China Automotive Systems Inc (CAAS) 2025 Q1 法說會逐字稿

Good morning, everyone, and welcome to China Automotive Systems' first-quarter 2025 conference call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss, Investor Relations. Kevin, the floor is yours.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2025 first 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 within the meaning of the Private Securities Litigation Reform Act of 1995.

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 and results of operations in the company's Form 10-K annual report for the year ended December 31, 2024, 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 regions where we conduct business, cause our business to suffer in ways we cannot predict, and materially and adversely 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 processes within any of our production facilities could result in delays in the shipments 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 first quarter 2025 results for the period ended March 31, 2025. Management will then conduct a question-and-answer session.

The 2025 first quarter results are unaudited and are reported using U.S. GAAP accounting. For the purposes of today's call, I'll review the financial results in US dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy, and automobile industry and our market position.

Following our record net sales of $650.9 million for the 2024 year, our net sales increased by 19.9% to $167.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024. All operations reported sales growth with the exception of North America in the first quarter of 2025.

Total net sales of electric power steering systems, EPS, increased by 54% year over year as our sales mix transitions to higher technology products. Our Henglong KYB subsidiary achieved 38.2% year-over-year sales growth of its EPS products in the first quarter of 2025.

Our largest steering subsidiary, Henglong, which produces traditional hydraulic steering systems for the Chinese passenger vehicle market reported the sales climb 37.5% year over year in the first quarter of 2025. Sales of traditional steering products to Chery Auto increased by 13.5% year over year and sales by Jiulong's commercial vehicle steering products rallied to 17.4% year-over-year growth in the first quarter of 2025.

While North American sales declined by 10.3% year over year to $27.2 million, due primarily to lower sales to Stellantis, our sales to the Brazilian market increased by 30.2% year over year due to higher demand by Stellantis.

The macro economy, Chinese GDP growth of 5.4% year over year in the first quarter of 2025, consistent with the fourth quarter of 2024. The Chinese economy has stabilized but is still facing challenges. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined unit sales of passenger and commercial vehicles increased by 11.2% year over year to 7.5 million units for the first quarter of 2025.

Passenger car unit sales grew 12.9% year over year to 6.4 million units. And China's passenger vehicle brands sales totaled 4.4 million units and represented 68.1% of total passenger vehicle market sales in the first quarter of 2025. New energy vehicle unit sales grew by 47.1% year over year to 3.1 million units and NEVs were 41.2% of the total car sales in China in the first quarter of 2025.

For the first quarter of 2025, Chinese commercial vehicle sales increased by 1.8% year over year to 1.05 million units and exports of automotive vehicle units increased by 7.3% year over year to 1.4 million units. Tax incentives, subsidies for scrapping older vehicles and lower interest financing are among the government incentives to support the purchases of automobiles in China for 2025. Additionally, local government and private incentives may also aid buyers.

Gross profit increased by 18.8% year over year to $28.6 million compared to $24.1 million in 2024. Gross margin was 17.1% compared to 17.3% in the first quarter last year, up from 15.6% in the fourth quarter of 2024.

R&D expenses increased by 64% to $8.7 million from $5.3 million in the first quarter of 2024. The increased investment was partially due to continuous development of our hydraulic EPS products, especially our EPS product, which recently started mass production. Also, the increase reflected the purchase of new molds for a new product beginning in the first quarter of 2025 as well as the project for Stellantis.

A 41.3% increase in operating expenses, including R&D, resulted in a 10.5% year-over-year reduction in income from operations. Net income attributable to the parent company shareholders per diluted shares was $0.24 versus 27% in the year ago first quarter.

Net cash provided by operating activities rose 73.1% year over year to $18.1 million for the first quarter of 2025. Total cash and cash equivalents plus cash and short-term investments were $135.9 million or approximately $4.50 per diluted share at March 31, 2025.

Our R-EPS steering product developed for Nanjing Iveco has entered mass production in the first quarter of '25. This product features an electric motor with a unit control and a ball nut and belt drive reduction system to provide steering assist. R-EPS architecture is capable of performing autonomous driving functions such as automatic parking, lane keep assist and lane follow assist.

Our Shashi Jiulong Power Steering Gears Company subsidiary won customer awards and accolades from two major vehicle OEM customers, Beiqi Foton Motor and Shaanxi Automobile Heavy Truck. Shashi Jiulong provides steering systems to various commercial vehicles in China.

Shashi Jiulong received dual honors, the Excellent Supplier Series Award and the Excellent Supplier Series Award from the Auman Business Unit of Foton Motors for exemplary product development cooperation, supply guarantees, and quality reliability. In addition, Shashi Jiulon won the Strategic Synergy Award, the highest award given by Shaanxi for our future research development and supply chain cooperation. We remain well positioned with our advanced steering technology and diverse product portfolio to address market opportunities in China and overseas.

Now let me review the financial results in the first quarter of 2025. Our net sales increased by 19.9% to $167.1 million in the first quarter of 2025 compared to $139.4 million in the first quarter of 2024. Net sales of traditional steering products and parts increased by 2.3% to $94.1 million compared to $92 million for the first quarter of 2024.

