China Automotive Systems (CAAS) Q4 2021 Earnings Call Transcript

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China Automotive Systems (CAAS -1.65%)
Q4 2021 Earnings Call
Mar 30, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the China Automotive Systems' fourth quarter and fiscal year 2021 Conference Call. [Operator instructions] It is now my pleasure to turn the floor over to your host, Kevin Theiss. Sir, the floor is yours.

Kevin Theiss -- Manager, Investor Relations

Thank you. Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2021 fourth quarter and full year 2021 conference call. Joining us today are our chairman, Chen; 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 will 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 the 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 and for the year-end December 31, 2021, 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 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 further unforeseen delay in our operations of the manufacturing, delivery, and assembly process 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 full year results for the period ending December 31, 2021. Management will then conduct a question-and-answer session.

The following 2021 fourth quarter financial results are unaudited and the year results are audited and all results are reported using U.S. GAAP accounting. For the purposes of our call today, I'll review the financial results in U.S. dollars.

We will begin with a review of the recent dynamics of the Chinese economy, the automobile industry, and China Automotive's market position. China's GDP growth slowed to 4% in the fourth quarter of 2021 compared with a year ago. A number of concerns affected the growth rate in the fourth quarter, including lower real estate and construction activities, new outbreaks of COVID-19 causing supply interruptions, and lower retail spending. Manufacturing slowed and momentary power shortages arose and supply of automobile computer chips was unable to meet demand.

In this challenging environment, Chinese Automobile sales declined year over year each month in the fourth quarter of 2021. According to statistics from the China Association of Automobile Manufacturers, CAAM, passenger vehicle sales in October were down 5% year over year, November sales by 4.7%, and down by 7.1% in December compared with 2020. Chinese commercial vehicle sales declined at a higher rate each month. Sales of commercial vehicles in October declined by 29.7% year over year with truck sales down by 31.8%.

In November, commercial vehicle sales were down by 30.3%, with truck sales down 31.9%. On December 31, sales decreased by 20% with truck sales declining by 21%. Reflecting the auto industry headwinds, our sales in the fourth quarter of 2021 declined but by only 5.2% to $138.8 million from $146.5 million in the fourth quarter of 2020. Fourth quarter income from operations rebounded to profitability compared to a loss a year ago.

We reduced our selling expenses, and the significant decline in general and administrative expenses in the fourth quarter of 2021 was due to a onetime nonrecurring expected credit loss provision of $6.4 million related to a customer's bankruptcy reorganization proceeding in the fourth quarter of 2020. Net income attributable to company's common shareholders was $5 million or diluted net income per share of $0.16 in the fourth quarter of 2021 compared to a net loss in the fourth quarter last year and a net loss in the third quarter of 2021. For the full year, CAAM statistics reveal that overall sales of automobiles in China grew by only 3.8% year over year. Sales of Chinese passenger vehicles were 6.5% higher in 2021 than in 2020.

As the day in sales rose by 7.1%, SUV sales increased by 6.8%, MPV sales were 0.1% higher, and crossover vehicle sales grew by 0.8%. Sales in the commercial vehicle markets declined by 6.6% in 2021 as the bus industry sales increased by 12.6%, but the larger truck market declined by 8.5%. Full year 2021 sales of commercial vehicles were impacted by the government-mandated national implementation of the more expensive and stricter National VI emission standard in July of 2021. This new emission standard created a significant prebuy of National V vehicles followed by a downturn in sales of new trucks in the second half of 2021.

Our net sales in 2021 increased by 19.3% to $498 million as our passenger vehicle steering gear sales increased by 26.5% year over year. Our sales commercial vehicle markets suffered a decrease of 16%. North America revenues grew by 10.4%, and our Brazilian operation also had strong growth. Sales to our Chery Automobile customer grew by 90.2%, our advanced hydraulic product sales rose by 7.6%.

And our electric power steering, EPS, revenue increased 86%, including a 53.1% gain in our Henglong KYB subsidiary in 2021. EPS sales represented 23.2% of total revenues compared with 14.8% a year ago. Great Wall, Chery Auto, Beijing Auto, and JAC Motors began using our EPS products in 2021. We introduced a new proprietary EPS product in 2021, which integrates and communicates with the vehicle's main data to create lane-keeping assist, LKA; automatic parking assist, APA; lane centering, LCK; and traffic jam assist, TJA functions as part of the company's Advanced Driver Assistance Systems, ADAS.

