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Operator: Good morning, everyone, and welcome to China Automotive Systems’ First Quarter 2025 Conference Call. At this time, all participants are in a listen – only mode and we will be opening the floor for questions following the presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to our host, Kevin Seeth, Investor Relations. Kevin, the floor is yours.

Kevin Theiss: Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2025 first quarter conference call. Joining us today are 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 the forward-looking statements due to a number of factors, including those under the heading Risk Factors and Results of Operations in the Company’s Form 10-K annual report for the year ended December 31, 2024, 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 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 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 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 quarter 2025 results, for the period ended March 31, 2025. Management will then conduct a question-and-answer session. The 2025 first quarter results are unaudited and the 2025 results are audited. These financial results are reported using U.S. GAAP Accounting. For purposes of our call today, I will review the financial results in U.S. dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy, and automobile industry in our market position. Following our record net sales of $650.9 million for the 2024 year, our net sales increased by 19.9% to $157.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024.

All operations reported sales growth with the exception of North America in the first quarter of 2025. Total net sales of electric power steering systems, EPS, increased by 54% year-over-year as our sales transitions to higher technology products. Our Henlong KYB subsidiary achieved 38.2% year-over-year sales growth of its EPS products in the first quarter of 2025. Our largest steering subsidiary, Henlong, which produces traditional hydraulic steering systems for the Chinese passenger vehicle market, reported that sales climbed 37.5% year-over-year in the first quarter of 2025. Sales of traditional steering products, the Cherry Auto, increased by 13.5% year-over-year, and sales by Ulong’s commercial vehicle steering products rallied to 17.4% year-over-year growth in the first quarter of 2025.

While North American sales declined by 10.3% year-over-year to $27.2 million due primarily to lower sales to Stellantis, our sales to the Brazilian market increased by 30.2% year-over-year due to higher demand by Stellantis. In the macroeconomy, Chinese GDP growth was 5.4% year-over-year in the first quarter of 2025, consistent with the fourth quarter of 2024. The Chinese economy is stabilized, but is still facing challenges. According to statistics from the China Association of Automobile Manufacturers, CAAM, the combined unit sales of passenger commercial vehicles increased by 11.2% year-over-year to $7.5 million units for the first quarter of 2025. Passenger car unit sales grew 12.9% year-over-year to $6.4 million units, and China’s passenger vehicle brands sales totaled $4.4 million units and represented 68.1% total passenger vehicle market sales in the first quarter of 2025.

New energy vehicle unit sales grew by 47.1% year-over-year to $3.1 million units, and MEVs were 41.2% of the total car sales in China in the first quarter of 2025. For the first quarter of 2025, Chinese commercial vehicle sales increased by 1.8% year-over-year to $1.05 million units, and exports of automotive vehicle units increased by 7.3% year-over-year to $1.4 million units. Tax incentives, subsidies for scrapping older vehicles, and lower interest financing are among the government incentives to support the purchase of automobiles in China for 2025. Additionally, local government and private incentives may also aid buyers. Gross profit increased by 18.8% year-over-year to $28.6 million compared to $24.1 million in 2024. Gross revenue was 17.1% compared to 17.3% in the first quarter last year, up from 15.6% in the fourth quarter of 2024.

R&D expenses increased by 64% to $8.7 million from $5.3 million in the first quarter of 2024. The increased investment was partially due to continuous development of our hydraulic and EPS products, especially our R-EPS product, which recently started mass production. Also, the increase reflected the purchase of new molds for a new product beginning in the first quarter of 2025, as well as the project was still in place. A 41.3% increase in operating expenses, including R&D, resulted in a 10.5% year-over-year reduction in income from operations. Net income exceeded which is a parent company’s shareholders for deleted shares was $0.24 versus 27% in the year-ago first quarter. Net cash provided by operating activities rose 73.1% year-over-year to $18.1 million for the first quarter of 2025.

