CAAS 中汽系统

Operator

Greetings and welcome to the China Automotive Systems Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Dixon Chen. Thank you, Mr. Chen. You may begin.

Dixon Chen

Thank you. Thank you everyone for joining us today. Welcome to China Automotive Systems' Third Quarter 2016 Earnings Conference Call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; Mr. Jie Li, Chief Financial Officer; Ms. Levine Rachel, Financial Manager 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 estimate and assumptions only as of the date of this call. As a result, the company's actual results may 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, 2015 as filed with the Securities and Exchange Commission on March 30, 2016, and in other documents filed by the company from time-to-time with the Securities Exchange Commission. The Company expressly disclaim 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 third quarter and nine months of 2016, then I will turn the call over to the management to conduct a question-and-answer session. Then the following 2016 third quarter and six months results are unaudited; and these results are reported under the US GAAP. For the purpose of our call today, I will review financial results in US dollars. We will begin with an overview with the recent dynamics of the automotive industry and China Automotive Systems' market position. Overall unit vehicle sales in China grew by 24.9% year-on-year in the third quarter of 2016 according to China Association of Automobile Manufacturers, CAAM. Government tax rates and dealer incentives drove a 29% growth in China's car sales in the months of September 2016, representing the largest increase since January 2013. Passenger vehicle sales in the third quarter grew by 27.7% year-over-year, but there was a significant variation in different segments. Sales in the important basic passenger car segment and crossover passenger car sales were lackluster. Sales of SUV, MPV vehicles were strong in third quarter. Sales of Chinese branded cars were up 11.5% year-over-year for the third quarter 2016. First nine months, passenger vehicle sales were 19.4 million units, up 13.2% year-over-year; commercial vehicle sales grew by only 6.1% in the third quarter of 2016; and the truck sales rose, but bus sales declined. In the third quarter of 2016, our net sales increased 12.2% to $94.6 million, compared with $90.8 million in the same quarter of 2016. This increase was mainly due to high volumes and a change in the product mix to more higher priced Electric Power Steering systems, EPS. All of our operating segment achieved growth in the third quarter including our legacy hydraulic steering products, thereby reversing its recent decline. China markets shift to more EPS, Electric Power Steering systems continues and our EPS product sales increased by 26.1% and represented 27.0% of net sales compared with 22.4% in the third quarter last year. We continue to build our EPS product portfolio and production capability to increase our market share in this growing market segments. Approximately 80% of our third quarter sales were in China and depreciation of the R&D to U.S. dollars has cost a decline by 6.4% in the reported sales in renewed period. While our sales are mostly in R&D, we reported in U.S. dollars. Internationally, our assembling plan has started commercial production to serve our global Tier-1 customers in Brazil, in Chinese OEMs operating in a region as well as the local regional aftermarket. Our relationships with Fiat Chrysler North America remains strong and we'll continue to produce and ships doing product with Ford for the North American market. We look forward to international sales becoming a greater portion of automotive sales in the future. We continue to invest in our product and operation. For the first nine months, we have invested $27.2 million in property planned equipment to improve our operations and production efficiency, especially for our export plans and EPS operations that have potential for strong continuing growth in the future. We also invested approximately $6.7 million in the third quarter and $18.8 million in the first nine months of 2016 in research and development. We're specially expanding our product portfolio of our EPS products including specialist [ph] motor, EPS and enhanced those products' performance in the marketplace. EPS product in China have been taking market shares from our legacy hydraulics steering product. We have anticipated this trend towards the more advanced EPS technology and we believe sales of our EPS product will drive our sales as we launch new models to meet the needs of a larger number of vehicle models. In the end of third quarter, we have cash, cash equivalent, pledged cash and short-term investment of $99.5 million as our capital investment and share repurchase during the third quarter of 2016. Our shares are not being properly valued with our established market leadership in China, our continued probability and cash flow generation and our growing presence in global market. As of September 30, 2016, approximately $1 million have been invested to repurchase approximately 260,000 shares in the open market. We have $4 million remaining in our authorized