China Automotive Systems(US:CAAS)2024-03-28 12:04PART I Item 1. Business CAAS manufactures and sells power steering systems and related automotive parts through its subsidiaries in China and Brazil, serving over sixty OEMs - CAAS is a Delaware holding company primarily manufacturing power steering systems and related automotive parts in China and Brazil6824 - The company serves over sixty vehicle manufacturers, including major Chinese and international OEMs22 - CAAS's strategic plan emphasizes market expansion, brand recognition, quality control, cost efficiency, R&D, and strategic acquisitions43444546 Top 5 Customers by Percentage of Total Revenue (2023) | Name of Major Customers | Percentage of Total Revenue in 2023 (%) | | :------------------------------ | :---------------------------------- | | Stellantis N.V. | 17.2 | | BYD Auto Co., Ltd. | 6.4 | | Hubei Hongrun Intelligent System Co., Ltd. | 6.1 | | Mahindra & Mahindra Ltd | 5.5 | | Chery Automobile Co.,Ltd. | 5.2 | - R&D expenditures were $29.2 million in 2023, with newly developed products accounting for 33.8% of total sales60 Chinese Automobile Industry Output and Sales Volume Growth (2023 vs. 2022) | Category | Output Growth (YoY, %) | Sales Volume Growth (YoY, %) | | :----------------- | :------------------ | :------------------------ | | Passenger Vehicles | 9.7 | 10.6 | | Commercial Vehicles| 25.0 | 21.2 | Sales and Total Assets by Geographic Region (2023) | Geographic Region | Net Sales (2023, %) | Long-term Assets (2023, %) | | :------------------ | :--------------- | :---------------------- | | China | 65.1 | 98.7 | | United States | 19.3 | 0.5 | | Other Foreign Countries | 15.6 | 0.8 | | Total Consolidated | 100.0 | 100.0 | Item 1A. Risk Factors The company faces significant risks from the automotive industry's cyclical nature, rising costs, intense competition, customer dependence, and China's evolving regulatory environment - The automotive industry's cyclical nature, increasing raw material costs, and intense competition pose significant business risks727374757981 - Dependence on few large customers (top 5 accounted for 40.4% of 2023 sales) and OEM pricing pressure can materially affect operations8384 - Operating in China involves risks from government intervention, evolving regulatory policies, and legal system uncertainties293031121122131132136137142143164165166167168172173181182184185 - The company is exposed to foreign currency exchange rate fluctuations, particularly between USD and RMB, impacting operating margins127128133134135 - PCAOB's ability to inspect the company's auditor in China was resolved in December 2022, but future inability could lead to delisting from Nasdaq23144145146147148 Item 1B. Unresolved Staff Comments This section confirms the absence of any unresolved staff comments applicable to the company Item 1C. Cybersecurity The company maintains robust cybersecurity policies, conducts periodic assessments, and reports no material incidents in 2023, with board oversight - The company has established policies and processes for assessing, identifying, and managing material cybersecurity risks, including periodic assessments and employee training194195 - The board of directors oversees strategic cybersecurity risk, with regular briefings from CEO and executive management197 - No cybersecurity incidents materially affected the company's business, strategy, operations, or financial condition in 2023196 Item 2. Properties The company's headquarters are in Jingzhou City, PRC, operating numerous manufacturing facilities across China with a total area of 661,526 square meters - The company's headquarters are in Jingzhou City, Hubei Province, PRC198 Summary of Manufacturing Facilities (as of December 31, 2023) | Name of Entity | Product | Total Area (sq.m.) | Building Area (sq.m.) | Original Cost of Equipment ($ thousands) | | :------------- | :------------------------ | :----------------- | :-------------------- | :----------------------------- | | Henglong | Automotive Parts | 97,818 | 20,226 | 64,293 | | Jiulong | Power Steering Gear | 39,478 | 24,734 | 44,802 | | Shenyang | Automotive Steering Gear | 35,354 | 18,041 | 8,865 | | Chongqing | Power Steering Gear | 57,849 | 22,812 | 3,544 | | Jielong | Electric Power Steering | — | — | 7,449 | | Wuhan Chuguanjie | Electric Power Steering | 53,675 | 44,054 | 5,472 | | Henglong KYB | Automotive Steering Gear | — | — | 16,121 | | Hubei Henglong | Automotive Steering Gear | 280,254 | 78,833 | 92,493 | | Wuhu | Automotive Steering Gear | 83,705 | 27,288 | 7,550 | | Wuhu Hongrun | High Polymer Materials | — | — | 1,158 | | Total | | 661,526 | 249,695 | 251,747 | - Jielong, Henglong KYB, and Wuhu Hongrun rent their buildings from other subsidiaries199 Item 3. Legal Proceedings The company is not involved in any pending or threatened legal proceedings, nor are its directors or officers - The company is not a party to any pending or threatened legal proceedings201 - No director, officer, affiliate, or major security holder is a party adverse to the company in pending litigation201 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'CAAS,' with 32.3 million shares outstanding, and does not anticipate paying cash dividends - The company's common stock trades on the Nasdaq Capital Market under the symbol "CAAS"203 - As of December 31, 2023, 32,338,302 common shares were outstanding with approximately 60 stockholders of record206 Share Repurchase Program Activity | Year Ended December 31 | Shares Repurchased | Cash Consideration ($ thousands) | | :--------------------- | :----------------- | :--------------------- | | 2023 | 0 | 0 | | 2022 | 322,269 | N/A | - The company does not anticipate paying cash dividends in the foreseeable future, retaining earnings for operations and expansion207 Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2023) | Plan Category | Number of securities to be issued upon exercise of outstanding options (shares) | Weighted average exercise price of outstanding options ($) | Number of securities remaining available for future issuance (shares) | | :------------------------------------------ | :------------------------------------------------------------------- | :--------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | 2,200,000 | 6.26 | 1,541,150 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased by 77.8% to $37.7 million in 2023, driven by 8.8% sales growth and improved gross margin, while operating cash flow decreased Selected Financial Highlights (2023 vs. 2022, in thousands of USD) | Metric | 2023 | 2022 | Change | Change % | | :---------------------------------------------- | :--------- | :--------- | :--------- | :------- | | Net product sales | $576,354 | $529,551 | $46,803 | 8.8 | | Cost of products sold | 472,603 | 446,157 | 26,446 | 5.9 | | Net gain on other sales | 5,788 | 3,696 | 2,092 | 56.6 | | Selling expenses | 15,610 | 16,910 | (1,300) | (7.7) | | General and administrative expenses | 25,503 | 26,120 | (617) | (2.4) | | Research and development expenses | 29,181 | 36,109 | (6,928) | (19.2) | | Other income, net | 5,345 | 5,782 | (437) | (7.6) | | Interest expense | 1,021 | 1,450 | (429) | (29.6) | | Financial income, net | (4,666) | (10,753) | 6,087 | (56.6) | | Income taxes | 5,137 | 3,082 | 2,055 | 66.7 | | Net income | 42,738 | 22,343 | 20,395 | 91.3 | | Net income attributable to non-controlling interest | 5,050 | 1,132 | 3,918 | 346.1 | | Net income attributable to parent company's common shareholders | 37,658 | 21,181 | 16,447 | 77.8 | - Net product sales increased by 8.8% to $576.4 million in 2023, primarily from a 24.6% increase in Electric Power Steering (EPS) sales215216 - Gross margin improved to 18.0% in 2023 from 15.7% in 2022, driven by a favorable product mix231 Cash Flow Summary (2023 vs. 2022, in thousands of USD) | Cash Flow Activity | 2023 | 2022 | Change | | :---------------------- | :--------- | :--------- | :--------- | | Operating Activities | $19,906 | $48,023 | $(28,117) | | Investing Activities | $(28,637) | $(32,740) | $4,103 | | Financing Activities | $6,798 | $(1,583) | $8,381 | - Cash, cash equivalents, and short-term investments totaled $125.7 million as of December 31, 2023, a decrease of $8.4 million243 - Working capital increased by $23.8 million (15.2%) to $180.3 million as of December 31, 2023244 Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency and interest rate fluctuations, with credit risk concentrated in trade accounts receivable - The company's primary market risks are foreign currency exchange rate fluctuations (RMB vs. USD) and interest rate changes284285 - A price negotiation mechanism with international customers mitigates currency exchange rate risk if fluctuations exceed 8%287 - Credit risk is concentrated in trade accounts receivable, with Stellantis N.V. accounting for 17.2% of 2023 consolidated revenues, mitigated by long-term relationships288435 - Interest rate risk stems from credit facility borrowings, with outstanding indebtedness subject to fluctuations289 Item 8. Financial Statements and Supplementary Data This section references the full consolidated financial statements and supplementary quarterly data, showing fluctuating net sales and income - The financial statements required by this item begin on page 61 (original document)290 Quarterly Results of Operations (2023 vs. 2022, in thousands of USD, except per share amounts) | Metric | 2023 First | 2022 First | 2023 Second | 2022 Second | 2023 Third | 2022 Third | 2023 Fourth | 2022 Fourth | | :------------------------------------------------------------------ | :--------- | :--------- | :---------- | :---------- | :--------- | :--------- | :---------- | :---------- | | Net sales | $142,243 | $136,396 | $137,410 | $127,161 | $137,541 | $137,207 | $159,160 | $128,787 | | Gross profit | 21,618 | 14,734 | 22,718 | 22,711 | 24,757 | 20,918 | 34,658 | 25,031 | | Income/(loss) from operations | 7,744 | (1,538) | 7,789 | 7,200 | 10,153 | 4,887 | 13,559 | (2,598) | | Net income | 7,883 | 149 | 11,468 | 9,935 | 11,244 | 8,007 | 12,143 | 4,252 | | Net income/(loss) attributable to non-controlling interest | 1,055 | 200 | 995 | 500 | 1,749 | 529 | 1,251 | (97) | | Net income/(loss) attributable to parent company's common shareholders | 6,820 | (59) | 10,466 | 9,428 | 9,488 | 7,470 | 10,884 | 4,342 | | Net income/(loss) attributable to parent company's common shareholders per share - Basic | $0.23 | $— | $0.35 | $0.31 | $0.31 | $0.24 | $0.36 | $0.14 | | Diluted | $0.23 | $— | $0.35 | $0.31 | $0.31 | $0.24 | $0.36 | $0.14 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section confirms no changes in or disagreements with accountants on accounting and financial disclosure Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2023292 - Management assessed and determined that internal control over financial reporting was effective as of December 31, 2023295 - No material changes in internal control over financial reporting occurred during Q4 2023298 - The