China Automotive Systems Inc (CAAS) 2020 Q4 法說會逐字稿

Greetings, and welcome to the China Automotive Systems Fourth Quarter 2020 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, Investor Relations.

Please go ahead, sir.

Thank you, everyone, for joining us today.

Welcome to China Automotive Systems 2020 Fourth Quarter and Annual Conference Call.

Joining us today are 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'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 today 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 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 fourth quarter and annual financial results for the period ended December 31, 2020.

Management will then conduct a Q&A session.

The following 2020 fourth quarter financial results are unaudited, and the annual results are audited, and both results 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 will begin with a review of the recent dynamics of the Chinese economy, automobile industry and China Automotive's market position.

The Chinese economy has fully recovered from the impact of the COVID-19 pandemic with GDP attaining a 6.5% growth rate in the fourth quarter of 2020 and a 2.3% growth rate for the full year of 2020.

Statistics from the China Association of Automobile Manufacturers, CAAM, show that in the 2020 fourth quarter, for the month of October 2020, overall automobile sales rose by 12.5% year-over-year, with passenger vehicle sales up by 9.3% and commercial vehicle sales 30.1% higher than the same month a year ago.

In November 2020, overall automobile sales were up 12.6% year-over-year, with passenger vehicle sales 11.6% higher and commercial vehicle sales 18% above last year's November numbers.

In December 2020, overall automobile sales rose 6.4% year-over-year, with passenger vehicle sales up 7.2% and commercial vehicle sales 2.4% higher than last year.

December was the ninth straight month that overall automobile vehicle sales rose.

For the full year 2020, overall automobile sales were 25.3 million vehicles, representing a decline of 1.9% year-over-year primarily due to the impact of the COVID-19 pandemic earlier in the year.

Passenger vehicle sales were 20.2 million or 6% lower year-over-year, with sedans down by 9.9%, NPV sales reduced by 23.8%, SUV sales up 0.7% and crossover vehicles down by 2.9%.

Commercial vehicle sales rose 18.7% year-over-year, with bus sales decreased by 5.6% and truck sales 21.7% higher.

New energy vehicle sales rose 10.9% year-over-year to 1.4 million vehicles with passenger vehicle sales rising by 14.6% and commercial vehicle sales down 17.2% in the 2020 year.

Given the volatile sales during the 2020 year, we are pleased to report that our fourth quarter sales rose by 26.4% to $146.5 million from $115.9 million in the fourth quarter of 2019, and our gross profit increased faster at 35.7% to $22.8 million from $16.8 million in the fourth quarter of 2019.

Gross margin increased in the 2020 fourth quarter to 15.6% compared with 14.5% a year ago.

For the fourth quarter of 2020, our net loss attributable to parent company's common shareholders was $3.2 million or a diluted loss per share of $0.10 compared to net income of $1.7 million or diluted income per share of $0.06 in the fourth quarter of 2019.

Included in the net loss for the fourth quarter of 2020 was a nonrecurring $4.5 million in expected credit loss provisions net of minority interest due to the bankruptcy reorganization proceedings of our customer, Brilliance Auto.

We have decided to take the most conservative approach and have written off the entire accounts and notes receivable due from Brilliance even as we proceed with our collection process with them.

For the year 2020, our net sales were $417.6 million compared to $431.4 million in 2019, reflecting the very weak sales in the first half of the year due to the impact of the COVID-19 pandemic on automotive sales in China and in international markets, including North America.

The company's sales of steering gears for passenger vehicles decreased by 7.8% and sales for steering gears for commercial vehicles increased by 12.1% in 2020 compared to 2019 in China.

In November 2020, we shipped approximately 70,000 steering gears to Chinese truck OEMs and the aftermarket in North America.

This amount established the company's new monthly high sales record for commercial vehicle steering products.

Our commercial vehicle steering production lines are running near full capacity to keep up with demand.

Hydraulic steering products grew by 1.9% while our electric power steering products sales declined in 2020.

Changes in product mix and selling prices impacted both sales and gross profit in the 2020 year.

The net loss attributable to the parent company's shareholders was $5 million in 2020, which also included $4.5 million onetime nonrecurring charge for bad debt due to the Brilliance Auto bankruptcy reorganization.

Our research and development has brought a number of advanced products to fruition in 2020 to address changes in automotive technologies.

These new products will better serve current customers and attract new ones as well to position CAAS for future growth.

We began shipping our EPS systems to Great Wall for their ORA R150 all-electric small vehicle as the exclusive supplier in 2020.