This system is an industry milestone for the first time a Chinese domestic steering producer drove the entire product development cycle in-house. To further enhance our NEV products, we purchased a 40% interest in Sweden's Sentient AB, a world leader in steering and vehicle control software and hardware, specialized in advanced steering functions, vehicle motion control, and the fast-growing autonomous driving market. To enhance our position in the European NEV market, we introduced new steering for Alfa Romeo's first luxury plug-in hybrid SUV, the model 2021 Tonale. The sophisticated technology in European vehicles present new targets for our advanced NEV steering products.

Our wholly owned subsidiary, Hubei Henglong Automotive Systems Group, received the ISO26262:2018 ASIL-D, which is -- this is the automotive safety integrity level certification from SGS TUV. ISO26262:2018 ASIL safety standards range from A to D with D being the most stringent safety standard. Our D certification provides further evidence to our technology proficiency and separates us from many peer companies. Net sales were 19.2% higher year over year in 2021.

Gross margin increased to 14.5% with greater sales of advanced hydraulic and specialty EPA product sales. We returned to profitable operations with a loss -- compared with a loss last year as operating expenses grew by only 4.6% despite a nearly 10% increase in research and development spending. Net cash flow from operating activities was $28.3 million in 2021, and total cash and cash equivalents, pledged cash, and short-term investments were $161.3 million or approximately $5.23 per share. Our EPS product line sales grew as more technologies were added and Sentient AB will add even more advanced technology to enhance the capability of our NEV products in the future.

The Chinese economy and automobile industry still have challenges ahead, but passenger vehicle sales have risen in the first two months of 2022. Banks have lowered rates and government policies are now more growth-oriented. We use our strong financial resources and advanced product to grow our market presence with global OEMs and markets around the world. Now let me review the financial results in the fourth quarter of 2021.

In the fourth quarter of 2021, net sales decreased by 5.3% to $138.8 million, compared to $146.5 million in the same quarter of 2020. The net sales decrease was mainly due to a change in the product mix and lower demand for automobiles in the fourth quarter of 2021 compared with the fourth quarter of 2020. Gross profit was $19.7 million in the fourth quarter of 2021, compared to $22.8 million in the fourth quarter of 2020. Gross margin in the fourth quarter of 2021 was 14.2%, compared to 15.6% in the fourth quarter of 2020, primarily due to lower sales volume and a change in product mix.

Gain on other sales was $1.8 million in the fourth quarter of 2021, compared to $1.4 million in the fourth quarter of 2020. Selling expenses were $3.4 million in the fourth quarter of 2021, compared to $5.6 million in the fourth quarter of 2020. Selling expenses represented 2.4% of net sales in the fourth quarter of 2021, compared to 3.8% in the fourth quarter of 2020. General and administrative expenses, G&A expenses, were $7.6 million in the fourth quarter of 2021, compared to $14.3 million in the same period in 2020.

G&A expenses represented 5.5% of net sales in the fourth quarter of 2021, compared to 9.8% of net sales in the fourth quarter of 2020. The significantly higher G&A expenses in the fourth quarter of 2020 were mainly attributable to a onetime nonrecurring expected credit loss provision of $6.4 million related to a customer's bankruptcy reorganization proceeding. Research and development expenses, R&D, were $9.9 million in the fourth quarter of 2021, compared to $8.3 million in the fourth quarter of 2020. R&D expenses represented 7.1% of net sales in the fourth quarter of 2021, compared to 5.7% in the fourth quarter of 2020.

Higher R&D expenses were mainly related to higher investments in EPS and NEV products. Income from operations was $0.6 million in the fourth quarter of 2021, compared with a loss from operations of $4 million in the fourth quarter of 2020. Increase in the income from operations in the fourth quarter of 2021 was mainly due to a 25.9% year-over-year decrease in total operating expenses as both selling and G&A expenses declined significantly. Interest expense was $0.5 million in the fourth quarter of 2021, compared to $0.4 million in the fourth quarter of 2020.