Net sales of electronic power steering, EPS products and parts grew by 54% to $73 million for the three months ended March 31, 2025, compared with $47.4 million for the same period in 2024. EPS products for the first quarter of 2025 were approximately 43.7% of total sales compared to 34% of total net sales in the first quarter of 2024.

Hubei Henglong export sales were $27.2 million compared to $30.1 million in the first quarter of 2024, primarily due to lower demand for passenger vehicle products by Stellantis NV. Shashi Jiulon sales increased by 17.4% to $19.7 million from $16.8 million in the 2024 first quarter.

Brazil Henglong net product sales increased by 30.2% to $16.5 million in the first quarter of 2025 compared to $12.7 million for the same period in 2024, due to higher demand from Stellantis NV in that market. Hubei sales, which mainly provide steering systems to Chery Automobile in China, increased by 13.5% year over year and sales for other entities increased by 19.1% year over year to $34.6 million.

Gross profit increased by 18.8% to $28.6 million from $24.1 million in the first quarter of 2024. Gross margin in the first quarter of 2025 was 17.1%, which was consistent with 17.3% in the first quarter of 2024. Selling expenses increased by 18.3% to $4.8 million from $4.1 million in the first quarter of 2024. This increase in selling expenses was primarily due to higher warehouse and logistical expenses due to higher revenues. Selling expenses represented 2.9% of net sales in the first quarter of 2025 and the first quarter of 2024.

General and administrative expenses, G&A, increased by 36.4% to $7.6 million compared with $5.5 million in the first quarter of 2024, mainly due to staff-related expenses included a onetime severance cost of approximately $1.4 million at one subsidiary.

G&A expenses represented 4.5% of net sales in the first quarter of 2025 compared with 4% of net sales in the first quarter of 2024. Research and development expenses, R&D increased by 64% to $8.7 million compared to $5.3 million in the first quarter of 2024, mainly due to higher R&D activities for new projects and products.

R&D expenses represented 5.2% of net sales in the first quarter of 2025 compared to 3.8% in the first quarter of 2024. Other income was $1.9 million for the first quarter of 2025 compared to $2.4 million for the first quarter of 2024.

Income from operations declined by 10.5% to $8.6 million in the first quarter of 2025 compared to income from operations of $9.7 million in the first quarter of 2024. The decrease in 2025 first quarter income from operations was primarily due to a 41.3% increase in operating expenses.

Interest expense was $0.5 million in the first quarter of 2025 compared to $0.3 million in the first quarter of 2024. Financial income net was $2 million in the first quarter of 2025 compared to financial expense net of $0.01 million in the first quarter of 2024. This change was primarily due to an increase in foreign exchange gains due to foreign exchange volatility.

Income before income tax expenses and equity and earnings of affiliated companies was $12.1 million in first quarter of 2025 compared to $11.8 million in the first quarter of 2024. Equity and losses of affiliated companies was $0.7 million in the first quarter of 2025 compared with equity and losses of affiliated companies of $0.8 million in the first quarter of 2024.

Income tax expense was $2.9 million for the first quarter of 2025 as compared to $1.7 million for the first quarter of 2024. This higher tax was primarily due to higher income before income tax expenses as compared to the same period last year, and a higher expected annual effective tax rate in 2025 based on the latest annual forecast as compared to 2024.

Net income attributable to parent company's common shareholders was $7.1 million in the first quarter of 2025 compared to $8.3 million in the first quarter of 2024. Diluted income per share was $0.24 in the first quarter of 2025 compared to net income per diluted share of $0.27 in the first quarter of 2024. The weighted average number of diluted common shares outstanding was 30,170,172 in first quarter of 2025 compared to 30,185,702 in the first quarter of 2024.

Now I'll provide some balance sheet and other financial highlights. As of March 31, 2025, total cash, cash equivalents, and short-term investments were $89.9 million. Total accounts receivable, including notes receivable, was $323.6 million.

Accounts payable, including notes payable, were $282.6 million and short-term bank loans were $66.7 million. Our current ratio was 1.4:1 and working capital raised to $154.7 million as of March 31, 2025, compared to $146.2 million as of December 31, 2024.

Total parent company's stockholders' equity was $357.5 million as of March 31, 2025, compared to $349.6 million as of December 31, 2024. Net cash flow from operating activities was $18.1 million in the first quarter of 2025 compared with $10.5 million in the first quarter of 2024. Cash paid to acquire property, plant, and equipment and land use rights was $10.3 million in the first quarter of 2025.

Business outlook. Management has reiterated revenue guidance for the full fiscal year 2025 of $700 million. This target is based on company's current views on operating and market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A session.

(Operator Instructions) Jonathan Nieves, Private Investor.

Good morning, everybody or hello. My question is why did research development increase by 64% in the 2025 first quarter? Will R&D remain at this high level for the 2025 year? Or will it vary?.

(interpreted) In the first quarter, we did increase our R&D effort. And hence, the R&D expenses also went up, mainly in the area of our research and development of our EPS product. For this product, we have increased the staffing to help us to further advance new technologies. We also increased some of the equipment design modules. So all that contributed to higher R&D expenses in Q1.