In fact, approximately 140,000 EPS steering units were shipped to a number of Chinese OEMs for their use in electric vehicles in 2020.

In the outlook, this was sales of approximately 200,000 EPS units just for electric vehicles in 2021.

The Chinese government has targeted that EVs, electric vehicles, should be 20% of all new cars by 2025, and we are well positioned to capture this expected growth.

In addition, we have developed a new steering system for the Daily van or IVECO S.p.

A. in Europe, and started supplying a new steering product with jeep models in North America.

In addition, a new recirculating ball steering system, the i-RCB program, has been produced to be used in the global tier 1 customers' future autonomous vehicles in North America.

A brand-new dedicated assembly line for our Intelligent RCB steering systems for commercial vehicles has been installed.

i-RCB is specifically designed for autonomous driven commercial vehicles and will provide maximum assistance in parking and in lane keeping at highway speeds.

Recently, we announced the introduction of our new EPS system to empower advanced driver assistance systems, ADAS, and the future of autonomous driving.

This new EPS product was developed using proprietary technology developed by CAAS' R&D team, and it represents the first time a Chinese domestic steering producer drove the entire product development cycle in-house and developed proprietary algorithms for steering control software as well.

The company has begun mass production of this product for new vehicle models of the leading Chinese automaker, Great Wall Motors.

Additional purchase orders have been received from JAC, Chery Auto and Fiat Chrysler automobiles, with other OEMs expressing interest.

Seamlessly connected with vehicle data, CAAS' new EPS system enables drivers to adapt to different road conditions.

This new EPS system integrates and communicates with the vehicle's main data architecture to fulfill key ADAS functionalities, including lane keeping assist, automatic parking assist, lane centering and traffic jam assists.

Also, our Hyoseong (Wuhan) Motion Mechatronic System's joint venture began delivering its small powerpack brushless motors to enhance our i-RCB, our CEPS and P/DP-EPS products.

Building financial strength remains a top priority to provide the resources to support future growth and enhance shareholder value.

We continued to generate positive cash flows from operating activities in 2020.

Our cash flow provided by operations increased almost 90% in 2020 to $57.4 million from $30.3 million in 2019.

Our total cash and cash equivalents, pledged cash and short-term investments increased to $138.2 million as of December 31, 2020, compared with $112.2 million in 2019.

We repurchased 322,000 common shares in the market during the 2020 year as part of our share repurchase plans.

Total parent stockholders -- total parent company stockholders' equity rose to $303.2 million at December 31, 2020, from $289.3 million at the end of 2019.

Now that automotive market of 2020 are behind us and conditions are improving in 2021 where the first 2 months of 2021, commercial vehicle sales rose by 86.2% to approximately 757,000 vehicles, with growth in all sizes of trucks and buses.

In the Chinese passenger vehicle market, CAAS' main market, Chinese brand vehicles sold $1.4 million of -- I'm sorry, 1.4 million units, representing an 87.5% year-over-year growth.

This increase correlated to a 3.1% market share increase for Chinese branded passenger vehicles and accounted for 14.6% of the Chinese market.

We have confidence that our extensive customer base in China, growing international market presence, long-established hydraulic product line and new technology products adjusting the emerging markets for electric vehicles and autonomous driven vehicles position us well for future growth.

Now let me review the financial results in the fourth quarter of 2020.

Net sales increased by 26.4% to $146.5 million in the fourth quarter of 2020 compared to $115.9 million in the same quarter of 2019.

The net sales increase was mainly due to a change in the product mix and higher demand for Chinese domestic branded automobiles in the fourth quarter of 2020 compared with the fourth quarter of 2019.

Gross profit rose by 35.7% to $22.8 million compared to $16.8 million in the fourth quarter of 2019.

Gross margin in the fourth quarter of 2020 was 15.6% compared to 14.5% in the fourth quarter of 2019.

The increase in gross profit and gross margin was primarily due to higher volume of sales, a change in the product mix and reduced costs compared with the fourth quarter of 2019.

Gain on other sales was $1.4 million compared to $0.2 million in the fourth quarter of 2019.

Selling expenses were $5.6 million compared to $3.8 million in the fourth quarter of 2019.

Selling expenses represented 3.8% of net sales in the fourth quarter of 2020 compared to 3.3% in the fourth quarter of 2019.

General and administrative expenses were $14.3 million compared to $6.5 million in the fourth quarter of 2019.

G&A expenses represented 9.8% of net sales in the fourth quarter of 2020 compared to 5.6% of net sales in the fourth quarter of 2019.