repurchase program of future transactions to support long-term shareholder value. We continue to leverage our leadership in China where we supply the largest OEM market with advanced steering product. We continue to develop new technologies to enhance our market position, strengthening our customer relationships and creating new growth opportunities in the global market. Now, let me review the financial results for the third quarter of 2016. In the third quarter of 2016, net sales increased 4.2% to $94.6 million compared to $90.8 million in the same quarter of 2016. This increase was mainly due to higher volumes and a change of product mix to more Electric Power Steering systems, EPS. Gross profit was $20 million in the third quarter of 2016 compared to $15.9 million in the third quarter of 2015. The gross margin was 21.1% in the third quarter of 2016 versus 17.5% in the third quarter of 2015. Selling expenses were $3.8 million in the third quarter of 2016 compared to $3.3 million in third quarter of 2015. Greater unit sales led to higher transportation expenses in the third quarter of 2016. Selling expenses representing 4.1% of net sales in the third quarter of 2016 compared to 3.7% in third quarter 2015. General and administrative expenses, G&A expenses were $3.7 million in third quarter of 2016, compared to $3.1 million in the third quarter of 2015. G&A expenses represented 4% of net sales in the third quarter of 2016 and 3.4% in the third quarter of 2015. Research and development expenses, R&D expenses were $6.7 million in the third quarter of 2016, compared to $5.4 million in the third quarter of 2015. R&D expenses represented 7.1% of net sales in the third quarter of 2016 compared to 6.0% in the third quarter of 2015. The higher R&D expenses as the percentage revenue was mainly due to continued development of new EPS product and acquiring a vast production equipment. Net financial expenses was $0.8 million in third quarter of 2016, compared to net financial income of $0.6 million in third quarter of 2015. Income from operations increased by 15.2% to $5.7 million in third quarter of 2016 compared with $5 million in the same quarter of 2015. The increase was mainly due to higher net sales in gross margin. Income from income tax expenses in the equity in the earnings of affiliate companies was $6.7 million in the third quarter of 2016, compared to $5.2 million in the same quarter of 2015. The increase in income before income tax expenses and equity in earnings of Affiliate Company was mainly due to higher operating income, lower interest expense and higher net financial income in third quarter of 2016, compared to the same quarter of 2015. Net income attributable to parent company's common shareholder worth $5.7 million in the third quarter of 2016 compared to net income attributable to parent company's common shareholder of $4.3 million in the third quarter of 2015. Diluted earnings per share were $0.18 in the third quarter of 2016, compared to earnings per shares of $0.13 in the third quarter of 2015. The weighted average number of diluted common shares outstanding was 31,911,722 shares in the third quarter of 2016, compared to 32,134,839 shares in the third quarter of 2015. Now, let me go over the highlights for the first nine months of 2016. Net sales for the first nine months of 2016 were $312.5 million compared to $323.5 million in the first nine months of 2015. Nine months gross profit was $59.1 million compared to $59.4 million in the corresponding period last year. Nine months gross margin was 18.9% compared to 18.4% for the corresponding period in 2015. For the nine months ended September 30, 2016, gain on other sales amounted to $2 million compared to $3.2 million for the corresponding period in 2015. Income from operations was $80 million compared to $22.6 million in the first nine months of 2015. Operating margin was 5.8% compared to 7% of the same period of 2015. Net income attributable to parent company's common shareholders was $16.8 million, compared to $20.5 million in the same period last year. Diluted earnings per share were $0.52 in the first nine months of 2016 compared to diluted earnings per share of $0.64 for the corresponding period of 2015. In addition to our continuing probability, we continue to have a strong balance sheet. As of September 30, 2016, strong total cash and cash equivalent, pledged cash deposit and short-term investment were at $99.5 million. Total accounts receivable including notes receivable were $279.4 million, accounts payable were $210 million and bank government loan was $39.9 million. Total parent company's shareholder equity was $312.2 million as of September 30, 2016 compared to $299 million as of December 31, 2015. Net cash flow for operating activities was $13.1 million for the first nine months of 2016. With our business outlook, management has increased our revenue guidance for the full year 2016 to $450 million. This target is based on the company's current view of operating in market conditions which are subject to change. With that, operator, we're ready to begin the Q&A session.

Operator

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of William Gregozeski with Greenridge Global. Please proceed with your question.

