China Automotive Systems, Inc. (NASDAQ:CAAS) Q3 2023 Earnings Call Transcript

China Automotive Systems, Inc. (NASDAQ:CAAS) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good morning, everyone, and welcome to the China Automotive Systems’ Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode and the floor will be open for questions after the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Kevin Theiss, Investor Relations. Kevin, over to you.

Kevin Theiss: Thank you, everyone, for joining us today. Welcome to China Automotive Systems’ 2023 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 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 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, 2022, 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.

Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the region where we conduct business cause our business to suffer in ways that we cannot predict and materially impact our business, financial condition and results of operations. A prolonged disruption or any unforeseen delay in our operations of the manufacturing, delivery and assembly process within our production facilities could continue to result in delays in the treatment of products to our customers, increased cost 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, fee events or otherwise.

On this call, I will provide a brief overview and summary of the third quarter and first 9 months results for the period ended December 30, 2023. The Management will then conduct a question-and-answer session. The 2023 third quarter and first 9 months results are unaudited and reported using U.S. GAAP accounting. For the purposes of our call today, I’ll review the financial results in U.S. dollars. We will first begin with a review of the recent dynamics of the Chinese economy, the on mobile industry and our market position. The Chinese economy continues to grow but at a more subdued pace as the GDP growth rate was 4.9% year-over-year in the third quarter of 2023, according to China’s National Bureau of Statistics. Industrial production increased and retail sales stabilized in to 2023 third quarter.

However, a 2-year housing slump has continued and resulted in consumer spending more cautiously, affecting consumer price levels. Reduced demand for real estate has affected prices and erode the financial condition of real estate developers and decreased building construction. We all see development investment declined by 9.1% in the first 9 months of 2023 year-over-year. According to the Chinese Association of our Reveal Manufacturers, CAAM, passenger automobile statistics in China for the third quarter of 2023 included a decline of 3.4% in July, an increase of 8.2% in August and growth of 6.6% in September on a year-over-year basis. Passenger vehicle sales increased each month over the prior year during the 2023 third quarter. Commercial vehicle sales year-over-year during the third quarter of 2023 reflected an increase of 16.8% in July, followed by a 20% rise in August and a 33.2% increase in September.

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Q&A Session

Elective new wholesales and vehicle export sales also rose each month on a year-over-year basis in the 2023 third quarter. Vehicle sales growth in the third quarter of 2023 partially reflected weak industry sales in the year ago period as China was coming out of COVID restrictions. The central government, local government and auto dealers have provided financial subsidies and incentives to help foster vehicle sales in China. Specific approaches include reducing automobile purchase taxes, boosting demand for electric vehicles by improving and expanding EV infrastructure more consumer-friendly banking policies and regulations and promotion tourism. Our 2023 third quarter revenue growth increased slightly year-over-year to $137.5 million. Net sales of traditional steering products and parts at $91.8 million were consistent with net sales in last year’s third quarter.

Net sales of EPS systems grew by 2% to $45.7 million and increased as a percentage of sales to 33.2% for the 3 months ended September 30, 2023. Domestic passenger car sales were slightly higher, while sales to the domestic commercial vehicle market declined by 8.2%. Net product sales of other entities rose by 23.9%, primarily due to higher sales by Wuhan Gil [ph] our producer of steering columns. Internationally, our sales in Brazil continued its growth rend, rising by 15.7% to $13.3 million in the 2023 third quarter, mainly due to higher sales to Fiat. Sales into North America declined by 6.4% to $27.6 million. The low sales was primarily due to less volume shipped to Ford Motor in the third quarter. The volatility of the U.S. dollar to the RMB also had affected the reported revenue in the third quarter of 2023.

With China, the largest – the world’s largest vehicle exporter, our customers are benefiting and exports are becoming a more important growth opportunity. Our overall net sales increased slightly, our gross margin grew by 18.7% year-over-year – I’m sorry, our gross profit grew by 18.7% year-over-year and our gross margin increased to 18% from the third quarter of 2023 from 15.2% in the same quarter in 2022. Our efficient cost controls led to an approximate 8.2% year-over-year decline in total operating expenses, which helped propel an increase of 108.2% year-over-year and income from operations in the third quarter of 2023. Diluted income per share rose to $0.31 compared with $0.24 in the year ago third quarter. For the first 9 months ended September 30, 2023, net sales increased by 4.1% year-over-year, with gross margin increasing to 16.6% from 14.6% a year ago.

Diluted income per share increased to $0.89, up from $0.55 in the first 9 months of 2022. We continue to supply a large number of vehicle OEMs in China, including BYD, the largest electric Reco [ph] producer in China, Dongfeng Auto Limited, BK Photon Motors and internationally, including Jeep, Ram, CI and Alphameo [ph] in different worldwide markets and Ford Motor Company in North America. In addition to being a supplier of advanced steering products, our research and development programs are aligned with specific projects of our OEM customers. Collaboration with our OEM customers broadens our technology base for future use. To enhance our own proprietary advanced driver assistance systems, ADAS, we are incorporating our Sentient AB subsidiaries automotive technology, including software development and hardware design for advanced steering functions, combined with their vehicle motion controls to increase our autonomous driving program.

With our growing technology capability, new models of steering are underdeveloped to expand our market presence. At September 30, our cash and cash equivalents and pledged cash were $135.1 million, approximately $4.47 per share. In addition, at September 30, 2023, inventory levels were $9 million lower and short-term loans declined by 7.1% compared to the end of 2022. Total foreign assets were $509 million compared with total liabilities of $258.8 million at September 30, 2023, further highlighting our financial strength. Now let me review the financial results in the third quarter of 2023. In the third quarter of 2023, our net sales increased slightly to $137.5 million compared to $137.2 million in the same quarter of 2022. The increase in net product sales was due to an increase in EPS net product sales and steering columns compared to the third quarter of 2022.