Total cash and cash equivalents, pledge cash, and short-term investments were $135.9 million, or approximately $4 dollars and $0.50 per deleted share, excuse me, at March 31, 2025. Our R-EPS steering product developed for managing Inveco has entered mass production in the first quarter of 2025. This product features an electric motor with a unit control and a ball nut and bell drive reduction system to provide steering assist. R-EPS architecture is capable of performing autonomous driving functions, such as automatic parking, lane keep assist, and lane follow assist. Our Shanshi Zhulong power steering gears company subsidiary won customer awards and accolades from two major vehicle OEM customers, UK Flotam Motors and Shanshi Automobile Heavy Truck.

Shanshi Zhulong provides steering assistance to various commercial vehicles in China. Shanshi Zhulong is the bearer of the excellent supplier series award and excellent supplier series award from the all-man business unit of Flotam Motors for exemplary product development cooperation, supply guarantee, and quality reliability. In addition, Shanshi Zhulong won the Strategic Synergy Award, the highest award given by Shanshi for future research development and supply chain cooperation. We remain well positioned with our advanced steering technology and diverse product portfolio to address market opportunities in China and overseas. Now let me review the financial results in the first quarter of 2025. Net sales increased by 19.9% to $167.1 million in the first quarter of 2025, compared to $139.4 million in the first quarter of 2024.

Net sales of traditional steering products and parts increased by 2.3% to $94.1 million, compared to $92 million for the first quarter of 2024. Net sales of electronic power steering EPS products and parts grew by 54% to $73 million for the three months into March 31, 2025, compared with $47.4 million for the same period in 2024. EPS products for the first quarter of 2025 were approximately 43.7% of total sales, compared with 34% of total net sales in the first quarter of 2024. QB headlong export sales were $27.2 million, compared to $30.1 million in the first quarter of 2024, primarily due to lower demand for passenger vehicle products by Stellantis and Reed. Sachet V long sales increased by 17.4% to $19.7 million from $16.8 million in the 2024 first quarter.

The real and long-term net product sales increased by 30.2% to $16.5 million in the first quarter of 2025, compared to $12.7 million for the same period in 2024, due to higher demand from Stellantis and Reed. Yuhu sales, which mainly provide steering systems to carry on the wheel in China, increased by 13.5% year-over-year, and sales for other entities increased by 19.1% year-over-year to $34.6 million. Most profit increased by 18.8% to $28.6 million and $24.1 million in the first quarter of 2024. Gross margin in the first quarter of 2025 was 17.1%, which was consistent with 17.3% in the first quarter of 2024. Salary expenses increased by 18.3% to $4.8 million from $4.1 million in the first quarter of 2024. This increase in salary expenses was primarily due to higher warehouse and logistical expenses due to higher revenues.

Salary expenses represented 2.9% of net sales in the first quarter of 2025 and the first quarter of 2024. General and limited trade expenses, G&A, increased by 36.4% to $7.6 million, compared to $5.5 million in the first quarter of 2024, mainly due to staff-related expenses, including the 1×7 cost of approximately $1.4 million at one subsidiary. G&A expenses represented 4.5% of net sales in the first quarter of 2025, compared with 4% of net sales in the first quarter of 2024. Research and development expenses, R&D, increased by 64% to $8.7 million, compared to $5.3 million in the first quarter of 2024, mainly due to higher R&D activities for new projects and products. R&D expenses represented 5.2% of net sales in the first quarter of 2025, compared to 3.8% in the first quarter of 2024.

Other income was $1.9 million for the first quarter of 2025, compared to $2.4 million for the first quarter of 2024. Income from operations declined by 10.5% to $8.6 million in the first quarter of 2025, compared to income from operations of $9.7 million in the first quarter of 2024. The decrease in 2025 first quarter income from operations was primarily due to a 41.3% increase in operating expenses. Interest expense was $0.5 million in the first quarter of 2025, compared to $0.3 million in the first quarter of 2024. Financial income net was $2 million in the first quarter of 2025, compared to financial expense net of $0.01 million in the first quarter of 2024. This change was primarily due to an increase in foreign exchange gains due to foreign exchange volatility.