Financial expense was $1.5 million in the fourth quarter of 2021, compared with $2 million in the fourth quarter of 2020. Loss before income tax expense and equity in earnings of affiliated companies was $0.4 million in the fourth quarter of 2021, compared to a loss of $5.7 million in the fourth quarter of 2020. Income tax expense was $0.7 million in the fourth quarter of 2021, compared to an income tax expense of $1.9 million for the fourth quarter of 2020, mainly due to a change in the valuation allowance recognized in the fourth quarter of 2021. Net income attributable to parent company's common shareholders was $5 million in the fourth quarter of 2021, compared to a net loss attributable to the parent company's common shareholders of $3.2 million in the fourth quarter of 2020.

The net loss in the fourth quarter of 2020 was mainly due to a onetime nonrecurring $6.4 million expected credit loss provision for a customer's bankruptcy reorganization, net of minority interest. Diluted per share -- I'm sorry, diluted income per share was $0.16 in the fourth quarter of 2021 compared to diluted loss per share of $0.10 in the fourth quarter of 2020. The weighted average number of diluted shares outstanding was 30,853,822 in the fourth quarter of 2021, compared to 31,851,776 in the fourth quarter of 2020. Now a review of the full year 2021 highlights.

Net sales increased by 19.3% to $498 million in 2021, compared to $417.6 million in 2020. The increase was mainly due to the recovery in net sales in the first half of 2021 from the COVID-19 pandemic's impact on automobile sales in China and North America. In 2021, sales of hydraulic products increased by 7.6% year over year, while total sales of EPS systems increased by 86% year over year. EPS sales represented 23.2% of total revenue in 2021, compared with 14.8% in 2020.

Net sales of vehicle steering systems to the company's North American customers increased by 10.4% year over year in 2021. Gross profit in 2021 increased 30.4% to $72.1 million, compared to $55.3 million in 2020. The gross margin increased to 14.5% from 13.3% in 2020, mainly due to changes in the product mix. Gain on other sales amounted to $4.4 million, generally consistent with $4.3 million in 2020.

Selling expenses were $18.3 million in 2021, compared to $14.5 million in 2020, mainly due to higher transportation expenses. Selling expenses represented $3.7 million in net sales in 2021 compared to $3.5 million in 2020. G&A expenses declined 11.6% to $24.4 million in 2021 from $27.6 million in 2020. The decrease was mainly due to a decreased provision of allowance for doubtful accounts related to one customer's bankruptcy reorganization in November 2020, which was partially offset by higher personnel costs.

G&A expenses represented 4.9% of net sales in 2021, compared to 6.6% of net sales in 2020. R&D expenses were $28.2 million in 2021, compared to $25.7 million in fiscal year 2020. The increase was primarily due to higher investment in EPS products. R&D expenses were 5.7% of net sales in 2021, compared to 6.2% of net sales in 2020.

Income from operations was $5.5 million in 2021, compared to a loss from operations of $8.1 million in 2020. The income was mainly due to a 30.4% increase in gross profit with an offsetting impact of a 4.6% increase in total operating expense in 2021. The loss in 2020 was primarily due to lower net sales and a onetime nonrecurring expected credit loss provision related to a customer's bankruptcy reorganization. Interest expense was $1.4 million in 2021, a slight decline from the $1.6 million in 2020.

Net financial expense was $2.4 million in 2021, compared with $4.9 million in 2020, primarily due to a decrease in foreign exchange losses. Income before income tax expenses and equity in earnings of affiliated companies was $8.4 million, compared to a loss before income tax expenses and equity in earnings of affiliated companies of $12.2 million in fiscal year 2020. The change was primarily due to generating income from operations and lower net financial expenses in 2021. Net income attributable to parent company's shareholders was $11.1 million in 2021, compared to net loss attributable to parent company's common shareholders of $5 million in 2020.

The loss in 2020 was mainly due to the lower sales and a onetime nonrecurring $6.4 million expected credit loss provision from a customer's bankruptcy, net of minority interest. Diluted net income per share was $0.36 in 2021, compared to diluted loss per share of $0.16 in 2020. The weighted average number of diluted common shares outstanding was 30,855,431 in 2021, compared to 31,077,196 in 2020. Next, we'll review a few balance sheet items.

