China Automotive Systems Inc (CAAS) 2017 Q2 法說會逐字稿

Greetings, and welcome to the China Automotive Systems' Second Quarter 2017 Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Kevin Theiss.

Thank you.

You may begin.

Thank you, everyone, for joining us today.

Welcome to China Automotive Systems' 2017 Second Quarter Conference Call.

Joining us today are Mr. Hanlin Chen, Chairman; 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 would 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, 2016, as filed with the Securities and Exchange Commission on March 30, 2017, and in other documents filed by the company from time-to-time with the Securities and Exchange Commission.

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 financial results for the 2017 second quarter and 6-month period.

Management will then conduct a question-and-answer session.

The following 2017 second quarter financial results are unaudited and the fiscal year results are audited.

These results are reported under U.S. GAAP.

And for the purposes of our call today, I'll review the financial results in U.S. dollars.

We will begin with a review of the recent dynamics of the automobile industry and China Automotive's market position.

The 2016 year was very strong for passenger vehicle sales as the Chinese government reduced its consumption tax on automobile purchases from 10% to 5% for smaller vehicles powered by 1.6-liter engine or smaller.

In the 2017 year, the consumption tax was raised to 7.5% and the passenger vehicle sales have slowed.

Passenger vehicle sales in the first quarter -- in the second quarter grew by 4.6%, but sales declined in both April and May.

However, passenger vehicle sales in June 2017 rebounded with a 2.3% year-over-year growth.

For the first half of 2017, passenger vehicle sales increased by 1.6% compared to the same period in 2016.

The industry sales for passenger vehicles in the second quarter of 2017 was in sharp contrast to our net sales growth of 16.5% to $117.7 million from $101 million in the second quarter of 2016.

Our net sales increase was mainly due to higher unit sales and a change in the product mix.

Net sales of our traditional hydraulic steering products continued to grow.

In the second quarter of 2017, hydraulic steering product sales grew by 24.8% following a 5.5% rise in the first quarter of 2017.

Net sales of our electric power steering, EPS, products for the second quarter of 2017 declined slightly to $26.6 million from $28 million in the same period of last year and accounted for 22.6% of total sales revenue in this quarter.

Despite our product mix in the second quarter of 2017, the market trend continues to favor EPS steering.

We are investing more resources to enhance our EPS products and production to accommodate the growing requirements for these products.

Net export sales grew by 64.5% to $23.9 million in the second quarter of 2017 versus net sales of $14.5 million for the same quarter in 2016.

Sales to Fiat Chrysler North America and to Ford in North America continues to grow as we introduced new products that began mass production at the end of 2016.

We continue to believe in the bright future of our Brazilian assembly operation as it increases its operation to serve our global Tier 1 customers in Brazil and Chinese OEMs operating in the region.

During the second quarter of 2017, we acquired another 15.8% equity ownership in our Brazil venture, raising our total ownership to 95.8%, showing our confidence in the future of this operation.

As we become a larger supplier to the global markets, our international sales will be contributing more to our total sales.

In addition, our operations that currently sell to Fiat Chrysler North America, Ford in North America and Brazil in South America, some of our other operations are targeting products to the international markets to expand our market reach and augment our growth.

Our gross margin increased to 20.4% for the second quarter of 2017 compared to 18% for the same period of 2016, representing an increase of 2.4%.

This gain is mainly due to our 16.5% growth in sales resulting in greater economy of scale as more units were sold.

And more units were sold into the international markets in the 3 months ended June 30, 2017.

Our income from operations grew by 109.8% due to higher gross profit, increased gain on other sales and controlled operational expenses.

The operating margin grew to 9.4% versus 5.2% in the year-ago second quarter of 2016.

Our diluted net income attributable to the parent company's common shareholders per share increased to $0.28 from $0.17 in the second quarter of 2016.

We continue to invest in our businesses to expand in areas with the best growth potential, so we can leverage our leadership in the Chinese steering market and beyond.

(inaudible) $10.2 million in plant and equipment in the first 6 months of 2017 to advance our operation's focus on exports and our new product development, especially on advancing our growing EPS product line domestically.

We continue to invest in research and development expenses in the second quarter of 2017.

We increased our R&D spending by 28.3% to $7.7 million from $6 million for the same quarter in 2016.

These investments primarily target further development of our EPS technology and to expand our EPS product portfolio to meet the needs of a growing number of vehicle models.

R&D is also developing other new products, such as our Advanced Driver Assistance Systems, ADAS, for the future.