William Gregozeski

Hi, guys. What's the new revenue guidance? Can you just talk about where you see the growth coming from in the sales for the fourth quarter? And then just looking into next year where you see the growth coming from? [Foreign Language]

Qizhou Wu

[Foreign Language] Okay. For the fourth quarter, we are seeing our EPS, Electric Power Steering product growth is accelerating and our traditional hydraulic product sales is also having some good growth. Another area where we see growth is in the commercial vehicle sector. [Foreign Language] As we mentioned earlier, those area, we're experiencing good growth. What's driving this, there are three factors: first is Tier-3/Tier-4 city. Organization is continuing and we see those new urban centers. There are more people from those area buying cars. We believe those markets still have quite a bit room to grow and for the auto sales; secondly, as we mentioned earlier, purchased tax reduction introduced by Chinese government since early this year, still ongoing and that has been a benefiting factor for not above auto buyers to come in before the end of the year. That's also driving growth; and thirdly in the commercial vehicle sector, they are a lot more regulation coming in whether from emission perspective or from overloading perspective. We're seeing more astringent regulation in that area where are positively affecting commercial vehicle sales. [Foreign Language] Looking to 2017, we are cautiously optimistic and that we think the market probably will continue with a moderate growth of 10% overall market and auto industry will remain an integral part of growth engine as we all know Chinese economy still experiencing some difficulty to raise reasonable growth. So that being said, we see there's a possibility in auto purchase tax reduction may continue 2017. And also with that kind of incentive as well as earlier mentioned urban area for Tier-3/Tier-4 market still have some room for growth. We think domestic China market will shape up okay 2017. For our international market, we have a few order book that's going to put us into a good track for growth in 2017. Overall in 2016, as being a decent year, our production level is running at a historical high.

William Gregozeski

Okay. You mentioned the hydraulic as having some growth. Do you expect that to increase, or be flat, or still decline for 2017? [Foreign Language]

Qizhou Wu

In 2017, the hydraulic product sales may experience a small decline. That's mainly due to the more increased adoption of EPS products and we are going to grow the EPS area as well.

William Gregozeski

Okay. All right, thank you.

Dixon Chen

Thank you.

Operator

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Sam [ph], a Private Investor. Please proceed with your question.

Unidentified Analyst

Hi. Congratulations on a good third quarter. I am a shareholder of CAAS. I have been holding those shares for quite a long time. I've seen the value of the shares decline dramatically. And a question for management is what is being done to improve the shareholders' value? Please share with us on a constant basis the news about your organization and your business model and tell us about any intentions if you're planning to pay dividends for shareholders. Thank you.

Dixon Chen

Thank you. [Foreign Language] We also noticed the relatively soft stock price. We have announced and we have implemented share repurchase for one. Unfortunately, that's part of the rule. The repurchase that can only be 20% to 25% total volume on daily basis. It's limiting us buying more shares, but we have to be patient.

Qizhou Wu

[Foreign Language] We are actually already been planning. We'll provide more updates of our business operation. We will provide more frequent updates of operations. In terms of dividends, there are a few things here we're seeing as more difficult. One is the more restricted foreign exchange on the Chinese government. It's going to be more difficult for us to move money from China. And secondly, withholding taxes and also a capital gain taxes for the dividend distribution, there are some more cost. We are seeing probably the share repurchases more effectively to increase shareholder value at the moment.

Unidentified Analyst

Thank you very much. Another follow-up question, please. What happened to the increase of reduction in Brazil? Quite a number of quarters ago, there was a part about opening a facility in Brazil producing some components or parts over there. Can you give us an update on that facility, please? [Foreign Language]

Qizhou Wu

[Foreign Language] Yes. The resilient facility is up and running. Our initial design capacity was 300,000 units. However, due to the currency fluctuation in Brazilian real, depreciated quite a lot and so, we decided to scale back the size of [indiscernible] production from 300,000 units to 100,000 units.

Unidentified Analyst

All right. Thank you.

Dixon Chen

Thank you.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to the management for closing comments. End of Q&A:

Dixon Chen

Thank you for attending China Automotive Systems Third Quarter 2016 Earnings Conference Call. We look forward to speaking with you. Have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.