The significantly higher G&A expenses in the fourth quarter were mainly attributable to a onetime nonrecurring expected credit loss provision of $6.4 million related to Brilliance Auto's bankruptcy reorganization proceeding.

Based upon conservative accounting practices, this charge, although noncash in nature, accounted for all the outstanding accounts receivable and notes receivable from Brilliance Auto.

The company continues to work with Brilliance Auto on their receivables collection.

Research and development expenses were $8.3 million compared to $8.6 million in the fourth quarter of 2019.

R&D expenses represented 5.7% of net sales in the fourth quarter of 2020 compared to 7.4% in the fourth quarter of 2019.

Loss from operations was $4 million in the fourth quarter of 2020 compared with a loss from operations of $1.9 million in the fourth quarter of 2019.

The higher loss was mainly due to the onetime nonrecurring expected loss provision related to Brilliance Auto's bankruptcy reorganization proceedings.

Interest expense was $0.4 million in the fourth quarter of 2020 compared to $0.9 million in the fourth quarter of 2019.

Net loss attributable to parent company's common shareholders was $3.2 million in the fourth quarter of 2020 compared to net income attributable to parent company's common shareholders of $1.7 million in the fourth quarter of 2019.

The net loss in the fourth quarter of 2020 was mainly due to a onetime nonrecurring $4.5 million expected credit loss provision from Brilliance Auto net of minority interest.

Diluted loss per share was $0.10 in the fourth quarter of 2020 compared to diluted income per share of $0.06 in the fourth quarter of 2019.

Weighted average number of diluted common shares outstanding was 31,077,196 in the fourth quarter of 2020 compared to 31,333,740 in the fourth quarter of 2019.

Now we'll provide a summary annual results.

Net sales decreased by 3.2% to $417.6 million in 2020 compared to $431.4 million in 2019.

The decrease was mainly due to a 27.1% decrease in net sales in the first half of 2020 due to the COVID-19 pandemic's impact on automobiles in China and North America.

In 2020, sales of hydraulic products increased 1.9% while total EPS systems declined by 24.8%.

EPS sales represent 14.8% of total revenue in 2020 compared with 19.1% in 2019.

Net sales of vehicle steering systems to the company's North American customers decreased by 4.7% in 2020 compared with 2019.

Gross profit in 2020 was $55.3 million compared to $63.4 million in 2019.

The gross margin decreased to 13.3% from 14.7% in 2019 mainly due to a change in product mix and lower average selling prices.

Gain on other sales mainly consisted of the net amount retained from rental income, gain on disposal of intangible assets and sales of property, plant, equipment and technical service revenue.

With year-end December 31, 2020, gain on other sales amounted to $4.3 million compared to $5.1 million in 2019.

This decline was primarily due to a decrease in gain on disposal of property, plant and equipment.

Selling expenses were $14.5 million in 2020 compared to $14.3 million in 2019 mainly due to higher marketing expense.

Selling expenses represented 3.5% of net sales in 2020 compared to 3.3% in 2019.

G&A expenses were $27.6 million compared with $20 million in 2019.

The increase is mainly due to a onetime nonrecurring expected credit loss provision of $6.4 million reflecting all accounts and notes receivable of Brilliance Auto.

CAAS took the full provision in accordance with the conservative accounting practice but will continue to spend efforts on collections as the bankruptcy reorganization proceeding of Brilliance Auto is still underway.

G&A expenses represented 6.6% of net sales in 2020 compared to 4.6% of net sales in 2019.

R&D expenses were $25.7 million in 2020 compared to $28 million in 2019.

The decrease was due primarily to reduced activity from the impact of the COVID-19 earlier in 2020 and tighter cost controls.

R&D expenses represented 6.2% of net sales in 2020 compared to 6.5% of net sales in 2019.

Operating loss was $8.1 million in 2020 compared to operating income of $6.2 million in '20 mainly due to lower sales and the onetime nonrecurring expected credit loss position related to Brilliance Auto's bankruptcy reorganization proceeding.

Interest expense was $1.6 million in 2020 compared with $3 million in 2019 as a result of decreased loans and lower interest rates.

Net financial expense was $4.9 million in 2020 compared with net financial income of $2.5 million in 2019 primarily due to an increase in foreign exchange losses because of exchange rate fluctuations.

Loss before income taxes and equity and earnings of affiliated companies was $12.2 million compared to income before income tax expenses and equity and earnings of affiliated companies of $7.6 million in 2019.