At June 30, 2017, we had cash, cash and equivalents, pledged cash and short-term investments of $98.2 million.

During the second quarter, cash flow from operations were $19 million with capital expenditures of $6.9 million, mainly to enhance our EPS production capabilities.

We are well positioned with our broad product portfolio of hydraulic and EPS steering products and we are well established in the Chinese market as we supply more than 60 customers, including the 5 largest automobile manufacturers in China, the largest light vehicle manufacturer in China, the largest state-owned car manufacturer in China and the 2 largest privately owned car manufacturers in China.

The China-based joint ventures of General Motors, Volkswagen, Citroën and Chrysler North America are also customers.

This large and prestigious customer list demonstrates the high-quality performance and reliability of our steering products.

The passenger vehicle market for small cars may grow in the second half of 2017 as it is believed that the consumption tax rate may increase back to the standard 10% in 2018.

Our international operations in North and South America are growing and other overseas areas beckon as potential new markets.

We continue to expand as we focus on market share and building profitability and cash flow.

Let me review the financial results for the second quarter of 2017.

In the second quarter of 2017, net sales increased 16.5% to $117.7 million compared to $101 million in the same quarter of 2016.

Net sales of traditional steering products grew by 32.8% and the company sold more products to its North American customers.

Sales of electric power steering, EPS, represented 22.6% of total net sales.

Gross profit increased 32.6% to $24.1 million in the second quarter of 2017 compared to $18.1 million in the second quarter of 2016.

The gross margin was 20.4% in the second quarter of 2017 versus 18% in the second quarter of 2016 and 18.1% in the first quarter of 2017.

The gross margin increased mainly due to a better revenue mix as total units sold to the international markets increased during the second quarter of 2017.

Gain on other sales increased to $4.6 million in the second quarter of 2017 compared to $1.2 million in the second quarter of 2016.

The increase was mainly due to a one-time gain of $2.2 million on the disposal of a building in the second quarter of 2017.

Selling expenses were $4.6 million in the second quarter of 2017 compared to $4.1 million in the second quarter of 2016.

Selling expenses represented 3.9% of net sales in the 2017 second quarter compared to 4.1% in the same quarter of 2016.

The increase is mainly due to higher logistics expenses related to increased sales during the quarter.

General and administrative expenses were $5.3 million in the second quarter of 2017 compared to $3.9 million in the second quarter of 2016.

G&A expenses represented 4.5% of net sales in the second quarter of 2017 compared to 3.9% in the second quarter of 2016.

The increase is mainly due to the increased allowance for doubtful accounts of $1.1 million and higher payroll expenses.

Research and development expenses increased 28.3% to $7.7 million in the second quarter of 2017 compared to $6 million in the second quarter of 2016.

R&D expenses continue to focus on development of the company's EPS and other new products.

R&D expenses represented 6.5% of sales in the second quarter of 2017 compared with 5.9% in the 2016 second quarter.

Net financial income in the second quarter of 2017 was $0.6 million compared with $0.1 million in the second quarter of 2016.

Income from operations rose 109.8% to $11.1 million in the second quarter of 2017 compared to $5.3 million in the same quarter of 2016.

The increase was primarily due to higher gross profit and a gain on other sales.

As a percentage of net income, the operating margin was 9.4% in the second quarter of 2017 compared to 5.2% in the second quarter of 2016.

Income before income tax expense and equity in earnings of affiliated companies was $11.1 million in the second quarter of 2017 compared to $6.5 million in the second quarter of 2016.

Net income attributable to the parent company's shareholders rose 64.8% to $8.9 million in the second quarter of 2017 compared to net income attributable to the parent company's shareholders of $5.4 million in the corresponding period of 2016.

Diluted earnings per share were $0.28 in the second quarter of 2017 compared to $0.17 in the second quarter of 2016.

The weighted average number of diluted common shares outstanding was 31,649,322 in the second quarter of 2017 compared to 32,087,634 in the second quarter of 2016.

Foreign currency translation gain was $5.7 million in the second quarter of 2017 as compared to the foreign currency translation of $7.9 million in the same quarter in 2016.

Let me go over the results for the first 6 months of 2017.

Net sales increased 8.8% to $237 million in the first 6 months of 2017 compared to $217.9 million in the first 6 months of 2016.

6-month gross profit increased 16.6% to $45.7 million compared with $39.2 million in the corresponding period last year.

6-month gross margin was 19.3% in the 2017 period compared to 18% in the corresponding period in 2016.