As of December 31, 2021, total cash, cash equivalents, pledged cash, and short-term investments were $161.3 million. Total accounts receivable, including notes receivable, were $210.3 million. Accounts payable, including notes payable, were $228 million and short-term bank loans were $47.6 million. Total company stockholders' equity was $320 million as of December 31, 2020, compared to $303.2 million as of December 31, 2020.

Net cash flow from operating activities was $28.3 million in 2021, compared with $57.4 million in 2020. Cash paid to acquire property, plant and equipment and land use rights was $9.3 million in 2021, compared with $15.8 million in 2020. The business outlook. Management provides revenue guidance for fiscal year 2022 of $510 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 ready to begin the Q&A session.

Questions & Answers:

Operator

Certainly. [Operator instructions] Your first question for today is coming from William Gregozeski. Please announce your affiliation then pose your question.

William Gregozeski -- Greenridge Global -- Analyst

Hey, guys. Did you say that sales in Brazil were up 90% in 2021?

Unknown speaker

Your question is sales in Brazil up 90%? You asked why sales up, right?

William Gregozeski -- Greenridge Global -- Analyst

I guess I wanted to confirm that you guys said it was up 90% and then my follow-ups were going to be, how much is that in dollars? And then what are the expectations for that going forward?

Unknown speaker

[Foreign language] Yes. In terms of dollars -- the revenue in Brazil, our revenue in Brazil did experience a robust growth in 2021. In the amount -- the total amount from our Brazil business in 2021 was approximately RMB 164 million or $26 million. That's mainly attributable to our gross in new key accounts.

We signed some large customers. And looking into 2022, we believe we will have further growth in 2022.

William Gregozeski -- Greenridge Global -- Analyst

OK. Great. Great. Did the -- on the EPS products, were the margins -- did the margins continue to rise in the fourth quarter? And is that still expected to see margin improvement going through 2022?

Unknown speaker

[Foreign language] Yes. The answer is, yes. EPS margin will continue to improve and increase in 2022. We foresee a 20% to 30% volume increase in 2022 and mainly due to very strong demand.

And so clearly, demand outstripped the supply on the EPS product. So that gave us some good advantage in terms of pricing. And also the -- with the growth of the volume, we are achieving better economy of scale. So that will also help with our gross margin.

William Gregozeski -- Greenridge Global -- Analyst

OK. Great. What is the -- what is management's outlook for the 2022 year in China alone, the domestic market?

Unknown speaker

[Foreign language] OK. So overall, we see the overall Chinese auto market will experience a slight increase in 2022. Despite the volatility, which we expect there will be volatility throughout the course of the year. For example, we are already seeing the news of the lockdown in this large city like Shanghai.

However, we see Chinese governments are rolling out more favorable policy to stimulate the economy, such as cutting the interest rate and there are talks about lowering the taxes and also new policy to help with the property market. And so overall, we think the government's policy will offset the challenges and so will give us, the whole auto industry, a more net-net positive push for 2022. That's why we see a slight increase in 2022 from a year before.

William Gregozeski -- Greenridge Global -- Analyst

OK. Great. And last question is, can you provide a little more detail about the $5.9 million equity in earnings of affiliated gain in the fourth quarter?

Unknown speaker

[Foreign language] OK. That gain was associated with our investment. We have announced in the past years, we are -- we invested at three investment funds. Some are early stage venture funds specialized in automotive space.

One of the portfolio company -- there are a number of companies -- a few companies went public since last year, and they've done very well. In particular, this one company from the city of Chongqing then went to the tech board. They went IPO on the tech board. And their main business is in the hydrogen technology for the automotive sector, which is a very, very hot sector.

So the stock has experienced a very strong growth since their IPO. And so we are indirectly benefiting from it.

William Gregozeski -- Greenridge Global -- Analyst

OK. Perfect. Thank you, guys.

Unknown speaker

Thank you.

Operator

[Operator instructions] There are no questions in queue at this time.

Kevin Theiss -- Manager, Investor Relations

OK. We want to thank everybody for joining us today, and please be safe. And we look forward to talking to you in the future.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Kevin Theiss -- Manager, Investor Relations

William Gregozeski -- Greenridge Global -- Analyst

Unknown speaker

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