report acknowledges inherent limitations in control systems, providing reasonable, not absolute, assurance297 Item 9B. Other Information Wiselink Holding Limited entered a Rule 10b5-1 Trading Plan on June 1, 2023, for the sale of 282,100 shares - Wiselink Holding Limited and UBS Financial Services Inc. entered a Rule 10b5-1 Trading Plan on June 1, 2023299 Rule 10b5-1 Trading Plan Details | Order | Number of shares to be sold (shares) | Type of Limited Order: price(s) | Duration of order | Order cancel Date | | :------ | :-------------------------- | :------------------------------ | :---------------- | :---------------- | | 1 | 282,100 | $5.00 | GTC | August 30, 2024 | Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company expects to no longer be a Commission-Identified Issuer after 2023, following PCAOB's access to inspect auditors in China - The company was previously identified as a Commission-Identified Issuer under the HFCAA due to PCAOB's inability to inspect its auditor in mainland China300 - Following PCAOB's December 2022 announcement of complete access, the company does not expect to be identified as a Commission-Identified Issuer after its 2023 annual report301 - The company confirms it is not owned or controlled by any foreign governmental entity, has no material contracts with such parties, and no foreign government representatives on its board300 PART III Item 10. Directors, Executive Officers and Corporate Governance The board includes independent directors on key committees, with family relationships among some executives, and the company maintains a Code of Ethics Directors and Executive Officers (as of December 31, 2023) | Name | Age | Position(s) | | :------------ | :-- | :-------------------------------- | | Hanlin Chen | 66 | Chairman of the Board | | Tong Kooi Teo | 67 | Director | | Guangxun Xu | 73 | Director | | Heng Henry Lu | 58 | Director | | Qizhou Wu | 59 | Chief Executive Officer and Director | | Jie Li | 54 | Chief Financial Officer | | Andy Tse | 53 | Senior Vice President | | Haimian Cai | 60 | Vice President | | Henry Chen | 33 | Vice President | - The Audit, Compensation, and Nominating Committees are comprised of independent directors315316319 - Guangxun Xu chairs the Audit and Nominating Committees, while Tong Kooi Teo chairs the Compensation Committee315316319 - Family relationships exist between Hanlin Chen and Andy Tse (brothers-in-law), and Hanlin Chen and Henry Chen (father and son)321 - The company has adopted a Code of Ethics and Conduct applicable to all officers, directors, and employees322 Item 11. Executive Compensation The Compensation Committee sets executive compensation, including base salary and performance bonuses, with a new Compensation Recovery Policy adopted in October 2023 - The Compensation Committee, comprised of independent directors, sets executive compensation policies and administers benefit plans324 - Executive compensation aims to attract and retain talent and align incentives with stockholder value creation325326 - A Compensation Recovery Policy was adopted effective October 10, 2023, allowing clawback of incentive compensation based on restated financial results327 Executive Officer Compensation (2023 vs. 2022, in thousands of USD) | Name (Position) | Year | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :------------------------- | :--- | :--------- | :-------- | :---------------- | :-------- | | Hanlin Chen (Chairman) | 2023 | 306 | 77 | — | 383 | | | 2022 | 321 | 80 | — | 401 | | Qizhou Wu (CEO) | 2023 | 204 | 51 | — | 255 | | | 2022 | 214 | 53 | — | 267 | | Jie Li (CFO) | 2023 | 122 | 31 | — | 153 | | | 2022 | 128 | 32 | — | 160 | | Haimian Cai (Vice President) | 2023 | 387 | — | — | 387 | | | 2022 | 383 | — | — | 383 | - The company accrued 25% of annual salary as performance bonus for Named Executive Officers in 2023 due to achieving sales growth331332 - No stock options were granted to management in 2023 or 2022334495 Director Compensation (2023, in thousands of USD) | Name | Fees earned or paid in cash ($) | Option awards ($) | Total ($) | | :------------ | :------------------------------ | :---------------- | :-------- | | Tong Kooi Teo | 32 | — | 32 | | Guangxun Xu | 59 | — | 59 | | Heng Henry Lu | 32 | — | 32 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Management beneficially owned 64.73% of common stock as of December 31, 2023, with Chairman Hanlin Chen controlling 57.39%, giving him significant influence Security Ownership of Certain Beneficial Owners and Management (as of December 31, 2023) | Name/Title | Total Number of Shares | Percentage Ownership (%) | | :--------------------------------------- | :--------------------- | :------------------- | | Hanlin Chen, Chairman | 17,323,670 | 57.39 | | Qizhou Wu, CEO and Director | 1,537,524 | 5.09 | | Guangxun Xu, Director | — | — | | Tong Kooi Teo, Director | — | — | | Heng Henry Lu, Director | — | — | | Haimian Cai, VP | 50,000 | 0.17 | | Jie Li, CFO | 97,031 | 0.32 | | Tse Andy, Sr. VP | 531,682 | 1.76 | | Henry Chen, VP | — | — | | All Directors and Executive Officers (9 persons) | 19,539,907 | 64.73 | - Chairman Hanlin Chen beneficially owns 57.39% of common stock, including shares held by his wife and a controlled company, granting him effective control341532 Item 13. Certain Relationships and Related Transactions, and Director Independence The company engages in related party transactions at fair market prices, with the Audit Committee reviewing and approving them to ensure