China Automotive Systems, Inc. (CAAS) Earnings Call Transcript

Good day, everyone. Welcome to the China Automotive Systems Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Kevin Theiss, Investor Relations. The floor is yours.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2026 First Half Results Conference Call. Joining us today is 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, Results of Operations in the company's Form 20-F annual report for the year ended December 31, 2025, 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 impact on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that 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 shipment of those 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 half of 2023 unaudited results, which are reported using U.S. GAAP accounting. Management will then conduct a question-and-answer session. For the purposes of today's call, I will review the financial results in U.S. dollars. We will begin with a brief overview of our financial performance in the first half of 2026 and recent dynamics of the Chinese economy and automobile industry and our market position. For the 6 months ended June 30, 2026, we had growth across the board in our major operating units, with 3 operating units achieving net sales growth exceeding 40% in the first 6 months of 2026. These results offset the 5.1% decline in our Brazilian subsidiary. Net sales increased by 20.1% to a 6-month record of $412.5 million, with 6-month records in gross profits, which increased by 49.7% year-over-year; income from operations growth of 100.4% year-over-year, and diluted earnings per share growth by 98% year-over-year. Our growth contrasts with China's automotive industry performance, as data from the China Association of Automobile Manufacturers (CAAM) disclosed that vehicle production and sales fell 4% and 4.1% year-over-year, respectively, in the first half of 2024. Passenger vehicle sales fell by approximately 6% in the first half of 2026 as retail sales of ICE vehicles declined. The sales of NEV vehicles increased by 7.3% year-over-year and reached 49.6% of all new vehicle sales, and battery EV sales represented approximately 67% of total NEV sales. Rising fuel prices and a reduction in government EV subsidies and subsidies in China impacted vehicle demand. The Chinese economy was also a factor in lower vehicle growth, as China's gross domestic product grew by a sluggish 4.7% year-over-year in the first half of 2026. The growth slowed to 4.3% in the second quarter. The Chinese economy witnessed weak household consumption, an 18% year-over-year contraction in property investment, and weak wage growth. However, total exports remained strong with a 17.6% advance in the first half of 2026, including strong growth of NEV vehicles. Nevertheless, China is facing increasing uncertainty in foreign markets for the future. In 2025, we introduced a number of innovations, including our second-generation IRCB, an intelligent electrohydraulic circulating ball power steering for use in heavy-duty vehicles. The launch of our active rear wheel steering, produced our RPS steering system for Magic convento, and developed a high-torque 115-watt platform electric motor. These advancements help build our sales and marketing in specific markets in 2026. In the first 6 months of 2026, the first batch of our EPS steering was shipped to a global automaker's European division and is featured in 2 new European vehicle models. Other vehicle models are targeted to adopt this advanced steering. Annual sales volume is expected to reach 300,000 units. In addition to improving our sales and market presence in South America and Europe, we continue to build our strategic cooperation agreement with KYBUMW for a new regional manufacturing and supply system focused in Malaysia. With our financial strength, we were able to invest $20.8 million in research and development as well as $30.4 million in property, plant and equipment in the first half of 2026. Net cash provided by operating activities was $47.8 million in the first half of 2026. Cash, cash equivalents, and pledged totaled $155.6 million, and working capital was nearly $249.8 million. Despite these investments, our free cash flow was $14.3 million in the first 6 months of 2026. Our new 2026-2030 strategic plan is focused on deepening local presence in global markets, developing additional cutting-edge steering technologies, penetrating new product markets, and 0 defect quality with platform-based lean automated manufacturing systems. These strategies will lead to higher sales and greater market share in the global automotive marketplace. With these changes, we will grow our market position as a Tier 1 supplier to large global OEM customers in North America, Europe, Asia, and South America. Now let me review the financial results in the first 6 months of 2026. Net sales increased by 20.1% year-over-year to $412.5 million compared to $343.3 million in the first half of 2025. The net sales increase is mainly due to higher sales of electric power steering and the appreciation of the RMB against the U.S. dollar. Net sales of traditional steering products and parts increased 11.2% year-over-year to $219.6 million in the first half of 2026. Net sales of EPS products rose 32.2% year-over-year to $192.3 million from $145.9 million for the same period in 2025. EPS product sales grew to 46.8% of the total net sales for the first half of 2026 compared to 42.5% for the same period in 2025. Net sales in our Henglong subsidiary, the largest contributor to sales, rose by 25.3% to $205.7 million compared with $164.2 million for the first half of 2025. Sales to North American customers increased by 3.5% to $59.2 million compared to $57.2 million in the first half of 2025, primarily due to higher demand for passenger vehicle products by one customer. Sales in Brazil declined by 5.1% in the first half of 2026 to $32.6 million from $34.4 million in the first half of 2025. Julong's net sales to the Chinese commercial vehicle market increased 42.9% year-over-year to $61.7 million, and our Wuhu subsidiary's net sales to Cherry Automotive Company Limited rose by 40.3% year-over-year to $22.7 