Kevin Theiss
Thank you, everyone for joining us today. Welcome to China Automotive Systems 2019 third quarter 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 on the conference call with the assistance of translation. Before we begin, I remind all listeners that throughout this call, we will 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, 2018, as filed with the Securities and Exchange Commission on March 28, 2019, 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 or 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 2019 third quarter. Management will then conduct a question-and-answer session. The following 2019 third quarter and nine months financial results are unaudited and are reported under US GAAP. For the purposes of our call today, I'll review the financial results in U.S dollars. We will begin with review of the recent dynamics of the automobile industry in China automotive market position. China's GDP growth in the third quarter of 2019 grew at 6%, down from 6.2% in the second quarter and down from 6.4% in the first quarter of 2019. The decline in China's export accelerated in September decreasing by 20.2%. For the nine months ended September 30, 2019, China's exports to the U.S declined by 10.7% from the year earlier in dollar terms. The Chinese government at the same time promoting new automotive emission standards to reduce vehicle pollution. The stricter National VI emission standards were implemented on July 1, in some [indiscernible] and Tier 1 cities to improve air quality. This event resulted in a pre-buy vehicles before the national implementation as vehicle dealers needed to sell their inventory of National V vehicles that was the new standard that was nationally mandated. In addition, National VI vehicles carry a higher retail price to consumers. As a result of economic headwinds, the Purchasing Managers Index, PMI gauge the Chinese factory conditions was reported that 49.8% for September and declined to 49.3% -- I’m sorry to 49.3% in October. Below the 50 level economic growth still has not reached an expansion stage according to the National Bureau of Statistics. The index has stayed below the 50 mark for six straight months and the Chinese manufacturing activity fell to an eight months low in October 2019. According to the data reported by the China Association of Automobile Manufacturers, CAAM, in September 2019 the production and sales of passenger cars declined by 7.9% and 6.3% year-over-year. The total sales of Chinese branded passenger cars declined by 9.8% year-over-year and represented 37.7% of the total sales of passenger cars, a market share decline of 1.5% compared with a year-ago. In September, the production and sales of automobiles in China were down 6.2% and 5.2% year-over-year, respectively. In August, the production and sales of automobiles in China decreased .5% and 6.9% year-over-year, respectively. In July, the production and sales of automobiles were 11.9% and 4.3%, respectively below last year's same month. For the first nine months the production and sales of passenger vehicles were down 13.1% and 11.7% year-over-year compared to the same period a year-ago and by vehicle segment, production and sales of cars were down 12.4% and 12%, respectively. Production and sales of SUVs experienced a 12.4% and 9.3% decline and for MPVs the percentages were down 23% and 22.1% respectively. Across passenger cars, the production and sales decreased by 10.1% and 15.1%, respectively. The sales of Chinese branded passenger cars were down 18.5% year-over-year in the first nine months of 2019. The market share of Chinese branded passenger cars decreased 3.3% year-over-year and had a 38.7% market share. For the first nine months of 2019, Chinese auto exports decreased by 8.1% year-over-year. For the first nine months, the production and sales of commercial vehicles declined by 2.1% and 3.4%, respectively year-over-year. In such an environment, the net sales of our traditional hydraulic steering products declined by 10% year-over-year to $82 million in the third quarter of 2019. This reduction reflects lower vehicle sales and market conditions in the third quarter of 2019 as well as the transfer of our EPS business to the Henglong KYB joint venture. Our electric power steering product sales in the third quarter of 2019 were $18.5 million, and a 11.9% decline compared with the 2018 third quarter. As a percentage of net sales, our EPS or Electronic Product Sales accounted for 18.4% in the third quarter of 2019, which was consistent with the second quarter of 2019. Our Henglong KYB joint venture with Japan KYB Company Limited is a more powerful competitor in the EPS gearing [ph] segment in China. It focuses on providing Chinese branded and non-Chinese branded passenger vehicles with advanced electronic power steering systems. In addition, our EPS products have the potential to generate future exports as well. Our exclusive contract with Great Wall Motor Company to supply EPS systems for their new all electric small vehicle, the model ORA R150 is one indication of our capabilities. Other OEMs are evaluating our EPS products for application