The gain on other sales of $5.3 million in the first 6 months of 2016 compared with $2 million in the 2016 period.

Income from operations climbed 48.8% to $18.3 million in the first 6 months of 2017 compared to $12.3 million in the first 6 months of 2016.

Operating margin was 7.7% in the first 6 months of 2017 compared to 5.6% for the corresponding period of 2016.

Net income attributable to parent company's common shareholders increased 31.5% to $14.6 million in the first 6 months of 2017 compared to $11.1 million in the corresponding period in 2016.

Diluted earnings per share were $0.46 in the first 6 months of 2017 compared to diluted earnings per share of $0.34 in the 2016 period.

Foreign currency translation gain was $7.4 million as compared to a foreign currency translation loss of $6.3 million in the last year's similar period.

The balance sheet.

As of June 30, 2017, total cash and equivalents, pledged cash and short-term investments were $98.2 million.

Total accounts receivable, including notes receivable, were $311.1 million.

Accounts payable were $226.2 million and short-term bank and government loans were $67.4 million.

Total parent company stockholders' equity was $322.2 million as of June 30, 2017, compared to $300.5 million as of December 31, 2016.

Net cash flow from operating activities increased significantly to $19.2 million from a net use of $6.4 million in the first 6 months of 2016.

The business outlook.

Management has increased its revenue guidance for the full year 2017 to $490 million.

This target is based on the company's current views on operating and market conditions, which are subject to change.

With that, operator we're ready to begin the Q&A.

(Operator Instructions) Our first question comes from the line of William Gregozeski with Greenridge Global.

Could you talk about a little bit about why you're seeing the big increases now in hydraulic products and the year-over-year decline again in EPS sales?

(foreign language)

(foreign language)

The reason hydraulic product sales has experienced an increase in the second quarter is mainly due to 2 areas.

One is the export business is picking up.

Our, most of our international shipments are hydraulic products.

And the other reason that's driving the increase of hydraulic product sales is the commercial vehicle sector.

As you know, the commercial vehicle sector in China has posted very robust growth in this first and second quarter.

That's why hydraulic sales is up for us.

(foreign language)

Okay.

So in terms of our EPS sales, EPS product sales, our second quarter sales is relatively flat compared with the same period last year.

There are 2 reasons.

One is the recall took place late last year, early this year has a bit residual effect on the order side.

Second thing is the overall passenger vehicle sector, the growth has been relatively soft.

Year-to-date, the passenger vehicle sales year-over-year increase is only 1.6%.

That's for the entire industry.

And within the industry where the EPS products are mostly installed are MPV and sedans.

These has even smaller growth, even negative growth, for those two sedan segments.

And that's why our EPS -- overall EPS sales has been -- have remained flat.

Okay, all right.

As far as Hubei Henglong for the international business, the revenue for the quarter was quite a bit higher than what I was modeling for the lines you have.

What's the quarterly or annual revenue, what you guys have in place now is for that international export business?

(foreign language)

(foreign language)

(foreign language) Okay.

Henglong international auto business booked $40 million in the first half of 2017.

We're anticipating $50 million sales in the second half.

So full year would be $90 million for that unit, Henglong international.

Okay.

And last question is can you give an update on the Brazilian operations and also how you added that 15.8% ownership at no cost?

15.8%?

Yes, the equity that you added in the quarter.

(foreign language)

(foreign language)

(foreign language)

(foreign language)

Okay.

So the Brazilian operation is on track as we announced earlier, the annual production is 120,000 units.

The first half, we booked about RMB 20 million in sales.

In terms of equity consolidation for that 15.8% is basically that -- our Brazilian venture has been ongoing for a while.

Due to the economic environment in Brazil, hasn't been doing too well.

Even our first quarter -- first half of the year we booked decent revenue, we're still running at a loss, a small loss.

So our local partner, the Brazilian partner, somewhat wants to leave the venture.

So the reason -- the question you asked is how we get to consolidate this equity without paying anything.

The reason being is local law requires a local partner at the time of establishment.

So we need to have a Brazilian national at the time to form a company with us, a joint venture with us.

So he get to have that, he didn't put in any money.

So that's the reason why we get those shares back since the business is losing money, he is going to give to us so there's no cost.

Okay.

Is there any expectation you might get the rest of it back from the other Brazilian national?

(foreign language)

(foreign language)

Not at the moment.

(Operator Instructions) There are no further questions.

I will now turn it back to management for closing comments.

Well, thank you, everyone.

We look forward to speaking with you in the future.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time.