million in the first half of 2026. Gross profit grew by 49.7% year-over-year to $88.5 million from $59.1 million in the first half of 2025. Gross profit margin increased to 21.5% in the first half of 2026 from 17.2% in the first half of 2025. The increase in gross profit was mainly due to product volume gains and greater sales of relatively higher-margin products. Net gain on other sales increased to $2.1 million in the first half of 2026 compared to $1.6 million in the first half of 2025. Selling expenses grew by 28% to $11.9 million in the first 6 months of 2026 compared with $9.3 million in the same period last year. Higher selling expenses were a result of sales and volume gains; selling expenses represented 2.9% of net sales in the first half of 2026 compared with 2.7% in the first half of 2025. Administrative expenses increased 12.6% to $14.6 million compared to $13 million, primarily due to higher office expenses. G&A expenses represented 3.5% of net sales in the first 6 months of 2025 compared to 3.8% of net sales in the same period in 2025. Research and development expenses, R&D, increased by 23.6% to $20.8 million in the first 6 months of 2026 compared with $16.8 million in the first half of 2025. R&D expenses represented 5% of net sales compared to 4.9% in the first 6 months of 2025. Research and development programs include upgrading performance and quality of current products, customizing products for specific customers as well as further developing EPS and hydraulic steering systems, automotive intelligence and software technologies, automotive electronics, high polymer materials and manufacturing technologies. Other income net was $6.9 million in the first 26 weeks compared to the same period last year. This increase is mainly due to the decrease in the loss on disposal of property, plant and equipment. Income from operations climbed 100.4% to $43.3 million in the first 6 months of 2026 from $21.6 million in the first half of 2025. This gain reflected greater sales, higher gross profit margins, and effective cost controls. Interest expense was stable at $0.8 million in the first half of 2026 and 2024. Net financial expense was $2.9 million in the first half of 2026 compared to net financial income of $3.3 million in the first half of 2025. This change in net financial income was primarily due to foreign exchange volatility. Income before income tax expenses and equity and earnings of affiliated companies increased by 71.3% to $5 million in the first half of 2026 compared to $47.2 million in the same period in 2025. The change in income before income tax expenses and equity earnings of affiliated companies was mainly due to higher income from operations and higher net other income in the first half of 2026. Income tax expense was $9.9 million in the first half of 2026 compared to $7 million in the first half of 2025. The increase in income tax expense was primarily due to higher income before income tax expenses in the first half of 2026. The effective tax rate was 21.3% in the first 6 months of 2026 compared with 25.7% in the same period. Net income attributable to the parent company's common shareholders increased by 98.8% to $29.3 million in the first 6 months of 2026 compared to net income attributable to the parent company's common shareholders of $14.7 million in the first half of 2025. Diluted earnings per share were $0.97 in the first half of 2026 compared to $0.49 in the same period in 2025. The weighted average number of diluted common shares outstanding was 30,170,702 in each of the 2026 and 2025 6-month periods. Now, I'll provide some balance sheet and other financial highlights. Cash and cash equivalents and pledged cash were $155.6 million, or approximately $5.16 per share, as of June 30, 2026. Net working capital was $249.8 million. Total accounts receivable, including notes receivable, were $362.4 million. Accounts payable, including notes payable, were $361.5 million, and short-term loans were $75 million. Total parent company stockholders' equity was $443.8 million as of June 30, 2026, compared to $401.3 million as of December 31, 2025. Net cash provided by operating activities was $47.8 million, with payments to acquire property, plant and equipment of $30.4 million. Business outlook. Management has increased its revenue guidance for the fiscal year 2026 to $850 million from $810 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 go to the Q&A.

[Operator Instructions] First question is coming from Jonathan [indiscernible]

My question is, with the company's electric power steering now entering the South American market, how will it impact the company's operations in South America? [Foreign Language]

[interpreted] Yes. So for your question, the EPS product, electric power steering product, is now in South America. We are very excited about the prospect in that market. Our plan is about 300,000 units for the market for that particular line for building. Our engineers are working closely on the ground to get things ready. We are foreseeing that the production or the batch production will start in 2028. That being said, the general assembly line for the EPS product is on track, going there now being set up. Once it's up and running, we are seeing about a $40 million revenue impact. That will be roughly a 50% increase from the current run rate for the revenue in the South America market.

Your next question is coming from Michael Fiedler.

With the current financial resources, what are management's thoughts on cash dividends and buybacks in the near future? [Foreign Language]

[Interpreted] In terms of the shareholder return program, we are currently in discussion at a very high level at the Board level. But in the meantime, I just want you to be mindful that as we're expanding our global footprint, growing rapidly from top and bottom, we also are increasing CapEx. We have been increasing CapEx in the last year, and we're seeing higher CapEx this year and next year as well. So we just want you to be aware that the cash is being put back into the operation and to generate further return for shareholders. But that being said, we are at the Board level considering options to enhance shareholder value.