Net loss attributable to parent company's common shareholders was $5 million in 2020 compared to net income attributable to parent company's common shareholders of $10 million in 2019.

The loss was primarily due to lower sales and a onetime nonrecurring $4.5 million expected credit loss provision with Brilliance Auto net of minority interest.

Diluted net loss per share was $0.16 in 2020 compared to diluted income per share of $0.32 in 2019.

The weighted average number of diluted shares outstanding was 31,077,196 in 2020 compared to 31,458,926 in 2019.

Net cash flow from operating activities was $67.4 million in 2020 compared with $30.3 million in 2019.

Payments to acquire property, plant, equipment were $15.8 million in 2020 compared with $34.4 million in 2019.

Approximately 322,000 shares of common stock were repurchased during the year 2020, and the company expects to repurchase more shares in the future reflecting market conditions.

We'll now go over a few balance sheet items.

As of December 31, 2020, total cash and cash equivalents, pledged cash and short-term investments were $138.2 million.

Total accounts receivable, including notes receivable, were $234.1 million; accounts payable, including notes payable, were $225.3 million; and short-term bank and government loans were $44.2 million.

Total parent company stockholder equity was $320.2 million as of December 31, 2020, compared to $289.3 million as of December 31, 2019.

The business outlook.

Management provides revenue guidance of $470 million for the full year 2021.

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

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

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

Can you talk about what your working relationship with Brilliance has been since they announced the restructuring?

And what likelihood do you think there will be to recover some of that write-off?

Okay.

(foreign language)

Okay.

(foreign language)

[Interpreted] Okay.

So we are closely following -- monitoring the process of the Brilliance Auto's restructuring at the moment.

We also very closely follow with the senior management team on the outstanding receivables.

So we are actively and aggressively collecting the receivables.

And we have collected some of the account receivables from Brilliance Auto, and we also plan to continue to collect after they complete the restructuring proceeding.

Yes, so that's our plan.

And also, we still -- on the business side, we're still working with them, and they have some new product lines coming.

And so we're very carefully managing the relationship.

Okay.

If you exclude the write-offs, the G&A was still pretty high in the fourth quarter on an absolute dollar basis.

I mean what's like a good G&A amount you guys expect going forward, excluding any write-offs or recoveries?

Okay.

(foreign language)

(foreign language)

[Interpreted] So excluding -- if you look at our 2020's G&A expenses, excluding the onetime nonrecurring and noncash write-off related to the Brilliance Auto's restructuring proceeding, our G&A expenses is in line with 2019.

Now that -- we wanted you to be also mindful that in 2020, there was a major COVID event, and -- which hit our operation pretty hard, especially in the first quarter.

And during that time, we had to increase -- to facilitate the reopening of our production.

We had to increase the PPE and also the sanitization costs for all our business operation.

And in addition to that, we had to provide our workers housing accommodation and the dining, and because it's a special time, we want to make sure they do everything properly and to contain any kind of -- to avoid any kind of spreading of the COVID.

So all that extra cost, we bear that in 2020.

And even with all that, we're still at the very similar level of 2019.

Also in December 2020, we started a program to further streamline our cost management, especially in the G&A category.

We reduced some of the staffing -- staffs, and also, we cut back some of the expenses in the G&A category.

So within 1 month or so -- maybe 1.5 months, in January, we already see very evident changes after the -- implementing the cost control measures.

So we feel 2021, we should be able to manage the G&A expenses pretty well.

Okay.

And then my last question is last week, you guys discussed that you self-developed EPS product.

What's going on with the JV that you're self-developing EPS products for the Chinese market again because I thought that was all going to be done through the JV?

Okay.

(foreign language)

(foreign language)

[Interpreted] Okay.

To clear your -- to clear this point is the production has always been managed by the joint venture with KYB.

We -- according to initial arrangement or contract, CAAS will still lead the R&D of the EPS product and especially the new-generation EPS product.

Our joint venture partner, they will provide some of the know-how and the technology know-how as well as managing the production, and so -- with our local team.

So that's the arrangement.

And we -- for this particular new product we just recently announced, that's in the ADAS area for the assist driving, autonomous driving feature.

We -- our team, R&D team met the entire process.

And we believe and this is the way we're going forward.

And most of the high-end product need to be centralized in terms of R&D, so we're doing that.

And we're pretty pleased with the results.

(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Kevin Theiss for closing remarks.

We want to thank all of you for participating in today's conference call.

We wish you to be safe, and we look forward to speaking with you again.

Have a great day.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]