in their vehicles. Approximately 75,000 units are expected to be shipped in 2019 under this contract. We continue to believe our joint venture with Hyoseong Electric Company to produce the best-in-class small electric automotive motors, small electromechanical activated systems, we will benefit the quality, production and cost of these products for our own EPS systems. These products provide another sales channel in the future as we sell them to other vehicle OEMs. We’ve also recently added another new program. We passed the supplier evaluation by one of the largest commercial vehicle producers in Europe, IVECO S.p.A. The review ranged from technical review, IVECO's Daily van project product procedures, production management, product quality control, and material quality report to testing workshop quality control, aftermarket management, procurement inspection, and pre-production rectification verification. After the evaluation, IVECO awarded CAAS the development right for the IVECO Daily van project. This new project significantly increases our presence in the European market. The Daily van is one of the most iconic large light duty commercial vans in the world with over 3 million units sold in over 110 geographic markets. With our increasingly sophisticated steering technology, a global one customer headquartered in North America has designated us to read the development of the new recirculating-ball steering system, the I-RCB program. This technology and products are intended to be an integral part of their future autonomous vehicles, commercial production began in October 2019 with initial projected annual sales approximating 45,000 units. Our export sales in North America of our hydraulic steering products increased by 11.2% year-over-year to $33.7 million in the third quarter of 2019. We continue to advance our progress on the i-RCB program to develop new recirculating-ball steering systems for the Tier 1 customer in North America's autonomous vehicle program. Thanks to the changes in our product mix. Third quarter 2019 gross margin increased to 17.2% from 14.4% in the second quarter of 2018, and from 13.7% in the third quarter of 2018. Income from operations in the third quarter 2019 increased 155.2% to $4.7 million in the third quarter of 2019, compared with $1.8 million in the third quarter of 2018. Net income attributable to parent company's common shareholders increased to $4.2 million or diluted earnings per share of $0.13, compared to net income of $0.4 million or diluted earnings per share of $0.01 in the third quarter of 2018. As of September 30, 2019 cash and equivalents and pledged cash were $102.3 million compared with $89.1 million on June 30, 2019 and $124.6 million at December 31, 2018. During third quarter 2019, we repurchased approximately 96,000 common shares in open market transactions to demonstrate our commitment to building shareholder value. At the company's annual general meeting during the third quarter of 2019, Dr. Henry Lu and Dr. Tong Kooi Teo were elected as new independent members of the Board of Directors. We are proud of adding high caliber business and financial veterans with significant China experience to strengthen our Board. Looking forward, despite the challenges facing Chinese economy, there are still promising aspects for the recovery of growth in China. Central government has initiated a number of policies including price cuts, media regulations and monetary incentive [ph] to stimulate the economy. These measures will slowly have a positive impact on the slowdown trend in the Chinese economy. Furthermore, the recent dynamics on the China U.S trade dilution [ph] provide both these [indiscernible] measures will be reversed and [indiscernible] in the future. China's National Development and Reform Commission has announced monetary incentives to promote the purchase of autos, especially in rural areas. The incentives included subsidy for the purchase of newer less polluting cars with engines of 1.6 liters or smaller. Some state owned companies are also adding additional incentives to encourage the purchase of automobiles as the replacement cycle is coming for vehicles purchased during the boom years of 2009 to 2010. From a long-term perspective, we are well-positioned to benefit from new growth opportunities across a number of passenger vehicle segments as well as in the commercial vehicle market in China. We look forward to expanding our OEM customers outside of China as well as including additional Tier 1 vehicle manufacturers. Our joint ventures are developing and improve market position in their markets including EPS, autonomous steering and evolving steering technologies. We remain committed to building our financial strength and generate positive cash flow from operations. Now let me review the financial results for the third quarter of 2019. In the third quarter of 2019, net income -- I’m sorry net sales were $100.5 million compared to $112.1 million in the same quarter of 2018. The decrease in net product sales were primarily due to a change in the product mix and lower domestic sales volume due to softer demand in the