China Automotive Systems, Inc. (NASDAQ:CAAS) Q3 2022 Earnings Conference Call November 14, 2022 8:00 AM ET Company Participants Kevin Theiss - Investor Relations Jie Li - Chief Financial Officer Conference Call Participants William Gregozeski - Greenridge Global Operator Good morning ladies and gentlemen and welcome to the China Automotive Systems' Third Quarter 2022 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Kevin Theiss, Investor Relations. Kevi ...

[Part I — Financial Information](index=4&type=section&id=Part%20I%20%E2%80%94%20Financial%20Information) This part presents the company's unaudited financial statements, management's analysis, and market risk disclosures [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited condensed consolidated financial statements show significant net income growth driven by higher sales and favorable foreign exchange movements [Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income](index=4&type=section&id=Condensed%20Unaudited%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) The company reported a significant turnaround in Q3 2022 net income, driven by a 26.8% increase in net product sales Key Operating Results (Three Months Ended Sep 30) | Financial Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | | Net product sales | $137,207 | $108,231 | | Gross profit | $20,918 | $16,792 | | Income from operations | $4,887 | $591 | | Net income/(loss) attributable to parent | $7,470 | $(317) | | Diluted EPS | $0.24 | $(0.01) | Key Operating Results (Nine Months Ended Sep 30) | Financial Metric | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | | Net product sales | $400,764 | $359,176 | | Gross profit | $58,363 | $52,369 | | Income from operations | $10,549 | $4,870 | | Net income attributable to parent | $16,839 | $6,089 | | Diluted EPS | $0.55 | $0.20 | [Condensed Unaudited Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Unaudited%20Consolidated%20Balance%20Sheets) Total assets and liabilities decreased as of September 30, 2022, compared to the end of the previous fiscal year Key Balance Sheet Items (in thousands) | Balance Sheet Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $100,712 | $131,695 | | Total current assets | $488,180 | $501,380 | | Total assets | $674,893 | $716,762 | | **Liabilities & Equity** | | | | Total current liabilities | $334,775 | $351,816 | | Total liabilities | $357,252 | $379,321 | | Total stockholders' equity | $317,066 | $336,888 | [Condensed Unaudited Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities improved significantly, while investing activities saw increased cash usage for the nine-month period Summary of Cash Flows (in thousands) | Cash Flow Activity (Nine Months Ended) | Sep 30, 2022 | Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $31,677 | $(5,867) | | Net cash used in investing activities | $(42,662) | $(2,188) | | Net cash used in financing activities | $(546) | $(6,020) | | Net decrease in cash, cash equivalents and pledged cash | $(27,754) | $(13,060) | [Notes to Condensed Unaudited Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Unaudited%20Consolidated%20Financial%20Statements) Notes detail customer concentration, a significant long-term investment in Sentient AB, and segment sales performance - In Q3 2022, the company's five largest customers accounted for **41.9%** of consolidated net product sales, with one single customer representing **17.8%** of sales[41](index=41&type=chunk) - The company completed a transaction in March 2022 to purchase **40%** of Sentient AB's share capital for approximately **$24.5 million**, with **$21.62 million** paid as of September 30, 2022[48](index=48&type=chunk) Net Product Sales by Segment (Q3, in thousands) | Segment | Net Product Sales (Q3 2022) | Net Product Sales (Q3 2021) | | :--- | :--- | :--- | | Henglong | $62,590 | $39,937 | | Jiulong | $16,986 | $17,127 | | Hubei Henglong | $29,525 | $31,023 | | Henglong KYB | $36,995 | $19,095 | | Brazil Henglong | $11,510 | $7,576 | | **Total** | **$137,207** | **$108,231** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes strong performance to increased electric power steering (EPS) product sales and favorable foreign exchange gains [Results of Operations - Three Months Ended September 30, 2022 and 2021](index=34&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20September%2030%2C%202022%20and%202021) Q3 2022 net sales rose 26.8% driven by EPS products, while net income was boosted by significant foreign exchange gains - Net product sales increased by **$29.0 million (26.8%)** YoY in Q3 2022, primarily due to