortages arose and supply of automobile computer chips was unable to meet demand. In this challenging environment, Chinese Automobile sales declined year-over-year each month in the fourth quarter of 2021. According to statistics from the China Association of Automobile Manufacturers, CAAM, passenger vehicle sales in October were down 5% year-over-year, November sales by 4.7% and down by 7.1% in December compared with 2020. Chinese commercial vehicle sales declined at a 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 30.3%, with truck sales down 31.9%. On 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 declined, but by only 5.2% to $138.8 million from $146.5 million in the fourth quarter of 2020. Fourth quarter income from operations rebounded to profitability compared 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 non-recurring expected credit loss provision of $6.4 million related to a customer's bankruptcy reorganization proceeding in the fourth quarter of 2020. Net income attributable to company's common shareholders was $5 million or diluted net income per share of $0.16, 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 CAAM statistics reveal that overall sales of automobiles in China grew by only 3.8% year-over-year. Sales of Chinese passenger vehicles were 6.5% higher in 2021 than in 2020. As the day in sales rose by 7.1%, SUV sales increased by 6.8%, MPV sales were 0.1% higher and crossover vehicle sales grew by 0.8%. Sales in the commercial vehicle markets declined by 6.6% in 2021, as the bus industry sales increased by 12.6% but the larger truck market declined by 8.5%. Full-year 2021 sales of commercial vehicles were impacted by the government-mandated national implementation of the more expensive and stricter National VI emission standard in July of 2021. This new emission standard created a significant pre-buy of National V vehicles followed by a downturn in sales of new trucks in the second half of 2021. Our net sales in 2021 increased by 19.3% to $498 million as our passenger vehicle steering gear sales increased by 26.5% year-over-year. Our sales commercial vehicle markets suffered a decrease of 16%. North America revenues grew by 10.4% and our Brazilian operation also had strong growth. Sales to our Chery Automobile customer grew by 90.2% our advanced hydraulic product sales rose by 7.6%. And our electric power steering EPS revenue increased 86% including a 53.1% gain in our Henglong KYB subsidiary in 2021. EPS sales represented 23.2% of total revenues compared with 14.8% a year ago. Great Wall, Chery Auto, Beijing Auto and JAC Motors began using our EPS products in 2021. We introduced a new proprietary EPS product in 2021 which integrates and communicates with the vehicle's main data to create lane-keeping assist LKA; automatic parking assist APA; lane centering LCK; and traffic jam assist TJA functions as part of the company's Advanced Driver Assistance Systems ADAS. 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 NEV products, we purchased a 40% interest in Sweden's Sentient AB, a world leader in steering and vehicle control software and hardware, specialized in advanced steering functions, vehicle motion control and the fast-growing autonomous driving market. To enhance our position in the European NEV market, we introduced new steering for Alfa Romeo's first luxury plug-in hybrid SUV, the model 2021 Tonale. The sophisticated technology in European vehicles, present new targets for our advanced NEV steering products. Our wholly-owned subsidiary Hubei Henglong Automotive Systems Group received the ISO26262

[Operator:]

Certainly. Ladies and gentlemen, the floor is now open for question. Your first question for today is coming from William Gregozeski. Please announce your affiliation then pose your question.

[William Gregozeski:]

Hey, guys. Did you say that sales in Brazil were up 90% in 2021?

[Unidentified Company Representative:]

Your question is sales in Brazil, up 90%? You asked why sales up, right?

[William Gregozeski:]

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 are the expectations for that going forward?

[Unidentified Company Representative:]

. Yes in terms of dollars -- the revenue in Brazil -- our revenue in Brazil did experience a robust growth in 2021. In the amount -- the total amount from our Brazil business in 2021 was approximately RMB 164 million or $26 million. That's mainly attributable to our gross in new key accounts. We signed some large customers and looking into 2022, we believe we will have further growth in 2022.

[William Gregozeski:]

Okay. Great. Great. Did the -- on the EPS products were the margins -- did the margins continue to rise in the fourth quarter? And is that still expected to see margin improvement going through 2022?

[Unidentified Company Representative:]

Yes. The answer is yes. EPS margin will continue to improve and increase in 2022. We foresee a 20% to 30% volume increase in 2022 and mainly due to very strong demand. And so clearly demand outstripped the supply on the EPS product. So that gave us some good advantage in terms of pricing. And also the -- with the growth of the volume, we are achieving better economy of scale. So, that will also help with our gross margin.

[William Gregozeski:]

Okay great. What is the -- what is management's outlook for the 2022 year in China alone the domestic market?

[Unidentified Company Representative:]

Okay. So overall, we see the overall Chinese auto market will experience a slight increase in 2022. Despite the volatility which we expect there will be volatility throughout the course of the year. For example we are already seeing the news of the lockdown in this large city like Shanghai. However, we see Chinese governments are rolling out more favorable policy to stimulate the economy such as cutting the interest rate and there are talks about lowering the taxes and also new policy to help with the property market. And so overall we think the government's policy will offset the challenges and so will give us the whole auto industry a more net-net positive push for 2022. That's why we see a slight increase in 2022 from a year before.

[William Gregozeski:]

Okay, great. And last question is can you provide a little more detail about the $5.9 million equity in earnings of affiliated gain in the fourth quarter?

[Unidentified Company Representative:]

Okay. That gain was associated with our investment. We have announced in the past years we are -- we invested at three investment funds. Some are early-stage venture funds specialized in automotive space. One of the portfolio company -- there are a number of companies -- a few companies went public since last year and they've done very well. In particular, this one company from the City of Chongqing then went to the tech board. They went IPO on the tech board. And their main business is in the hydrogen technology for the automotive sector which is a very, very hot sector. So, the stock has experienced a very strong growth since their IPO. And so we are indirectly benefiting from it.

[William Gregozeski:]

Okay. Perfect. Thank you guys.

[Unidentified Company Representative:]

Thank you.

[Operator:]

There are no questions in queue at this time.

[Kevin Theiss:]

Okay. We want to thank everybody for joining us today and please be safe. And we look forward to talking to you in the future.

[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.