Chinese domestic brand automobile market. Net product sales to North America grew 11.2% to $33.7 million compared to $30.3 million for the same quarter in 2018. The increase in export sales to North America was primarily due to higher sales of the Company's more advanced products. Net sales for the Company's electric power steering, EPS products were $18.5 million, or 18.4% of net sales. Gross profit was $17.3 million in the third quarter of 2019, compared to $15.4 million in the third quarter of 2018. Gross margin was 17.2% compared to 13.7% for the same period of 2018, mainly due to changes in the product mix. Selling expenses were $3.6 million in the third quarter of 2019, compared to $3.4 million in the third quarter of 2018. Selling expenses represented 3.6% of net sales in the third quarter of 2019, compared to 3% in the third quarter of 2018. General and administrative expenses, G&A, were $4.4 million in the third quarter of 2019, compared to $3.7 million in the same quarter of 2018. The increase was primarily due to higher professional fees. G&A expenses represented 4.4% of net sales in the third quarter of 2019 compared with 3.3% in the third quarter of 2018. Research and development expenses were $6.1 million in the third quarter of 2019, compared to $7 million in the third quarter of 2018. R&D expenses represented 6.1% of net sales in the third quarter of 2019 and that compares with also 6.1% in the third quarter last year. The lower R&D expenses were mainly due to more strict cost controls over R&D expenditures. Net financial income was $1.6 million in the third quarter of 2019 compared to net financial income of $0.8 million in the third quarter of 2018, which was mainly due to the increase in foreign exchange gain as a result of significant appreciation of U.S dollar against the RMB. Income from operations was $4.3 million in the third quarter of 2019, compared to $1.8 million in the same quarter of 2018. The increase was mainly due to increased gross profit and higher gross margin. Income before income tax expenses and equity in earnings of affiliated companies was $5.3 million in the third quarter of 2019, compared to $1.8 million in the third quarter of 2018. The increase in income before income tax expenses and equity in earnings of affiliated companies was mainly due to higher operating income in the third quarter of 2019 compared with the third quarter of 2018. Net income attributable to parent company's common shareholders was $4.2 million in the third quarter of 2019, compared to net income attributable to parent company's common shareholders of $0.4 million in the third quarter of 2018. Diluted earnings per share were $0.13 in the third quarter of 2019, compared to diluted earnings per share of $0.01 in the third quarter of 2017. The weighted average number of diluted common shares outstanding was 31,492,035 in the third quarter of 2019, compared to 31,645,556 in the nine months -- I’m sorry, in 2018. Now, we will go over nine months financial highlights. Net sales for the first nine months of 2019 were $315.5 million, compared to $371.9 million in the first nine months of 2018. Nine-month gross profit was $46.5 million, compared to $54 million in the corresponding period last year. Nine-month gross margin was 14.8%, compared to 14.5% for the corresponding period in 2018. For the nine months ended September 30, 2019, gain on other sales amounted to $4.9 million, compared to $3 million for the corresponding period in 2018. Income from operations was $8.1 million compared to $7 million in the first nine months of 2018. Operating margin was 2.6%, compared to 1.9% for the corresponding period of 2018. Net income attributable to parent company's common shareholders was $8.2 million compared with $5.5 million in the corresponding period last year. Diluted earnings per share were $0.26 in the first nine months of 2019, compared to diluted earnings per share of $0.17 for the corresponding period in 2018. Now we will go over some balance sheet items and cash flow items. As of September 30, 2019, total cash, cash equivalents and pledged cash deposits were $102.3 million. Total accounts receivable including notes receivable were $234.3 million. Accounts payable including notes payable were $176.7 million, and short-term loans were $56 million. Total parent company stockholders' equity was $304.9 million as of September 30, 2019, compared to $304.8 million as of December 31, 2018. Net cash provided by operating activities was $4.1 million in the first nine months of 2019 compared with net cash provided by operating activities of $9 million in the first nine months of 2018. Payments to acquire property, plant and equipment were $23.6 million compared with $24.3 million in the first nine months of 2018. Approximately 96,000 shares of common stock were repurchased during the third quarter of 2019, and the Company expects to repurchase more shares in the future. For the business outlook, business -- management has reiterated its revenue guidance for the full-year 2019 to $430 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 are now ready to begin the Q&A. Operator?