arm's-length terms - The company engages in various related party transactions, including sales, material purchases, technology services, and short-term loans455456457458 - These related party transactions are conducted at fair market prices and under terms similar to unaffiliated third parties455456457 - The Audit Committee reviews and approves related party transactions to ensure arm's-length terms345 Item 14. Principal Accountant Fees and Services PricewaterhouseCoopers Zhong Tian LLP served as principal accountant, with audit fees of $724,000 in 2023, and the Audit Committee pre-approves all services Principal Accountant Fees (in thousands of USD) | Category | Fiscal 2023 | Fiscal 2022 | | :--------- | :---------- | :---------- | | Audit Fees | $724 | $731 | | Other Fees | $44 | $— | | Total Fees | $768 | $731 | - The Audit Committee has a pre-approval policy for all audit and non-audit services to maintain auditor independence347 PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the comprehensive financial statements and various exhibits filed as part of the Annual Report on Form 10-K - The report includes the Independent Auditor's Report, Consolidated Balance Sheets, Income Statements, Comprehensive Income, Equity Changes, Cash Flows, and Notes348 - A list of exhibits, including corporate governance documents, joint venture agreements, and certifications, is provided as part of this Form 10-K351352544 Item 16. Form 10-K Summary This item is not applicable to the company's reporting requirements Financial Statements Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers Zhong Tian LLP issued an unqualified opinion on the consolidated financial statements, identifying deferred tax asset recoverability as a critical audit matter - PricewaterhouseCoopers Zhong Tian LLP issued an unqualified opinion on the 2023 and 2022 consolidated financial statements, affirming U.S. GAAP conformity358 - A critical audit matter was the assessment of deferred tax asset recoverability, involving significant management judgment and estimation uncertainty362363364 Consolidated Balance Sheets Total assets increased to $766.4 million in 2023, driven by receivables, while liabilities and equity also grew, reflecting operational changes Consolidated Balance Sheet Highlights (in thousands of USD) | Metric | December 31, 2023 | December 31, 2022 | | :-------------------------- | :---------------- | :---------------- | | Total current assets | $564,075 | $520,718 | | Total non-current assets | $202,365 | $193,634 | | Total assets | $766,440 | $714,352 | | Total current liabilities | $383,739 | $364,195 | | Total long-term liabilities | $14,297 | $28,732 | | Total liabilities | $398,018 | $386,937 | | Total stockholders' equity | $367,809 | $326,833 | - Cash and cash equivalents decreased to $114.7 million in 2023 from $121.2 million in 2022369 - Accounts and notes receivable (net) increased to $269.4 million in 2023 from $224.3 million in 2022369462 - Accounts and notes payable (total) increased to $253.6 million in 2023 from $235.1 million in 2022369483 Consolidated Statements of Income or Loss Net product sales increased by 8.8% to $576.4 million, driving a 91.3% rise in net income to $42.7 million and EPS of $1.25 in 2023 Consolidated Statements of Income or Loss Highlights (in thousands of USD, except per share amounts) | Metric | 2023 | 2022 | Change | Change % | | :---------------------------------------------- | :--------- | :--------- | :--------- | :------- | | Net product sales | $576,354 | $529,551 | $46,803 | 8.8 | | Cost of products sold | 472,603 | 446,157 | 26,446 | 5.9 | | Gross profit | 103,751 | 83,394 | 20,357 | 24.4 | | Operating income | 39,245 | 7,951 | 31,294 | 393.6 | | Net income | 42,738 | 22,343 | 20,395 | 91.3 | | Net income attributable to parent company's common shareholders | 37,658 | 21,181 | 16,447 | 77.8 | | Basic EPS | $1.25 | $0.69 | $0.56 | 81.2 | | Diluted EPS | $1.25 | $0.69 | $0.56 | 81.2 | - Gross margin improved to 18.0% in 2023 from 15.7% in 2022231 - Research and development expenses decreased by 19.1% to $29.2 million in 2023236 - Financial income, net, decreased by $6.1 million, primarily due to lower foreign exchange gains239 Consolidated Statements of Comprehensive Income or Loss Comprehensive income reached $37.5 million in 2023, a significant improvement from a $7.6 million loss in 2022, driven by reduced foreign currency translation loss Consolidated Statements of Comprehensive Income or Loss Highlights (in thousands of USD) | Metric | 2023 | 2022 | | :-------------------------------------------------------- | :--------- | :---------- | | Net income | $42,738 | $22,343 | | Foreign currency translation loss | (5,191) | (29,934) | | Comprehensive income/(loss) | 37,547 | (7,591) | | Comprehensive income/(loss) attributable to parent company | $32,813 | $(6,949) | - Foreign currency translation loss significantly decreased from $29.9 million in 2022 to $5.2 million in 2023372 Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased to $367.8 million in 2023, driven by net income and improved accumulated other comprehensive income, with no share repurchases Consolidated Statements of Changes in Stockholders' Equity Highlights (in thousands of USD) | Metric | December 31, 2023 | December 31, 2022 | | :-------------------------------------------------------- | :---------------- | :---------------- | | Common Stock | $3 | $3 | | Additional Paid-in Capital | $63,731 | $63,731 | | Retained Earnings - Appropriated | $11,851 | $11,851 | | Retained Earnings - Unappropriated | $284,832 | $247,174 | | Accumulated Other Comprehensive (Loss)/Income | $(8,258) | $(3,413) | | Treasury Stock | $(7,695) | $(7,695) | | Total parent company stockholders' equity | $344,464 | $311,651 | | Non-controlling Interest | $23,345 | $15,182 | | Total stockholders' equity | $367,809 | $326,833 | - Net income attributable to parent company increased unappropriated retained earnings by $37.7 million in 2023374 - Accumulated other comprehensive income improved from $(28.1) million loss in 2022 to $(4.8) million loss in 2023 due to foreign currency translation adjustments374 - No common stock was repurchased in 2023, maintaining treasury stock at $7.7 million374497 Consolidated Statements of Cash Flows Operating cash flow decreased to $19.9 million in 2023, while financing cash flow reversed to a $6.8 million inflow, driven by bank loans Consolidated Statements of Cash Flows Highlights (in thousands of USD) | Cash Flow Activity | 2023 | 2022 | | :------------------------------------------------ | :--------- | :--------- | | Net cash provided by operating activities | $19,906 | $48,023 | | Net cash used in investing activities | $(28,637) | $(32,740) | | Net cash provided by/(used in) financing activities | $6,798 | $(1,583) | | Net decrease in cash and cash equivalents | $(3,757) | $(548) | | Cash, cash equivalents and pledged cash at end of year | $155,194 | $158,951 | - Operating cash flow decreased mainly due to reduced cash inflows from accounts and notes receivable ($13.8 million) and accounts and notes payable ($5.2 million)273 - Cash used in investing activities decreased due to a net effect of decreased purchase of short-term investments and long-term time deposits ($11.7 million)274 - Financing cash flow increased mainly due to higher proceeds from bank and government loans ($12.9 million)275 Notes to Consolidated Financial Statements 1. Organization and Business CAAS operates through its wholly-owned subsidiaries and 16 indirect subsidiaries/joint ventures in China and Brazil, focusing on automotive systems and components - CAAS is a Delaware corporation operating through its wholly-owned subsidiaries and 16 indirect subsidiaries/joint ventures in China and Brazil380381382 - Subsidiaries like Henglong and Jiulong produce power steering gears, while newer entities like Henglong KYB and Wuhan Hyoseong focus on electric steering systems384386391392 - Zhirong, established in June 2023, engages in inspection and testing of automotive products395 2. Basis of Presentation and Significant Accounting Policies The financial statements adhere to U.S. GAAP, employing estimates for asset valuation and revenue recognition, with specific policies for credit losses, leases, and foreign currency translation - Consolidated financial statements are prepared in accordance with U.S. GAAP, including the company and its subsidiaries, with inter-company balances eliminated396 - Significant estimates are made for long-term asset valuation, receivables, inventories, warranty obligations, and deferred tax asset recoverability405 - Revenue is recognized when control of products transfers to the customer, with allowances for estimated price discounts and product warranties423425 - The company adopted ASC Topic 326 for credit losses and ASC 842 for leases408442 Warranty Activities (in thousands of USD) | Metric | 2023 | 2022 | | :----------------------------------- | :------ | :------ | | Balance at the beginning of year | $32,435 | $36,572 | | Additions during the year | 11,309 | 10,941 | | Settlement within the year | (12,676)| (11,877)| | Foreign currency translation loss | (628) | (3,201) | | Balance at end of year | $30,440 | $32,435 | - The company's five largest customers accounted for 40.4% of 2023 consolidated sales, with Stellantis N.V. alone accounting for 17.2%435 - Functional currencies include USD, RMB, and BRL, with foreign currency translation adjustments included in comprehensive income452453 3. Accounts and Notes Receivable Total accounts and notes receivable, net, increased to $269.4 million in 2023, with the allowance for doubtful accounts rising to $17.0 million Accounts and Notes Receivable (in thousands of USD) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------------------------------- | :---------------- | :---------------- | | Accounts and notes receivable - unrelated parties | $276,836 | $228,667 | | Less: allowance for doubtful accounts - unrelated parties | $(15,599) | $(14,359) | | Accounts and notes receivable, net - unrelated parties | $261,237 | $214,308 | | Accounts and notes receivable - related parties | $9,573 | $11,779 | | Less: allowance for doubtful accounts - related parties | $(1,404) | $(1,763) | | Accounts and notes receivable, net - related parties | $8,169 | $10,016 | | Accounts and notes receivable, net | $269,406 | $224,324 | Allowance for Doubtful Accounts Activity (in thousands of USD) | Metric | 2023 | 2022 | | :--------------------------------------- | :------ | :------ | | Balance at beginning of year | $16,122 | $12,859 | | Amounts provided during the year | 2,002 | 5,371 | | Amounts reversed of collection during the year | (463) | (967) | | Writing off uncollectible account receivables | (410) | — | | Foreign currency translation | (248) | (1,141) | | Balance at end of year | $17,003 | $16,122 | - The company pledged notes receivable of $11.5 million in 2023 as collateral for bank notes payable463 