Income before income tax expenses and equity in earnings of affiliated companies was $12.1 million in the first quarter of 2025, compared to $11.8 million in the first quarter of 2024. Equity in losses of affiliated companies was $0.7 million in the first quarter of 2025, compared with equity in losses of affiliated companies of $0.8 million in the first quarter of 2024. Income tax expense was $2.9 million for the first quarter of 2025, as compared to $1.7 million for the first quarter of 2024. This higher tax was primarily due to a higher income before income tax expenses, as compared to the same period last year, and a higher expected annual effective tax rate in 2025 based on the latest annual forecast, as compared to 2024. Net income attributable to parent companies’ common shareholders was $7.1 million in the first quarter of 2025, compared to $8.2 million in the first quarter of 2024.

Diluted income per share was $0.24 in the first quarter of 2025, compared to net income per diluted share of $0.27 in the first quarter of 2024. The weighted average number of diluted common shares outstanding was $30,170,172 in the first quarter of 2025, compared to $30,185,702 in the first quarter of 2024. Now let’s provide some balance sheets and other financial highlights. As of March 31, 2025, total cash, cash equivalent, and short-term investments were $89.9 million. Total accounts receivable, including notes receivable, were $323.6 million. Accounts payable, including notes payable, were $282.6 million. And short-term bank loans were $66.7 million. Our current ratio is 1.4:1, and working capital raised to $154.7 million as of March 31, 2025, compared to $146.2 million as of December 31, 2024.

Total parent company stockholders equity was $357.5 million as of March 31, 2025, compared to $349.6 million as of December 31, 2024. Cash flow from operating activities was $18.1 million in the first quarter of 2025, compared with $10.5 million in the first quarter of 2024. Cash paid to acquire property, plants, and equipment, and land use rates was $10.3 million in the first quarter of 2025. Here’s this outlook. Management has reiterated revenue guidance for the fiscal year 2025 of $700 million. This target is based on companies’ current means of operating the market conditions, which are subject to change. With that, operator, we are ready to begin the Q&A session.

Operator: Thank you very much. At this time, we will be conducting our question-and-answer session. [Operator Instructions] Your first question is coming from Jonathan Nieves, the private investor. Jonathan, your line is live.

Unidenified Analyst: Good morning, everybody. My question is why did research development increase by 64% in the 2025 first quarter, will R&D remain at this high level for the 2025 year? Or will it vary?

Qizhou Wu: [interpreted] In the first quarter, we did increase our R&D effort and hence, the R&D expenses also went up, mainly in the area of our research and development of our EPS product. For this product, we have been staffing to help us to further advance the technologies. We also increased some of the equipment design modules. So all that contributed to higher R&D expenses in Q1. On a full year basis, looking forward, we were seeing about 5% of our total revenue, give or take around $34 million on R&D. So this also — please be mindful, we are — we are maintaining 5% of revenue in R&D. That will help us to qualify high-tech status in China. And then we will also, in turn, receive tax benefit.

Operator: And our next question is coming from Gary Nash from NASH Consulting. Gary, your line is live.

Gary Nash: Thank you. First, good day to everyone. Two-part question. Could you please comment on the almost $1 million increase in inventories in the first quarter of 2025. And then if you could also comment on what is the outlook for inventory levels and the rest of 2025?

Qizhou Wu: Okay. Thank you. [interpreted] So Gary, to answer your question. The inventory increase — it’s actually partly related to the trade war and as U.S. administration has been putting a lot of pressure on the tariff. So in response to the potential pressure, we have made some advanced shipments to the U.S. a month ahead. So we — so our customers will not experience any disruption in the production for that consideration. So — we — our inventory in the U.S. has given us up to September in case any kind of productivity policy wise. So this is — it’s sort of out of ordinary practice, but we have to do something to address such potential risk. That’s why our inventory increased. But in terms of percentage inventory increased about 10% for overall revenue, we have increased in 19.9%. So it’s not completely outsized increase. And on a full year basis, we believe we will maintain a healthy level. We will now have an oversized — the oversized inventory.

Operator: Okay. So that answer your question, Gary?

Gary Nash: Yes, it does.

Qizhou Wu: Thank you.

Operator: [Operator Instructions] Our next question is coming from Michael Fiedler, Private Investor, your line is live.