On a full year basis, looking forward, we're seeing about 5% of our total revenue, give or take, around USD34 million on R&D. So this also -- please be mindful, we are maintaining 5% of revenue in R&D. That will help us to qualify high-tech status in China. And then we will also, in turn, receive tax benefit.

Okay. Are you finished with your questions, Jonathan?

Yes. Thank you very much.

Gary Nash, NASH Consulting.

Thank you. First, good day to everyone. Two-part question. Could you please comment on the almost $10 million increase in inventories in the first quarter of 2025. And then if you could also comment on what is the outlook for inventory levels in the rest of 2025?

(interpreted) Okay. So Gary, to answer your question. The inventory increase -- it's actually partly related to the trade war and -- as the US administration has been putting a lot of pressure on the tariff. So in response to the potential pressure, we have made some advanced shipments to the US a month ahead. So we -- so our customers will not experience any disruption in the productions for that consideration.

So our inventory in the U Shas given us up to September in case any kind of productivity policy wise. So this is -- it's sort of out of ordinary practice, but we have to do something to address such potential risk. That's why our inventory increased.

But in terms of percentage inventory increased about 10%. The overall revenue, we have increased in 19.9%. So it's not completely outsized increase. And on a full-year basis, we believe, we will maintain a healthy level. We will now have an oversized inventory.

Okay, does that answer your question, Gary?

Yes it does thank you very much.

(Operator Instructions) Michael Fiedler, Private Investor.

Good morning. My question is the gross margin was 17.1% for the first quarter of 2025. What is the outlook for the gross margin for the rest of 2025?

(interpreted) Okay. Yes, Q1, our margin at -- slightly higher than 17%. That's the Q1 gross margin. It's very simpler to comparable corresponding quarter in 2024 as well as a full year average gross margin.

And we are fully aware this level of gross margin is typically -- it's lower than our typical margin in the past prior to 2024. But this is our -- part of our strategy to proactively seeking more market share by sing some of the strategy -- pricing strategy.

Clearly, this has bear fruit. This strategy has bear fruit. So we are growing revenue, gaining market share. And on a full year basis -- 2025 full year basis, we believe we will maintain at similar gross margin level and with a slight improvement.

That answers my question. Thank you.

(Operator Instructions) Okay, I'll hand back over to Kevin then for further comments. Hey.

Well, we have some additional questions that were e-mailed to us. So I'll go ahead and ask those. So the first one is, what is the impact of the US proposed tariffs on your new order flow? And is it impacting any areas beyond North America?

(interpreted) Okay. So in terms of tariffs, we mentioned earlier in the beginning of the year, we had anticipated there will be some pressure coming from the administration. So we made a decision to make some advanced shipment to our US facility. And those inventory help us to carry us to foreseeable challenges in the coming quarters, which turned out to be useful.

And also, as yesterday, in China, US announced to choose on the trading -- on the tariff, which is a very positive development. And we have immediately got in touch with our customer in North America, and we come to a very good conversation and decision. And they have agreed to bear the increased part of the cost related with the tariff.

So to answer your question, overall, the tariff has very minimal impact to our business and the order flow. The new order continues -- we'll continue to develop the product with our customers. And outside the US, we still see some opportunities. As we reported today, we have a pretty healthy strong growth in Brazil.

So we are also making some strategic planning on global expansion. And that will also, at some point, we announced it will help us to further weather different kind of volatilities in the marketplace.

I have another question that was emailed. Please provide an update on the manufacturing of the REPS steering product for Nanjing Iveco? And have other automotive OEMs also ordered the REPS product

(interpreted) Yes, REPS in the growth area. We have already begun the mass production and shipment to our customer Nanjing Iveco. In addition to Iveco, the other OEM also placing orders on our new products. They are including Chery Auto, Guangzhou, Guanci Auto, and then Yutong Bus and Qingdao.

And for this new -- for this REPS product, we have also built a brand-new facility dedicated to the production and install new production lines. And so we are pretty excited about this new opportunity presented to us.

Thank you. Then my last question is, can you provide an update on the Sentient operation as far as the automatic driving systems?

(interpreted) Yes, we have quite a bit of development on Sentient AB, our subsidiary for developing autonomous driving technologies. Our -- Sentient's main customer now is Volvo Truck for the EPS product. We are shipping 3,500 units. And on the full -- this month, on a full year basis, we are targeting 40,000 units for 2025.

On the revenue side, Sentient for this particular customer, we're booking EUR30 million for 2025. Other than this particular customer, we have one contract with BYD, their new model, Model SONG, S-O-N-G. The -- we are expecting mass production for this particular model, autonomous driving technology for 2025. So the mass production will start in 2025.

And also, we have entered into Volvo passenger vehicle with our fly-by-wire technology. And there's another automaker with Renault. So we are making very good progress with all different customers on both passenger and commercial side. So we are expecting a very meaningful contribution from our subsidiary, Sentient.

(Operator Instructions) Okay. We have no one else in the queue at the moment. I'll now hand back over to Kevin for any closing remarks.

We want to thank everyone for your participation in today's conference call. Please be safe, and we look forward to speaking with you in the future. Thank you.

Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.