4. Advance Payments and Others Total advance payments and others, net, increased to $16.0 million in 2023, primarily driven by input VAT and prepayments for raw materials Advance Payments and Others (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :-------------------------------------- | :---------------- | :---------------- | | Input VAT | $8,957 | $4,283 | | Prepayments for purchase of raw materials | 3,206 | 3,942 | | Prepayment for R&D service | 1,553 | 748 | | Prepaid income tax | 948 | 1,287 | | Employee advances | 448 | 713 | | Prepayment for share repurchase program | 9 | 754 | | Others | 900 | 734 | | Total advance payments and others | $16,021 | $12,461 | | Less: Allowance for doubtful accounts | (22) | (115) | | Advance payments and others, net | $15,999 | $12,346 | 5. Inventories Total inventories remained stable at $112.4 million in 2023, with a shift from finished goods to raw materials and work in process Inventories (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :-------------------- | :---------------- | :---------------- | | Finished goods | $62,760 | $71,371 | | Raw materials | 28,505 | 24,502 | | Work in process | 17,123 | 16,001 | | Cost of R&D service | 4,004 | 362 | | Balance at end of year | $112,392 | $112,236 | - Inventory write-downs to cost of product sold were $4.8 million in 2023 and $4.7 million in 2022465 6. Property, Plant and Equipment Net property, plant and equipment decreased to $101.4 million in 2023 due to depreciation and impairment, despite increased construction in progress Property, Plant and Equipment (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :------------------------- | :---------------- | :---------------- | | Machinery and equipment | $241,761 | $239,385 | | Buildings | 64,390 | 64,928 | | Electronic equipment | 5,804 | 6,242 | | Motor vehicles | 4,587 | 4,308 | | Construction in progress | 11,821 | 8,238 | | Gross Total | $328,363 | $323,101 | | Less: Accumulated depreciation | (226,436) | (216,495) | | Less: Impairment | (568) | — | | Balance at end of year, net | $101,359 | $106,606 | - Depreciation charges were $17.2 million in 2023 and $24.2 million in 2022466 - The company pledged $43.3 million in property, plant and equipment and land use rights as security for credit facilities in 2023467 7. Intangible Assets Net intangible assets increased to $3.9 million in 2023, primarily due to higher management software licenses, with amortization expenses of $1.0 million Intangible Assets (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :------------------------------ | :---------------- | :---------------- | | Management software license | $7,055 | $3,756 | | Patent technology | 2,340 | 2,266 | | Total intangible assets - at cost | $9,395 | $6,022 | | Less: Accumulated amortization | (5,530) | (4,749) | | Balance at end of year, net | $3,865 | $1,273 | - Amortization expenses were $1.0 million in 2023 and $0.6 million in 2022468 8. Long-term Investments Total long-term investments slightly increased to $60.2 million in 2023, primarily in limited partnerships and corporations accounted for using the equity method Long-term Investments (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :-------------------------------------- | :---------------- | :---------------- | | Limited Partnerships: | | | | Chongqing Venture Fund | $13,158 | $14,435 | | Hubei Venture Fund | 12,217 | 11,738 | | Suzhou Qingshan | 8,409 | 4,179 | | Suzhou Venture Fund | 3,387 | 5,473 | | Suzhou Mingzhi | 1,261 | — | | Subtotal - Investments in limited partnerships | $38,432 | $35,825 | | Corporations: | | | | Sentient AB | $20,417 | $21,831 | | Henglong Tianyu | 793 | 774 | | Chongqing Jinghua | — | 695 | | Jiangsu Intelligent | 531 | 685 | | Subtotal - Investments in corporations | $21,741 | $23,985 | | Total | $60,173 | $59,810 | - Investments in limited partnerships and corporations are accounted for using the equity method469470471472473 - The company's proportionate share of net loss from equity method investments was $2.0 million in 2023474 9. Deferred Income Tax Assets and Liabilities Net deferred tax assets increased to $11.2 million in 2023, while deferred tax liabilities decreased, with a reduction in the valuation allowance Deferred Tax Assets and Liabilities (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :------------------------------------------------ | :---------------- | :---------------- | | Total deferred tax assets | $30,229 | $33,635 | | Less: Valuation allowance | (18,981) | (23,270) | | Total deferred tax assets, net of valuation allowance | $11,248 | $10,365 | | Deferred withholding tax for dividend distribution from PRC subsidiaries | $3,943 | $4,010 | | Other taxable temporary differences | 2,349 | 2,713 | | Total deferred tax liabilities | $6,292 | $6,723 | Valuation Allowance for Deferred Tax Assets Activity (in thousands of USD) | Metric | 2023 | 2022 | | :--------------------------------------- | :------ | :------ | | Balance at beginning of year | $23,270 | $22,788 | | Amounts provided for during the year | 589 | 5,058 | | Amounts used during the year | (4,511) | (2,721) | | Foreign currency translation | (367) | (1,855) | | Balance at end of year | $18,981 | $23,270 | - The company has net operating loss carry-forwards in Hong Kong ($1.7 million) and PRC entities ($2.4 million and $3.9 million)475 10. Bank Loans Total bank loans increased to $49.2 million in 2023, with $195.8 million in credit facilities utilized at a 2.6% weighted average