Unidenified Analyst: Good morning. My question is the gross margin was 17.1% for the first quarter of 2025. What is the outlook for the gross margin for the rest of 2025?

Jie Li: [interpreted] Okay. Yes, Q1, our margin at higher than 17%. That’s the Q1 gross margin it’s very simpler to comparable corresponding quarter to 2024 as well as a full year average gross margin. And we are — we are fully aware this level of gross margin is typically, it’s lower than our typical margin in the past prior to 2024, but this is our — part of our strategy to proactively seeking more market share by the strategy, our pricing strategy. Clearly, this strategy has bear fruit — this strategy has bear fruit. So we are growing revenue, gaining market share. On a full year basis, 2025 full year basis, we believe we will maintain a similar gross margin level and with a slight improvement. strategy has bear

Operator: Okay. We appear to have no further questions in the queue. [Operator Instructions] Okay. I’ll hand back over Kevin then for further comments.

Kevin Theiss: Well, we have some additional questions that were e-mailed to us. So I’ll go ahead and ask those. So the first one is, what is the impact of the U.S. proposed tariffs under your new order flow. And are — is it impact in any areas beyond North America?

Qizhou Wu: [interpreted] Okay. So in terms of tariffs, we mentioned earlier in the beginning of the year, we had anticipated there will be some pressure coming from the administration. So we — made a decision to make some advanced shipment to our U.S. facility. And to — those inventories have points to carry us to foreseeable challenges in the coming quarters, which cannot be useful. And also, as yesterday, in China, U.S. announced the choice on the trading on the tariff, which is a very positive development, and we have immediately got in touch with our customer in North America, and we come to a very good conversation and position and they have agreed to bear increased part of the cost related with the tariff. So to answer your question, overall, the tariff has very minimum impact to our business and the order flow.

The new order continues to develop the product towards our customers. And outside the U.S., we still see some opportunities as we reported today, we have a pretty healthy strong growth in Brazil. So we are also making some strategic planning now on global expansion. And that will also, at some point, when we announce it will help us to further whether different kind of months in the marketplace.

Kevin Theiss: Okay. Thank you. I have another question that was e-mailed in. Please provide an update on the manufacturing of the REPS steering product for NeginkoLeco? And have other automotive OEMs also ordered the REPS product.

Qizhou Wu: [interpreted] Yes. REPS is a growth area. We have already begun our RETS production. In addition to that, the other OEMs also placing orders on our new products. They are including Cherry Auto, Guangzhou, Guangxi Auto, Yitong Bus, and Qingdao. And for this new RETS product, we have also built a brand new facility dedicated to the production and install new production lines. And so we are pretty excited about this new opportunity presented to us.

Kevin Theiss: Thank you. And the last question is, can you provide an update on the Sentient operation as far as the automatic driving systems?

Qizhou Wu: [interpreted] Yes. Okay. Thank you. Yes. We have quite a bit of development on Sentient AB, our subsidiary for developing autonomous driving technologies. Our Sentient’s main customer now is Volvo Truck for the EPS product. We are shipping 3,500 units. And this month, on a four-year basis, we are targeting 40,000 units for 2025. On the revenue side, Sentient, for this particular customer, we’re poking EUR 30 million for 2035. Other than this particular customer, we have one contract with BYB, their new model, Model Song, S-O-N-G. We are expecting mass production for this particular model autonomous driving technology for 2025. So the mass production will start in 2025. And also, we have entered into Volvo passenger vehicle with our fly-by-wire technology.

And there’s another automaker, Renault. So we are making very good progress with all different customers on both passenger and commercial side. So we are expecting a very meaningful contribution from our subsidiary, Sentient. Thank you.

Operator: Just before we wrap up the call, I’m going to check to see if there are any further questions from the audience. [Operator Instructions] Okay. We have no one else in the queue at the moment. I’ll now hand back over to Kevin for any closing remarks.

Kevin Theiss: Well, we want to thank everyone for your participation in today’s conference call. Please be safe. And we look forward to speaking with you in the future. Thank you.

Operator: Thank you very much. This does conclude today’s conference call. You can disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.