increased sales of electric power steering (EPS)[125](index=125&type=chunk) - Sales of EPS products grew by **$15.4 million (52.4%)** and accounted for **32.6%** of net sales in Q3 2022, up from 27.2% in Q3 2021[125](index=125&type=chunk) - Research and development expenses increased by **$3.8 million (65.4%)** due to increased R&D activities for new projects[143](index=143&type=chunk) - Net financial income was **$4.8 million**, compared to a net expense of $0.8 million in the prior year, primarily due to foreign exchange gains[146](index=146&type=chunk) [Results of Operations - Nine Months Ended September 30, 2022 and 2021](index=39&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%20Ended%20September%2030%2C%202022%20and%202021) Net sales grew 11.6% over nine months, with net income increasing 176.5% due to EPS sales and foreign exchange gains - Net product sales for the nine-month period increased by **$41.6 million (11.6%)** YoY, with EPS sales growing by **$40.8 million (52.8%)**[151](index=151&type=chunk) - Gross margin for the nine-month period was stable at **14.6%**, consistent with the same period in 2021[167](index=167&type=chunk) - Net income attributable to parent company's common shareholders increased by **176.5% to $16.8 million** for the nine months ended September 30, 2022[172](index=172&type=chunk) [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained solid liquidity with increased working capital and significantly improved operating cash flow - As of September 30, 2022, the company had working capital of **$153.5 million**, an increase of **2.6%** from December 31, 2021[173](index=173&type=chunk) - The company has comprehensive credit facilities totaling **$143.7 million**, with **$64.7 million** used as of September 30, 2022[179](index=179&type=chunk)[180](index=180&type=chunk) - Net cash provided by operating activities was **$31.7 million** for the first nine months of 2022, a significant improvement from a $5.9 million use of cash in the prior-year period[194](index=194&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes to market risk disclosures were reported since the last annual report - No material changes to market risk disclosures were reported for the period[197](index=197&type=chunk) [Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls over financial reporting were effective as of September 30, 2022 - The company's management concluded that disclosure controls and procedures were **effective** as of September 30, 2022[198](index=198&type=chunk) - **No material changes** to the company's internal control over financial reporting occurred during the third quarter of 2022[199](index=199&type=chunk) [Part II — Other Information](index=53&type=section&id=Part%20II%20%E2%80%94%20Other%20Information) This part details legal proceedings, risk factors, share repurchases, and filed exhibits [Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any pending or threatened legal proceedings - The company is **not involved** in any pending or threatened legal proceedings[200](index=200&type=chunk) [Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) Key risks include Chinese government oversight, potential new overseas listing regulations, and evolving data security requirements - The business is subject to **significant oversight and discretion from the Chinese government**, which may intervene in operations at any time[201](index=201&type=chunk) - The company may be subject to **new filing requirements** with the China Securities Regulatory Commission (CSRC) for future overseas offerings[206](index=206&type=chunk)[207](index=207&type=chunk) - New **cybersecurity and data transfer regulations** from the Cyberspace Administration of China (CAC) could impose additional compliance burdens[216](index=216&type=chunk)[220](index=220&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=59&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 382,418 shares in Q3 2022 under its approved share repurchase program - On March 29, 2022, the Board approved a share repurchase program for up to **$5.0 million** of common stock through March 30, 2023[227](index=227&type=chunk) Share Repurchase Activity (Q3 2022) | Period (2022) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July | 85,633 | $2.8705 | | August | 128,525 | $3.4589 | | September | 168,260 | $4.0479 | | **Total Q3** | **382,418** | **$3.5863** | [Exhibits](index=60&type=section&id=Item%206.%20Exhibits) This section indexes the exhibits filed with the Form 10-Q, including CEO and CFO certifications

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