interest rate Bank Loans (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :---------------- | :---------------- | :---------------- | | Short-term bank loans | $48,005 | $45,671 | | Long-term loans | 1,221 | 528 | | Total bank loans | $49,226 | $46,199 | - The total credit facility was $195.8 million in 2023, with $49.2 million drawn at a 2.6% weighted average interest rate479 - Loans are secured by property, plant and equipment, and land use rights479 - The company complied with all financial covenants as of December 31, 2023481 11. Accounts and Notes Payable Total accounts and notes payable increased to $253.6 million in 2023, with notes payable at $93.0 million, secured by pledged cash and notes receivable Accounts and Notes Payable (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :------------------------------------- | :---------------- | :---------------- | | Accounts payable - unrelated parties | $147,712 | $133,882 | | Notes payable - unrelated parties | 93,027 | 84,530 | | Accounts and notes payable - unrelated parties | $240,739 | $218,412 | | Accounts and notes payable - related parties | $12,839 | $16,695 | | Balance at end of year | $253,578 | $235,107 | - The company pledged cash of $39.3 million and notes receivable of $11.5 million in 2023 as collateral for bank notes payable482 12. Accrued Expenses and Other Payables Accrued expenses and other payables decreased to $44.8 million in 2023, with warranty reserves remaining the largest component at $30.4 million Accrued Expenses and Other Payables (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :---------------- | :---------------- | | Accrued expenses | $10,464 | $9,652 | | Warranty reserves | 30,440 | 32,435 | | Payable for the investment in Sentient AB | — | 2,043 | | Payables for overseas transportation and custom clearance | 400 | 294 | | Dividends payable to holders of non-controlling interests | 424 | 431 | | Accrued interest | — | 465 | | Other payables | 3,043 | 2,991 | | Balance at end of year | $44,771 | $48,311 | 13. Taxes Payable Short-term taxes payable remained stable at $17.3 million in 2023, while long-term taxes payable decreased to $8.8 million due to payments Taxes Payable (in thousands of USD) | Category | December 31, 2023 | December 31, 2022 | | :---------------------------------------- | :---------------- | :---------------- | | Value-added tax payable | $3,104 | $3,470 | | Tariffs payable | 3,548 | 7,061 | | Long-term taxes payable - current portion | 7,024 | 5,270 | | Income tax payable | 2,293 | 680 | | Other tax payable | 1,298 | 1,117 | | Short-term taxes payable | $17,267 | $17,598 | | Long-term taxes payable | $8,781 | $15,805 | - Long-term taxes payable relate to a $35.6 million one-time transition tax from the U.S. Tax Reform, payable over eight years486 14. Redeemable non-controlling interests Redeemable non-controlling interests totaled $613,000 in 2023, subject to purchase by the company if a subsidiary fails to complete a qualified IPO - Redeemable non-controlling interests were $613,000 in 2023 and $582,000 in 2022369 - These interests are subject to purchase by the company if the subsidiary fails to complete a qualified IPO, with an accretion of $30,000 to the redemption value recognized annually487488 15. Stock Options The stock option plan allows for 2.2 million common shares, with 22,500 options outstanding and exercisable as of December 31, 2023, and no grants in 2023 or 2022 - The stock option plan, extended to June 27, 2025, allows for issuance of up to 2,200,000 common shares489 Stock Option Activity (Shares) | Metric | 2023 | 2022 | | :-------------------------- | :------ | :------ | | Outstanding - January 1 | 30,000 | 37,500 | | Expired | (7,500) | (7,500) | | Outstanding - December 31 | 22,500 | 30,000 | - As of December 31, 2023, 22,500 stock options were outstanding and exercisable, with a weighted-average exercise price of $6.26 and a remaining contractual term of 2.00 years493494 - No stock options were granted or exercised during 2023 and 2022495 16. Retained Earnings PRC subsidiaries must appropriate 10% of after-tax profits to statutory surplus reserves, which are not distributable as cash dividends - PRC subsidiaries must appropriate 10% of after-tax profits to statutory surplus reserves annually until 50% of registered capital is reached496 - These statutory reserves are not distributable as cash dividends496 - Statutory reserves appropriated by China subsidiaries were nil in 2023 and $0.4 million in 2022496 17. Treasury Stock The company held 2,152,600 shares of treasury stock valued at $7.7 million as of December 31, 2023, with no repurchases in 2023 - Treasury stock is accounted for under the cost method and represents repurchased shares no longer outstanding497498 - As of December 31, 2023, the company held 2,152,600 shares of treasury stock valued at $7.7 million374 - No shares were repurchased in 2023; in 2022, 666,074 shares were repurchased for $2.4 million under a $5.0 million program497 18. Other Income, Net Other income, net, decreased to $5.3 million in 2023, primarily due to lower government subsidies and the absence of a prior year impairment provision Other Income, Net (in thousands of USD) | Category | 2023 | 2022 | | :------------------------------------------------ | :------ | :------ | | Government subsidy | $3,777 | $6,270 | | Investment income | 1,465 | 1,912 | | Charity donation | 103 | 140 | | Provision for impairment of prepayment for investment in Hefei Senye | — | (2,540) | | Total other income, net | $5,345 | $5,782 | - The decrease in other income, net, was mainly due to lower government subsidies and the absence of the Hefei Senye impairment provision in 2023499 19. Financial Income, net Financial income, net, decreased significantly to $4.7 million in 2023, primarily due to lower foreign exchange gains from reduced volatility Financial Income, Net (in thousands of USD) | Category | 2023 | 2022 | | :------------------------- | :----- | :------ | | Foreign exchange income, net | $3,355 | $9,833 | | Interest income | 1,524 | 1,247 | | Bank fees | (213) | (327) | | Total financial income, net | $4,666 | $10,753 | - The decrease in financial income, net, was primarily due to a decrease in foreign exchange gains from reduced volatility in 2023239500 20. Income Taxes Income tax expense increased to $5.1 million in 2023 due to higher GILTI taxes, with PRC subsidiaries subject to 25% or preferential 15% rates and withholding taxes on dividends - Income tax expense increased to $5.1 million in 2023, mainly due to higher GILTI tax expenses240514 - PRC subsidiaries are subject to a 25% corporate income tax rate, with a preferential 15% rate for "High & New Technology Enterprises"501505506 - Dividends from PRC subsidiaries to the Hong Kong holding company are subject to a 5% or 10% withholding tax503 - The company recognized $3.9 million in deferred tax liabilities for $39.4 million of undistributed profits expected to be distributed from PRC subsidiaries504 - Brazil Henglong is subject to a 24% income tax rate, plus an additional 10% tax on taxable income over BRL 0.24 million507 - The company is subject to U.S. corporate income tax at up to 21% and has a $35.1 million one-time transition tax liability from the U.S. Tax Reform509512 21. Income Per Share Basic and diluted net income per share increased to $1.25 in 2023, reflecting higher net income attributable to parent company shareholders Income Per Share (in thousands of USD, except per share amounts) | Metric | 2023 | 2022 | | :------------------------------------------------------------------ | :--------- | :--------- | | Net income attributable to parent company's common shareholders | $37,658 | $21,181 | | Weighted average number of common shares outstanding - Basic | 30,185,702 | 30,639,102 | | Weighted average number of common shares outstanding - Diluted | 30,189,421 | 30,641,274 | | Basic income per share attributable to parent company's common shareholders | $1.25 | $0.69 | | Diluted income per share attributable to parent company's common shareholders | $1.25 | $0.69 | - Basic and diluted EPS increased by $0.56 (81.2%) in 2023 compared to 2022520 - Stock options with exercise prices above market price were excluded from diluted EPS calculations as they were anti-dilutive516 22. Significant Concentrations The company's business is highly concentrated in China, with RMB currency controls and profit distribution rules posing risks to capital repatriation - A significant portion of the company's business is conducted in China, with RMB as the primary currency517 - PRC regulations on currency conversion, especially for "capital account" transactions, require prior SAFE approval, potentially limiting capital repatriation521522 - The company relies on dividend payments from China-based subsidiaries, subject to PRC profit distribution rules and statutory reserve requirements restricting cash dividends518 23. Related Party Transactions The company engages in various related party transactions, including sales and purchases, all conducted at fair market prices, with Chairman Hanlin Chen holding significant control Merchandise Sold to Related Parties (in thousands of USD) | Related Party | 2023 | 2022 | | :------------------------ | :------ | :------ | | Hubei Hongrun | $33,829 | $32,489 | | Jingzhou Yude | 11,390 | 8,778 | | Xiamen Automotive Parts | 1,733 | 2,468 | | Other related parties | 562 | 547 | | Total | $47,514 | $44,282 | Materials Purchased from Related Parties (in thousands of USD) | Related Party | 2023 | 2022 | | :--------------------- | :------ | :------ | | Jingzhou Tongying | $12,033 | $12,152 | | Wuhan Tongkai | 8,311 | 9,974 | | Jiangling Tongchuang | 3,390 | 3,238 | | Honghu Changrun | 2,396 | 2,467 | | Henglong Tianyu | 557 | 611 | | Hubei Wiselink | 528 | 310 | | Hubei Yiling | 57 | 30 | | Other related parties | 16 | 28 | | Total | $27,288 | $28,810 | Advance Payments for Property, Plant and Equipment to Related Parties (in thousands of USD) | Related Party | December 31, 2023 | December 31, 2022 | | :--------------------- | :---------------- | :---------------- | | Hubei Wiselink | $3,609 | $1,618 | | Henglong Real Estate | 2,150 | 224 | | Hubei Hongrun | — | 42 | | Total | $5,759 | $1,884 | - Hanlin Chen, the chairman, owns 57.39% of the common stock, granting him effective control over significant matters532 24. Commitments and Contingencies The company has no pending legal proceedings, but has non-cancelable commitments totaling $26.8 million, primarily for purchasing and investment contracts - The company is not a party to any pending or threatened legal proceedings533 Non-Cancelable Commitments and Contingencies (as of December 31, 2023, in thousands of USD) | Category | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :------------------------------------- | :------- | :--------------- | :-------- | :-------- | :---------------- | | Obligations for investment contracts | $2,965 | $— | $2,965 | $— | $— |